S-11/A 1 v207640_jmp-s11a.htm VintageFilings,LLC

As filed with the Securities and Exchange Commission on January 21, 2011

Registration No. 333-170157

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549



 

AMENDMENT NO. 1 TO
FORM S-11
FOR REGISTRATION UNDER
THE SECURITIES ACT OF 1933 OF SECURITIES
OF CERTAIN REAL ESTATE COMPANIES



 

IMH FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Governing Instrument)

   
Delaware   6162   81-0624254
(State or Other Jurisdiction of
incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

4900 N. Scottsdale Rd #5000
Scottsdale, Arizona 85251
(480) 840-8400

(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant’s Principal Executive Offices)

Shane C. Albers
Chief Executive Officer
IMH Financial Corporation
4900 N. Scottsdale Rd #5000
Scottsdale, Arizona 85251
(480) 840-8400

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)

Copy to:

Peter T. Healy, Esq.
O’Melveny & Myers LLP
Two Embarcadero Center, 28th Floor
San Francisco, CA 94111
(415) 984-8833

Approximate Date of Commencement of Proposed Sale of Securities to the Public: As soon as practicable after the effective date of this Registration Statement.

If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o

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. (Check One):

 
Large accelerated filer  o   Accelerated filer  o
Non-accelerated filer  x (Do not check if a smaller reporting company)   Smaller reporting company  o

 


 
 

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CALCULATION OF REGISTRATION FEE

   
Title of Securities to be Registered   Proposed Maximum Aggregate Offering Price(1)   Amount of Registration Fee
Common Stock, $ 0.01 par value per share   $ 115,000,000     $ 8,200 (2) 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes common shares that the underwriters have the option to purchase solely to cover overallotments, if any.
(2) Previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.


 
 

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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission has become effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION

 
PROSPECTUS   PRELIMINARY PROSPECTUS DATED JANUARY 21, 2011

        Shares

[GRAPHIC MISSING]

Common Stock

We are a real estate finance company based in the southwest United States with over 13 years of experience in the real estate lending and investment process that was formed from the conversion of IMH Secured Loan Fund, LLC, a limited liability company that was externally managed by Investors Mortgage Holdings Inc., into an internally managed corporation named IMH Financial Corporation.

This is our initial public offering and no public market currently exists for our common stock. We are offering     shares of our common stock. We expect the initial public offering price to be between $    and $    per common share. We intend to apply to list our common stock on the New York Stock Exchange, or the NYSE under the symbol “        ”.

Investing in our common stock involves a high degree of risk. See the section entitled “Risk Factors” beginning on page 13 of this prospectus for a discussion of the following and other risks that you should consider before investing in our common stock.

   
  Per Share   Total
Public offering price   $         $      
Underwriting discounts and commissions   $         $      
Proceeds to us, before expenses   $         $      

We have granted the underwriters an option for a period of 30 days to purchase, on the same terms and conditions as set forth above, up to an additional      shares of our common stock to cover overallotments.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Delivery of the shares of common stock is expected to be made on or about     , 2011.

 
                           

The date of this prospectus is     , 2011.


 
 

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TABLE OF CONTENTS

 
SUMMARY     1  
RISK FACTORS     13  
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS     41  
CAPITALIZATION     43  
DILUTION     44  
DIVIDEND AND DISTRIBUTION POLICY     45  
USE OF PROCEEDS     47  
SELECTED HISTORICAL FINANCIAL DATA     48  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     59  
BUSINESS     132  
OUR MANAGEMENT     158  
EXECUTIVE COMPENSATION     165  
PRINCIPAL STOCKHOLDERS     173  
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS     174  
DESCRIPTION OF CAPITAL STOCK     175  
SHARES ELIGIBLE FOR FUTURE SALE     184  
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS     186  
ERISA CONSIDERATIONS     189  
UNDERWRITING     192  
LEGAL MATTERS     195  
EXPERTS     195  
WHERE YOU CAN FIND MORE INFORMATION     195  
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS     F-1  

You should rely only on the information contained in this prospectus, or in any free writing prospectus prepared by us or information to which we have referred you. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus and any free writing prospectus prepared by us is accurate only as of their respective dates or on the date or dates which are specified in these documents. Our business, financial condition, liquidity, results of operations and prospects may have changed since those dates.

We use market data throughout this prospectus. We have obtained certain market data from publicly available information and industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. Forecasts are based on industry surveys and the preparer’s expertise in the industry and there is no assurance that any of the projected amounts will be achieved. We believe this data others have compiled are reliable, but we have not independently verified this information.

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SUMMARY

This summary highlights selected information in this prospectus and may not contain all of the information that you should consider before investing in our common stock. You should carefully read this entire prospectus, including the section entitled “Risk Factors” and our financial statements and related notes, and the other documents to which this prospectus refers in order to understand in greater detail this offering. Except where the context suggests otherwise, the terms “company,” “we,” “us” and “our” refer to IMH Financial Corporation, a Delaware corporation, together with its consolidated subsidiaries. As used in this prospectus, unless the context otherwise requires, the terms “our common stock” or “the common stock” refer to Common Stock, par value $0.01 per share, of IMH Financial Corporation to be sold in this offering, and do not include shares of (i) Class B-1 common stock, par value $0.01 per share, (ii) Class B-2 common stock, par value $0.01 per share, (iii) Class B-3 common stock, par value $0.01 per share, (iv) Class B-4 common stock, par value $0.01 per share, (v) Class C common stock, par value $0.01 per share or (vi) Class D common stock, par value $0.01 per share. Unless indicated otherwise, the information in this prospectus assumes (i) the common stock to be sold in this offering is sold at $     per share, which is the midpoint of the range of prices set forth on the cover page of this prospectus and (ii) no exercise by the underwriters of their overallotment option to purchase up to an additional      shares of our common stock, because these documents govern many of the rights of a holder of common stock in IMH Financial Corporation.

Our Company

We are a real estate finance company based in the southwest United States with over 13 years of experience in various and diverse facets of the real estate lending and investment process, including origination, acquisition, underwriting, documentation, servicing, construction, enforcement, development, marketing, and disposition. We have historically focused on the origination of senior short-term commercial bridge loans, which we consider to be loans with maturities of 12 to 36 months that are expected to be replaced thereafter with “permanent take-out” financing, which refers to longer-term financings which have a maturity of five years or more provided by a subsequent lender that replaces the senior short-term commercial bridge loan. However, after completion of this offering, our primary near-term future focus will be on the acquisition and origination of interim loans, which we consider to be loans or financings with maturities of 18 to 30 months that are used to pay off construction or commercial or residential property loans and that are not reliant on the availability of permanent take-out financing, or other short-term financings with maturities of 12 to 36 months. In addition, we will target the acquisition or financing of whole commercial real estate mortgage loans, which may be performing, distressed or non-performing, and participating interests in performing commercial real estate mortgage loans. Our target transaction size is typically above the maximum investment size of community banks, but below the minimum investment size of larger financial institutions, which we believe positions us favorably in an underserved segment of the real estate finance industry.

We combine traditional credit analysis typically performed by banks, with advanced property valuation techniques used by developers, in order to produce a more comprehensive investment decision process. In addition to the property appraisal and underwriting process performed by traditional bank lenders, we build and stress test a property-specific valuation model for each real estate investment we make, based upon, among other factors, acquisition price, carrying cost, development time, potential cost and time overruns, absorption rate, existing and potential rental rates, existing and known planned competing properties, market trends and exit strategy. We test these assumptions with a combination of field inspections and local market analysis, as well as financial, physical, legal and environmental due diligence. Through this process, we have acquired or originated real estate assets as of September 30, 2010 with an original investment basis of $717.1 million and a current carrying value of $265.6 million consisting of commercial real estate mortgage loans with a carrying value of $109.6 million and owned property with a carrying value of $156.0 million. The decline in the carrying value of our real estate assets is reflective of the deterioration of the commercial real estate lending market and the sustained decline in pricing of residential and commercial real estate in the last 18 to 24 months together with the continuing downturn in the commercial real estate markets and general economy.

Our senior management team, along with our other investment professionals, have extensive experience analyzing, structuring, negotiating, originating, purchasing and servicing senior-position commercial real estate mortgage loans and related real estate investments. Over the past 13 years, we have built a mortgage lending

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platform and have made over 500 real estate investments and co-investments, and our senior management team has raised approximately $1 billion of capital. For a further discussion of our senior management team’s experience, track record and relationships, see the headings entitled “Business — Our Company” and “Our Management.”

We are a Delaware corporation that was formed from the conversion of IMH Secured Loan Fund, LLC, a limited liability company that was externally managed by Investors Mortgage Holdings Inc. Our principal executive offices are located at 4900 N. Scottsdale Road, Suite 5000, Scottsdale, Arizona 85251, and our telephone number is (480) 840-8400. Our website address is www.imhfc.com. This website and the information contained on it or connected to it do not constitute a part of this prospectus.

Our Market Opportunity

We believe there are attractive current and emerging opportunities to acquire and originate whole commercial real estate mortgage loans and other discounted real estate-related assets as a result of the ongoing disruption in the real estate and financial markets, particularly in the southwestern United States where we focus. We believe that some of these assets are attractively priced in relation to their relative risk as a result of the imbalance between supply and demand in the current market environment, which has forced numerous financial institutions to dispose of both financial and physical real estate-related assets in order to meet regulatory or general capital requirements. Although we view opportunities to acquire commercial real estate mortgage loans and other real estate related assets as more attractive for new investments over the short to medium term, we believe that the opportunity to originate commercial real estate mortgage loans remains attractive, particularly for interim loans or other short term loans that generally have terms of one to three years and intermediate term loans, which we consider to be loans with maturities of three to five years, each of which are not reliant upon the immediate availability of permanent take-out financing. As a result of limited credit availability in the marketplace, we believe that such loans can now be structured on more favorable lender terms than in the past. We believe that we are positioned to capitalize on such opportunities as well as to remain flexible to adapt our investment strategy as market conditions change.

Our Target Assets

Although we have historically focused primarily on the origination of whole senior short-term commercial bridge loans with maturities of 12 to 18 months oriented toward the availability of permanent take-out financing at maturity and our portfolio consists primarily of loans that we originated, after completion of this offering we intend to focus our future investments primarily on the following asset classes, which we consider to be our target assets:

interim loans, which are loans with terms of 18 to 30 months that are not reliant upon the immediate availability of traditional or permanent financing;
whole commercial real estate mortgage loans, which may be performing, distressed or non-performing loans;
participating interests in performing commercial real estate mortgage loans; and
other types of real estate assets and real estate-related debt instruments we can acquire from time to time as attractive opportunities continue to emerge in the existing economic environment.

Following the closing of this offering, we intend to continue the process of disposing of a significant portion of our existing loans and real estate assets, or REO assets, individually or in bulk, and to reinvest the proceeds from such dispositions and the net proceeds from this offering in our target assets. We intend to diversify our assets further across asset classes, with current target allocations for new investments of approximately 45% of total assets in interim loans or other short-term loans originated by us, 25% in performing whole, or participating interests in, commercial real estate mortgage loans we acquire, 15% in whole non-performing commercial real estate loans we acquire and 15% in other types of real estate-related assets and real estate-related debt instruments, although the exact allocations will depend on the investment opportunities we decide to pursue. Once real estate conditions improve, and the availability of permanent take-

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out financing returns, we believe our experience, industry knowledge and comprehensive underwriting process will allow us to refocus on our historical model of originating short-term senior secured whole commercial real estate mortgage loans.

In addition, we believe opportunities will arise to use our stock or cash to acquire, on attractive terms, real estate-related assets or companies, including real estate investment trusts, or REITs, real estate vehicles, limited partnerships and similar vehicles. Many of these entities are seeking to reposition their portfolios or dispose of assets, and may also have investors who are seeking liquidity or exit options.

For a further discussion of our target assets, see the heading entitled “Business — Our Target Assets.”

Our Competitive Strengths

We believe the following competitive strengths will help us implement our strategies and distinguish ourselves from our competitors:

Existing Assets. We believe that we will be able to generate significant liquidity if we can successfully execute our disposition strategy relating to our existing portfolio. We intend to actively market and sell a significant portion of our current loans (in whole or in part) and REO assets, individually or in bulk, over the next 18 months following this offering and redeploy a substantial portion of the sale proceeds in our target assets. As a result of the rapid decline in the economy and substantial disruptions in the real estate and financial markets, we have recorded significant provisions for credit losses on our loans and impairment charges on our REO assets reflecting lower pricing assumptions and a significant increase in discount factors to reflect current market risk. If we sell our assets in an improving economic climate, we believe that the aggregate potential value of our assets may exceed the current aggregate carrying value of those assets. Further, we believe that the potential value of some of the properties securing our mortgage loans may allow us the flexibility, and motivate our borrowers, to restructure loan terms which may enable us to generate current income and ultimately realize attractive returns on those loans.
Access to Extensive Pipeline of Industry Relationships. We have long-term relationships with an extensive network of community banks, real estate owners, developers and financial intermediaries, particularly in the west and southwest, which we believe has received less attention from larger investors. We believe this diversified transaction referral network provides us with a significant stream of “first look” lending and acquisition opportunities, which are opportunities to consider a potential investment before it becomes more widely marketed. We believe these relationships will continue to provide us access to potential attractive lending and acquisition opportunities as a greater number of financial institutions seek to reduce their exposure to commercial real estate in order to reduce leverage and meet various capital or regulatory requirements.
Localized Market Expertise. Our focus for over 13 years on the real estate lending and investment industry in the southwest, along with our extensive network of long-term relationships with banks, real estate owners and developers, mortgage lenders and other strategic partners focused on our target market provides us with a specialized understanding of the market dynamics and opportunities that we believe is difficult to replicate. Moreover, we believe our specialized focus in our target markets also positions us favorably to engage in repeat business with investment and commercial banks, brokerage firms, public and private real estate investment companies and others that have targeted opportunities in the Southwest, but lack our in-depth understanding of, and access to, opportunities in this market.
Experienced Management Team with Expertise in Real Estate. Our senior management team, which is led by Shane Albers, William Meris and Steven Darak, has extensive experience originating, acquiring, managing and investing in commercial mortgage loans and other commercial real estate and real estate-related assets through various credit cycles and market conditions. We believe our senior management team has accumulated a deep and sophisticated understanding of industry trends, market values and the particular characteristics of the regions in which we lend, which has equipped our senior management team with a deep understanding of our target assets.

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Strong Underwriting Capabilities. We have a fully integrated in-house underwriting platform, which has extensive experience underwriting, conducting due diligence and valuing real estate and real estate-related investments. We combine traditional credit analysis typically performed by banks with advanced property valuation techniques used by developers, to produce a more comprehensive investment decision process that we believe provides us an advantage relative to the procedures utilized by many of our competitors and enables us to better identify attractive investment opportunities and assess expected performance, risk and returns.
Value Added Execution and Asset Management Experience. Our asset management team has extensive experience creating capital appreciation opportunities through the active management of distressed and non-performing real estate and real estate-related assets in order to extract the maximum amount of value from each asset through, among other things, repositioning, restructuring and intensive management.
Speed of Execution. As a significant number of banks continue to fail, we believe the Federal Deposit Insurance Corporation, or the FDIC, and other government agencies are increasingly likely to value participants who can purchase loans on an accelerated timetable and on a highly reliable basis in order to reduce closing risk. We believe that our market knowledge and experience allows us to underwrite and execute complex transactions quickly, in order to acquire our target assets from these sources.
Market-Driven Investment Strategy. Our investment strategy is market-driven, which we believe enables us to adapt to shifts in economic, real estate and market conditions, and to exploit inefficiencies in the applicable markets. Since 1997, we have made or arranged over 500 real estate investments and co-investments with a focus primarily on markets in the southwestern region of the United States. We believe that limited capital and credit availability in the marketplace allows us to structure loans at even more favorable terms than that which we have been able to achieve historically.
Tax Attributes. Due to the significant decline in the real estate markets in recent years, the tax basis of our existing assets exceeds the carrying value of such assets by approximately $267.8 million as of September 30, 2010, which we believe, subject to certain limitations, provides an approximation of the “built-in losses” that may be available to offset future taxable income and gain upon the disposition of such assets as well as potential income and gain from new assets we acquire.

For more information, see the heading entitled “Business — Our Competitive Strengths.”

Our Investment Strategy

Our objective is to utilize our real estate lending experience and industry knowledge to generate attractive risk-adjusted returns, which are returns that are adjusted to reflect the degree of risk involved in producing that return relative to other investments with varying degrees of risk. We will seek to achieve this objective by acquiring, originating and managing our target assets and executing our disposition strategy to opportunistically sell a significant portion of our existing portfolio, individually or in bulk, to generate capital to deploy in our target assets. We intend to pursue investment opportunities in our target assets by:

Repositioning our Existing Portfolio to Income-Generating Assets. We intend to actively market and sell a significant portion of our currently-owned loans (in whole or in part) and REO assets, individually or in bulk, over the next 18 months following this offering and redeploy a substantial proportion of the sale proceeds in our target assets. We plan to use the proceeds from the sale of these primarily non-income earning assets and deploy them in our target assets.
Maintaining Investment Discipline. We intend to continue to capitalize on our fully integrated in-house underwriting platform, experience and market knowledge. We will continue to combine traditional credit analysis typically performed by banks with the advanced property valuation techniques used by developers to support a more comprehensive investment decision process.
Selectively Pursuing Opportunities to Acquire Real Estate-Related Companies and Assets. We believe opportunities will emerge to acquire attractively priced real estate-related assets or

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companies, including REITs, real estate vehicles, limited partnerships and similar vehicles not targeted by larger investors. We expect that cash or listed public company stock may be an attractive currency for providing liquidity or exit strategies for these companies and their investors and thus will position us to acquire target assets on attractive terms.
Leveraging our Relationships to Generate New Sources of Income. We also believe there may be opportunities to leverage the network of financial advisors that we have built over the years to create new revenue streams by providing access to various real estate-related and other investment opportunities, either structured by us or introduced to us through our relationships, to our network of financial advisors. This network has been responsible for directing considerable investment capital to us and currently provides access to over 40 independent broker dealer firms, through whom we have the ability to reach over 9,000 financial advisors.

For more information, see the heading entitled “Business — Our Investment Strategy.”

In implementing our investment strategy, we will utilize our management’s expertise in identifying attractive opportunities within the target asset classes, as well as management’s capabilities related to transaction sourcing, underwriting, execution, asset management and disposition. We expect that our management will make decisions based on a variety of factors, including, but not limited to, expected risk-adjusted returns, credit fundamentals, liquidity, availability of adequate financing, borrowing costs and macro-economic conditions.

Unprecedented dislocations in the real estate and capital markets have caused us to incur a significant reduction in loan payoffs from borrowers and an increase in delinquencies, non-performing loans and REO assets, resulting in a substantial reduction in our cash flows. We have taken a number of measures to provide liquidity for us, including, among other things, engaging in efforts to sell whole loans and participation interests in our loans, and to dispose of certain real estate assets. We have also consummated the Conversion Transactions, as described under the heading “ — History and Structure” below, in an effort to position us for this offering.

We expect our primary sources of liquidity over the next twelve months to consist of the proceeds generated by (i) this offering and (ii) the disposition of our portfolio of loans and REO assets. We anticipate redeploying these proceeds to acquire various performing REO assets, the maintenance and ultimate disposition of which we expect will generate ongoing liquidity. In addition, we may address our liquidity needs by periodically accessing the capital markets, lines of credit and credit facilities available to us from time to time, and cash flows from the sales of whole loans, participations in loans, interest income and loan payoffs from borrowers.

Summary of Risk Factors

An investment in shares of our common stock involves a high degree of risk. You should consider carefully the risks discussed below and under the heading “Risk Factors” beginning on page 13 of this prospectus, together with the other information included in this prospectus, before purchasing our common stock. If any of these risks occur, our business, financial condition, liquidity, results of operations and prospects could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

We may continue to record losses as a result of additional provisions for credit losses or otherwise, which may harm our results of operations.
Our operating expenses may increase as a result of the recent completion of the Conversion Transactions.
We have not yet identified any specific future investments for our portfolio and, therefore, you will be unable to evaluate the allocation of net proceeds from this offering or the economic merits of our investments prior to making an investment decision.

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We anticipate that a significant portion of our commercial mortgage loans will continue to be in the form of non-performing and distressed commercial mortgage loans, or loans that may become non-performing and distressed, which are subject to increased risks relative to performing mortgage loans.
Litigation or claims, including in connection with the recently consummated Conversion Transactions, may harm our business.
If we are required to fund the entire amount of unfunded loans in process, our liquidity may be adversely affected.
The risk that our financial condition and results of operations could be harmed if economic conditions in general, and conditions in the commercial real estate market in particular, do not improve.
A secondary market for our loans or other assets we acquire may not develop, in which case we may not be able to diversify our assets in response to changes in economic and other conditions, and we may be forced to bear the risk of deteriorating real estate markets, which could increase borrower defaults on our loans and cause us to experience losses.
Our access to public capital markets and private sources of financing may be limited and, thus our ability to make investments in our target assets may be limited.
If we are unable to sell our existing assets, or are only able to do so at a loss, we may be unable to continue as a “going concern” or implement our investment strategy.
If we do not resume our mortgage lending or investing activities, we will not be able to grow our business and our financial results and financial condition will be harmed.
Our borrowers are exposed to risks associated with owning real estate, and unexpected expenses or liabilities resulting from such ownership could reduce the likelihood that our borrowers will be able to develop or sell the real estate that serves as collateral for our loans, which will increase the likelihood that our borrowers will default on the loans that we fund or acquire.
We may not be able to utilize our built-in losses as anticipated, which could result in greater than anticipated tax liabilities.
We may experience a further decline in the fair value of our assets, which could harm our results of operations, financial conditions and our ability to make distributions to stockholders.
There has been no public market for our common stock prior to this offering and an active trading market may not develop or be sustained following this offering.
We have not established a minimum dividend and distribution level and we may not have the ability to pay dividends and other distributions to you in the future.

Investment Company Act Exemption

We operate our business so that we will be exempt from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act. We plan to rely on the exemption provided by Section 3(c)(5)(C) of the Investment Company Act. We monitor our portfolio periodically and prior to each investment to confirm that we continue to qualify for the exemption. To qualify for the exemption, we must make investments so that at least 55% of the assets we own on an unconsolidated basis consist of qualifying mortgages and other liens on and interests in real estate, which we refer to as qualifying real estate assets, and so that at least 80% of the assets we own on an unconsolidated basis consist of real estate-related assets, including our qualifying real estate assets. See “Business — Regulation — Investment Company Status.”

Dividend policy

There have been no cash dividends declared on our common stock since our company was formed from our predecessor entity, but our predecessor made periodic distributions to its members prior to suspending distributions in the third quarter of the year ended December 31, 2008. Dividends are declared at the sole

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discretion of our board of directors. We intend to declare and pay to all shares of our Class B common stock issued and outstanding on the 12-month anniversary of the consummation of this offering a one-time dividend equal to $0.95 per share of Class B common stock, or the Special Dividend. Investors who purchase our common stock in this offering will not be eligible for the Special Dividend. For more information about our dividend policy, see the section entitled “Dividends and Distribution Policy.

Our History and Structure

We were formed from the conversion of our predecessor entity, IMH Secured Loan Fund, LLC, or the Fund, into a Delaware corporation. The Fund, which was organized in May 2003, commenced operations in August 2003, focusing on investments in senior short-term whole commercial real estate mortgage loans collateralized by first mortgages on real property. The Fund was externally managed by Investors Mortgage Holdings, Inc., or the Manager, which was incorporated in Arizona in June 1997 and is licensed as a mortgage banker by the State of Arizona. Through a series of private placements to accredited investors, the Fund raised $875 million of equity capital from May 2003 through December 2008. Due to the cumulative number of investors in the Fund, the Fund registered under the Securities Exchange Act of 1934, as amended, on April 30, 2007 and began filing periodic reports with the Securities and Exchange Commission, or the SEC.

As a result of the unprecedented disruptions in the general real estate and related markets and the rapid decline in the global and U.S. economies, on October 1, 2008, pursuant to its operating agreement, the Fund suspended member redemption requests. In order to preserve liquidity in the ongoing credit crisis, the Fund suspended regular monthly distributions to members in the second quarter of 2009. On June 18, 2010, following approval by members representing 89% of membership units of the Fund voting on the matter, the Fund became internally-managed through the acquisition of the Manager and converted into a Delaware corporation, a series of transactions we refer to as the Conversion Transactions. The Fund intended the Conversion Transactions to position the Fund to become a publicly traded corporation listed on the NYSE, create the opportunity for liquidity for Fund members, and create the opportunity to raise additional capital in the public markets, thereby enabling the Fund to better acquire and originate commercial mortgage loans and other real estate related investments with a view to achieving long term value creation through dividends and capital appreciation.

As part of the Conversion Transactions, the Fund offered members seeking shorter-term liquidity the option of receiving shares, referred to as Class C common stock, which are eligible to be redeemed by us at our option from the proceeds of this offering at the initial public offering price less underwriting discounts and commissions. Any shares of Class C common stock not redeemed with the proceeds of this offering will automatically be converted to Class B common stock. Members representing only approximately 5.2% of membership interests in the Fund elected this option and received Class C common stock. The remaining 94.8% received one of three series of Class B common stock (Class B-1, B-2 or B-3) that are subject to restrictions on transfer that lapse, subject to certain exceptions, at various anniversaries following the closing of this offering: 25% at the six month anniversary, 25% upon the nine month anniversary and the remaining 50% on the 12 month anniversary. The restrictions also lapse upon certain change of control events, and are also eligible for conversion and transfer after the five-month anniversary of this offering if the closing price of our common stock price is greater than or equal to 125% of the initial public offering price for 20 consecutive trading days at the option of the holder thereof. Once the sale of all or a portion of the shares of Class B common stock becomes possible, the sale or potential sale of a substantial number of shares of the common stock into which shares of Class B common stock may convert could depress the market price of all common stock and impair our ability to raise capital through the sale of additional shares.

To provide additional incentive for holders of Class B common stock to remain longer-term investors, we agreed to pay, subject to the availability of legally distributable funds, a Special Dividend to Class B stockholders of $0.95 a share to all stockholders who have retained continuous ownership of their shares through the 12 month period following this offering. The aggregate amount of the Special Dividend will be between $15.1 million and $16.0 million depending on the number of outstanding Class C shares that are redeemed in connection with the offering. If the proceeds from this offering are insufficient to redeem all outstanding shares of Class C common stock, the redemption will be effected on a pro rata basis among the holders of Class C common stock and the remaining shares of Class C common stock will automatically be

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converted into shares of Class B common stock and will be eligible for the Special Dividend if held continuously through the 12-month period following this offering.

We acquired the Manager, through the issuance of 716,279 shares of Class B common stock to the equity holders of the Manager and its affiliates, on June 18, 2010 as part of the Conversion Transactions. Prior to consummation of the Conversion Transactions, we paid management fees to the Manager to serve as our external manager and the Manager was responsible for managing every aspect of our operations, including identifying and funding new loans, evaluating and acquiring loans held by third parties, and periodically analyzing the composition of our portfolio. The Manager has a wholly-owned subsidiary, Investors Mortgage Holdings California, Inc., which is licensed as a real estate broker by the California Department of Real Estate. In connection with the acquisition, Messrs. Albers and Meris acquired shares of Class B-4 common stock which are subject to additional four-year transfer restrictions. The transfer restrictions applicable to the shares of Class B-4 common stock held by Messrs. Albers and Meris will terminate if, any time after five months from the first day of trading on a national securities exchange, either our market capitalization or book value will have exceeded $730.4 million (subject to upward and downward adjustment upon certain events). The additional four-year transfer restrictions will terminate if the restrictions on the Class B common stock are eliminated as a result of change of control of the shares of Class B common stock under our certificate of incorporation, or if, after entering into an employment agreement approved by our compensation committee, the holder of Class B common stock is terminated without cause, as will be defined in their employment agreements. As part of the Conversion Transactions, the former executive officers and employees of the Manager became our executive officers and employees and assumed the duties previously performed by the Manager. We ceased paying management fees to the Manager and are now entitled to retain all management, origination fees, gains and basis points previously allocated to the Manager.

In the Conversion Transactions, we also acquired IMH Holdings, LLC, or Holdings, which is a Delaware limited liability company and serves as a holding company for two wholly-owned subsidiaries, IMH Management Services, LLC, an Arizona limited liability company, and SWI Management, LLC, an Arizona limited liability company. IMH Management Services, LLC provides us and our affiliates with human resources and administrative services, including the supply of employees, and SWI Management, LLC, or SWIM, acts as the manager for the Strategic Wealth & Income Fund, LLC, or the SWI Fund. At July 31, 2010, the SWI Fund had $11.4 million under management. The SWI Fund is a Delaware limited liability company whose investment strategies and objectives are substantially similar to our historic strategy. We do not own any equity interest in the SWI Fund but we receive fee income for managing SWIM.

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Organizational Structure Chart

The following structure chart illustrates the structure and ownership of our company upon completion of this offering, based on the mid-point of the range of prices set forth on the front cover of this prospectus.

[GRAPHIC MISSING]

(1) We generally form a new subsidiary for each investment that we make solely to hold that investment. As of December 31, 2010, we had 78 special purpose investment subsidiaries all of which were wholly-owned by us.

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The Offering

Common stock offered by us    
           shares of our common stock, $0.01 par value
Common stock to be outstanding after this offering    
           shares(1)(2)
Use of proceeds    
    We intend to utilize the net proceeds of this offering for working capital, to fund the acquisition and origination of new investments in our target assets, and for other general corporate purposes. We also plan to use up to 30% of the proceeds of this offering to effect a pro rata redemption of the 838,448 outstanding shares of Class C common stock at the initial public offering price, less underwriting discounts and commissions.
Risk Factors    
    Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under the heading entitled “Risk Factors” beginning on page 13 and other information included in this prospectus before investing in our common stock.
Proposed New York Stock Exchange symbol    
    “        ”.

(1) The number of shares of common stock to be outstanding after this offering is based on 16,809,766 shares of Class B and Class C common stock outstanding as of January 21, 2011 that are convertible into 16,809,766 shares of our Common Stock, $0.01 par value, and excludes any shares to be reserved for issuance under our 2010 IMH Financial Corporation Stock Incentive Plan, or our 2010 Stock Incentive Plan.
(2) Excludes (i)     shares of common stock issuable upon the exercise of the underwriters’ overallotment option, (ii) 150,000 shares of common stock issuable upon conversion of warrants to be issued upon consummation of this offering and (iii)     shares of common stock reserved for future issuance pursuant to our 2010 IMH Financial Corporation Stock Incentive Plan, or our 2010 Stock Incentive Plan, which number will automatically increase to 1.8 million shares upon consummation of this offering.

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Summary Selected Historical Financial and Other Data

The following table shows summary financial and other data of IMH Financial Corporation (as successor to the Fund) for the periods ended and as of the dates indicated. The summary consolidated statements of financial condition data as of December 31, 2008 and 2009 and the summary consolidated statements of income data for each of the three years in the period ended December 31, 2009 have been derived from our audited consolidated financial statements and accompanying notes included elsewhere in this prospectus and should be read together with those consolidated financial statements and accompanying notes. The summary consolidated statements of financial condition data as of December 31, 2006, 2007 and 2008, and the summary consolidated statements of income data for the years ended December 31, 2005 and 2006 have been derived from audited consolidated financial statements not included in this prospectus. The summary consolidated financial and other data should be read together with the sections entitled “Selected Historical Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements and accompanying notes, and unaudited financial statements and accompanying notes, included elsewhere in this prospectus.

             
  As of and for the Year Ended December 31,   As of and for the Nine Months Ended September 30,
     2005   2006   2007   2008   2009   2009   2010
     (in thousands)   (unaudited)
Summary balance sheet items
     
Cash and cash equivalents   $ 12,089     $ 12,159     $ 73,604     $ 23,815     $ 963     $ 2,463     $ 4,580  
Mortgage loan principal outstanding   $ 92,945     $ 258,615     $ 510,797     $ 613,854     $ 544,448     $ 553,356     $ 490,882  
Allowance for credit losses / valuation allowance   $     $     $ (1,900 )    $ (300,310 )    $ (330,428 )    $ (337,000 )    $ (334,881 ) 
Mortgage loans, net   $ 92,945     $ 258,615     $ 508,897     $ 313,544     $ 214,020     $ 216,356     $ 156,001  
Real estate owned   $     $     $     $ 62,781     $ 104,231     $ 97,305     $ 109,306  
Total assets   $ 105,981     $ 273,374     $ 590,559     $ 414,804     $ 337,796     $ 334,577     $ 281,045  
Notes payable   $     $     $     $     $ 4,182     $     $ 16,963  
Total liabilities   $ 8,145     $ 13,193     $ 13,726     $ 6,753     $ 15,928     $ 13,406     $ 28,090  
Retained earnings (accumulated deficit)   $ 852     $ 1,426     $ 49     $ (322,332 )    $ (408,515 )    $ (409,212 )    $ (474,079 ) 
Total owners’ equity   $ 97,835     $ 260,181     $ 576,833     $ 408,051     $ 321,868     $ 321,171     $ 252,955  

             
  As of and for the Year Ended December 31,   As of and for the Nine Months Ended September 30,
     2005   2006   2007   2008   2009   2009   2010
     (in thousands)   (unaudited)
Summary income statement items
     
Mortgage loan
interest
  $ 7,846     $ 20,547     $ 47,929     $ 65,497     $ 21,339     $ 20,256     $ 1,112  
Total revenue   $ 7,961     $ 21,145     $ 49,763     $ 67,420     $ 22,522     $ 20,750     $ 2,782  
Operating expenses   $ 166     $ 430     $ 968     $ 2,454     $ 9,433     $ 5,924     $ 20,745  
Provision for credit losses                 1,900       296,000       79,299       82,000       34,380  
Impairment charges on Real Estate Owned                       27,175       8,000       8,000       13,221  
Total costs and expenses   $ 542     $ 1,043     $ 4,088     $ 325,707     $ 96,999     $ 95,924     $ 68,346  
Net earnings (loss)   $ 7,419     $ 20,102     $ 45,675     $ (258,287 )    $ (74,477 )    $ (75,174 )    $ (65,564 ) 

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  As of and for the Year Ended December 31,   As of and for the Nine Months Ended September 30,
     2005   2006   2007   2008   2009   2009   2010
     (in thousands, except percentage data)   (unaudited)
Principal balance % by state:
     
Arizona     81.5 %      57.9 %      44.8 %      47.9 %      55.5 %      53.0 %      62.8 % 
California     18.5 %      37.4 %      33.7 %      28.9 %      28.3 %      31.1 %      26.0 % 
Texas     0.0 %      4.4 %      6.3 %      9.1 %      3.2 %      3.1 %      0.0 % 
Idaho     0.0 %      0.0 %      9.6 %      8.1 %      5.0 %      4.9 %      4.2 % 
Other     0.0 %      0.3 %      5.6 %      6.0 %      8.0 %      7.9 %      7.0 % 
Total     100 %      100 %      100 %      100 %      100 %      100 %      100 % 

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RISK FACTORS

Our business involves a high degree of risk. You should carefully consider the following information about risks, together with the other information contained in this prospectus, in determining whether or not to purchase our common stock. The risks described below are those that we believe are the material risks relating to this offering and the purchase of our common stock. If any of the circumstances or events described below, or others that we did not anticipate, actually arise or occur, our business, prospects, financial condition, results of operations, and cash flows could be harmed. In any such case, the market price of our shares of common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business Strategy and Our Operations

We may continue to record losses as a result of additional provisions for credit losses or otherwise, which may harm our results of operations.

Due primarily to the recording of a provision for credit losses relating to our commercial mortgage loans, we reported a net loss of $258.3 million, $74.5 million and $65.6 million for the years ended December 31, 2008, 2009 and the nine months ended September 30, 2010, respectively. As of September 30, 2010, our accumulated deficit aggregated $474.1 million. Our historical business model relied on the availability of third-party capital to our borrowers to re-finance short-term commercial real estate bridge loans that we provided to the borrowers to facilitate real estate entitlement and development. However, the erosion of the U.S. and global credit markets in 2008 and 2009, including a significant and rapid deterioration of the commercial mortgage lending and related real estate markets, has substantially curtailed the availability of traditional sources of permanent take-out financing. As a result, we have experienced increased default and foreclosure rates on our commercial real estate mortgage loans. In addition, as a result of these changes, we modified certain commercial real estate mortgage loans, including modifications to the applicable periodic repayment rates and extended maturity dates by two years or longer. We may continue to record net losses in the future as a result of additional provisions for record losses or otherwise which may harm our results of operations.

Our operating expenses will continue to increase as a result of the recent completion of the Conversion Transactions and our active efforts to pursue enforcement on defaulted loans, subsequent foreclosure and our resulting ownership of the underlying collateral.

We bear overhead or operating expenses, including costs associated with commercial real estate mortgage loan originations, member development and operations, and other general overhead costs which the Manager previously was required to bear or voluntarily paid on behalf of the Fund prior to the consummation of the Conversion Transactions. As a result, we expect our overhead and operating expenses to increase, and the increase in these expenses may not necessarily be offset in whole or in part by increased revenues as a result of the acquisition of the Manager and Holdings. For the years ended December 31, 2007, 2008, and 2009 and the period from January 1, 2010 through June 18, 2010 (the date of the acquisition), the Manager paid $19.9 million, $18.2 million, $5.9 million and $2.7 million, respectively, of those expenses. Additionally, we are required to pay direct expenses or costs, which include salaries paid to our employees, expenses or costs related to our defaulted commercial real estate mortgage loans, foreclosure activities, property acquired through foreclosure, and interest expense paid on mortgage loans that we have sold or participated. As a result of our active efforts to pursue enforcement on defaulted loans, subsequent foreclosure and our resulting ownership of the underlying collateral, the costs related to these activities have also significantly increased and are expected to continue to increase. These costs are material and may harm our results of operations, cash flow and liquidity.

Increases in operating expenses as a result of the completion of this offering could harm our business, financial condition and results of operations.

As a publicly-reporting company, we incur significant accounting, legal and other expenses, including the costs associated with filing periodic reports with the SEC. We expect these and related costs to increase as a result of listing our shares of common stock on the NYSE, becoming subject to rules of the NYSE and complying with additional corporate governance requirements, including the retention of independent directors and the formation of additional board committees. The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the Exchange Act, and the rules and regulations promulgated thereunder, impose additional

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requirements on publicly-reporting companies. For example, the Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and maintain, test and report on internal control over financial reporting. Because we are currently a non-accelerated filer for SEC reporting purposes, we are not currently subject to this requirement but expect we will incur the additional expense to have our auditors attest to management’s evaluation of the effectiveness of its internal controls over financial reporting in accordance with Section 404(b) of the Sarbanes-Oxley Act as a result of becoming an accelerated filer for SEC reporting purposes by virtue of listing on the NYSE and raising additional capital. We expect to devote a substantial amount of time to these compliance initiatives, which diverts management from otherwise focusing on our day-to-day business activities. As a result, our operating expenses may increase, which could harm our business, financial condition and results of operations.

We have wide discretion as to the application of proceeds from this offering and you will be unable to evaluate allocation of net proceeds from that offering or otherwise.

While we continue to evaluate many potential opportunities that we believe may be attractive, we have not committed any of the proceeds from this offering to any specific future investment and there can be no assurance that we will be able to identify and acquire our target assets, originate loans or negotiate acceptable terms for these investments. In addition, our investments will be selected by our management and our stockholders will not have any input into such investment decisions. Our investment policy provides substantial flexibility with respect to the types and amounts of assets we may acquire or originate, including investments originating from the proceeds of this offering, and this policy may be modified by our Investment Committee at any time. As a result, you will not be able to evaluate the specific manner in which the proceeds from this offering or other assets will be invested or the economic merit of our expected investments before purchasing our common stock and you may not agree with any such investments. Further, we cannot assure you that we will be able to identify assets that meet our investment criteria in a timely manner or at all, that we will be successful in consummating the investment opportunities we identify or that the investments we may make using the net proceeds of this offering will yield attractive returns. These factors will increase the uncertainty and risk of investing in our shares of common stock and could adversely affect our ability to invest the proceeds and other assets effectively and may harm our business, financial condition, results of operations, cash flows and our ability to make distributions to our stockholders.

We anticipate that a significant portion of our portfolio will continue to be in the form of non-performing and distressed commercial real estate mortgage loans, or loans that may become non-performing and distressed, which are subject to increased risks relative to performing mortgage loans.

As is the case with our current assets, we anticipate that a significant portion of our future assets will continue to be in the form of commercial real estate mortgage loans that we originate or acquire, including non-performing and distressed commercial mortgage loans, which are subject to increased risks of loss. These loans may already be, or may become, non-performing or distressed for a variety of reasons, including, without limitation, because the underlying property is too highly leveraged or the borrower becomes financially distressed, in either case, resulting in the borrower being unable to meet its debt service or repayment obligations to us. These non-performing or distressed commercial real estate mortgage loans may require a substantial amount of workout negotiations or restructuring, which may divert the attention of our management from other activities and entail, among other things, a substantial reduction in the interest rate, capitalization of interest payments, and a substantial write-down of the principal of our loans. However, even if we successfully accomplish these restructurings, our borrowers may not be able or willing to maintain the restructured payments or refinance the restructured commercial real estate mortgage loans upon maturity. In addition, claims may be assessed against us on account of our position as mortgage holder or property owner, including responsibility for tax payments, environmental hazards and other liabilities, which could harm our results of operations, financial condition and our ability to make distributions to our stockholders.

In addition, certain non-performing or distressed commercial real estate mortgage loans that we acquire may have been originated by financial institutions that are or may become insolvent or suffer from serious financial stress or are no longer in existence. As a result, the recourse to the selling institution or the standards by which these loans are being serviced or operated may be adversely affected. Further, loans on properties operating under the close supervision of a mortgage lender are, in certain circumstances, subject to certain additional potential liabilities that may exceed the value of our investment.

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We may need to foreclose on a significant portion of the loans in our portfolio, which could harm our results of operations and financial condition.

As with our current commercial real estate mortgage loans, we may find it necessary or desirable to foreclose on many of the mortgage loans we originate or acquire, and the foreclosure process may be lengthy and expensive. Whether or not we have participated in the negotiation of the terms of any such loans, we cannot assure you as to the adequacy of the protection of the terms of the applicable loan, including the validity or enforceability of the loan and the maintenance of the anticipated priority and perfection of the applicable security interests. Furthermore, claims may be asserted by lenders or borrowers that might interfere with enforcement of our rights. Borrowers may resist mortgage foreclosure actions by asserting numerous claims, counterclaims and defenses against us, including, without limitation, lender liability claims and defenses, even when the assertions may have no basis in fact, in an effort to prolong the foreclosure action and seek to force the lender into a modification of the loan or a favorable buy-out of the borrower’s position in the loan. In some states, foreclosure actions can take several years or more to litigate. At any time prior to or during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure actions and further delaying the foreclosure process and potentially results in a reduction or discharge of a borrower’s mortgage debt. Foreclosure may create a negative public perception of the related mortgaged property, resulting in a diminution of its value. Even if we are successful in foreclosing on a loan, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us. Furthermore, any costs or delays involved in the foreclosure of the loan or a liquidation of the underlying property will further reduce the net proceeds and, thus, increase the loss.

If our exposure to a particular borrower or borrower group increases, the failure by that borrower or borrower group to perform on its loan obligations could harm our results of operations and financial condition.

Our investment policy provides that no single loan should exceed 10% of the total of all outstanding loans and that aggregate loans outstanding to one borrower or borrower group should not exceed 20% of the total of all outstanding loans. Following the origination of a loan, however, a single loan or the aggregate loans outstanding to a borrower or borrower group may exceed those thresholds as a result of changes in the size and composition of our overall portfolio. As of September 30, 2010, we had one borrower whose outstanding principal totaled $69.1 million, which was approximately 14.1% of our total mortgage loan principal balance outstanding, and is classified as “pre-entitled land – processing entitlements”. In addition, we had one borrowing group whose aggregate outstanding principal aggregated $99.4 million, representing approximately 20.3% of our total mortgage loan principal balance outstanding, which consisted of a $57.5 million loan, classified as “construction and existing structures – improvements” and a $41.9 million loan classified as “entitled land – infrastructure under construction”. Finally, we had an additional borrowing group whose outstanding principal aggregated $55.0 million, representing 11.2% of our total mortgage loan principal balance outstanding, which consisted of nine loans classified as “pre-entitled” or “entitled land”. Each of these loans was in non-accrual status as of December 31, 2009 and September 30, 2010 due to the shortfall in the combined current fair value of the underlying collateral for such loans, and we recognized no mortgage interest income for these loans during the nine months ended September 30, 2010.

When the loan or loans outstanding to a single borrower or borrower group exceed those thresholds, we face heightened exposure to the possibility that the single borrower or borrower group (as opposed to a diversified group of borrowers) will not be able to perform its obligation under the loan, which could cause us to take a number of actions, including the institution of foreclosure proceedings, that could harm our results of operations and financial condition.

If we experience additional difficulty in analyzing potential investment opportunities for our assets as a result of recent dislocations in the real estate market or otherwise, we may incur losses that could harm our financial condition, results of operations and our ability to pay dividends to our stockholders.

Our success depends, in part, on our ability to analyze effectively potential investment opportunities in order to assess the level of risk-adjusted returns that we should expect from any particular asset. To estimate the value of a particular asset, we may use historical assumptions that may or may not be appropriate during the current unprecedented downturn in the real estate market and general economy. To the extent that we use

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historical assumptions that are inappropriate under current market conditions, we may lend on a real estate asset that we might not otherwise lend against, overpay for an asset or acquire an asset that we otherwise might not acquire or be required to later write-down the value of assets acquired on the basis of such assumptions as we have been required to do with our current portfolio, which may harm our results of operations and our ability to pay dividends to our stockholders.

In addition, as part of our overall risk management, we analyze interest rate changes and prepayment trends separately and collectively to assess their effects on our assets. In conducting our analysis, we may depend on certain assumptions based upon historical trends with respect to the relationship between interest rates and prepayments under normal market conditions. Recent dislocations in the real estate mortgage market or other developments may change the way that prepayment trends have historically responded to interest rate changes, which may harm our ability to (i) assess the market value of our assets, (ii) implement any hedging strategies we may decide to pursue, and (iii) implement techniques to reduce our prepayment rate volatility. If our estimates prove to be incorrect or our hedges do not adequately mitigate the impact of changes in interest rates or prepayments, we may incur losses that could harm our financial condition, results of operations and our ability to pay dividends to our stockholders.

The supply of commercial mortgage loans available at significant discounts will likely decrease as the economy improves, which could prevent us from implementing our business strategies.

Our business strategy focuses on the acquisition and origination of commercial mortgage loans and other distressed real estate-related assets and the disposition of a significant portion of our existing assets, individually or in bulk. However, when the current conditions in the commercial mortgage market, the financial markets and the economy stabilize or improve, the availability of borrowers and projects that meet our underwriting criteria, or commercial mortgage loans that meet our current business objectives and strategies will likely decrease, which could prevent us from implementing our business strategies. As a result, any of our current strategies or future strategies we pursue in light of these changes may not be successful. Additionally, the manner in which we compete and the types of assets we seek to acquire will be affected by sudden changes in our industry, the regulatory environment, the role of government-sponsored entities, the role of credit rating agencies or their rating criteria or process, or the U.S. and global economies generally. If we do not effectively respond to these changes, or if our strategies to respond to these changes are not successful, our financial condition and results of operations may be harmed. In addition, we may not be successful in executing our business strategies and even if we successfully implement our business strategies, we may not ever generate revenues or profits.

Litigation or claims, including in connection with the recently consummated Conversion Transactions, may harm our business.

We are subject to a number of claims relating to the recently consummated Conversion Transactions and our historical operations. As discussed more fully under the heading “Our Business — Legal Proceedings,” three proposed class action lawsuits have been filed in the Delaware Court of Chancery against us and affiliated named individuals and entities, containing similar allegations. An action was also filed on June 14, 2010 by certain Fund members, alleging that fiduciary duties and the duty of disclosure owed to Fund members and to the Fund were breached. We and the named individuals and entities affiliated with us dispute these claims and will defend vigorously against this action. These class action lawsuits were consolidated on October 25, 2010 and a consolidated class action complaint was filed on December 17, 2010. Our response to the complaint is due on January 31, 2011. A member has also filed a lawsuit against us and individuals and entities associated with a broker-dealer who placed the member in the Fund, alleging breach of fiduciary duty by the broker dealer and failure to disclose by us. A trial date has been set for June 22, 2011. In addition, purported members filed a lawsuit against us and affiliated named individuals on December 29, 2010 alleging breach of fiduciary duties in connection with the Conversion Transactions and alleging that we wrongfully rejected a certain member’s requests for records, defamed the member and wrongfully brought a civil action related to the Conversion Transactions. We dispute these claims and intend to defend vigorously against these actions. We have been required to devote substantial time and resources to defend against such actions, resolution of any of which in the plaintiff’s favor could significantly harm our business and results of operations. Any such resolution could result, among other things, in the imposition of monetary remedies, which could harm our results of operations and financial condition, and/or the imposition of injunctive

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measures that could limit our operations flexibility and harm our business. Regardless of the merits of these claims, we have incurred significant additional expenses and devoted significant attention to the outcome of these matters. Other parties may also assert claims or legal actions against us, our directors or executive officers or other parties indemnified by us. Although we believe these existing claims are insured (subject to applicable deductions), there can be no guarantee these existing or future claims will be covered by our carrier. Regardless of the merits of such claim or legal action, we may incur significant additional expenses, liabilities and indemnification obligations, and any uncertainty as to the outcome of litigation and could distract management attention from focusing on managing our business and make it more difficult to raise capital on attractive terms or at all. As a result, we could be required to make cash payments at a time when we lack sufficient liquidity to do so, which would force us to sell assets at a significant discount to values that may otherwise be realizable.

If we are required to fund the entire amount of unfunded loans-in-process, our liquidity may be adversely affected.

We have contractual commitments on unfunded commercial mortgage loans to our borrowers in process and interest reserves totaling $18.7 million at September 30, 2010, of which we estimate we will be required to fund no more than $15.0 million and no more than $8.9 million in cash. The latter amount excludes amounts of previous commitments that we are no longer obligated to fund because the borrowers are in default, the loans have been modified to lower the funding amount, or the loan funding was contingent on various project milestones which were not met. If we are required to fund any of the unfunded contractual commitments to our borrowers for unfunded commercial mortgage loans-in-process, this could adversely affect our liquidity. For more information about our loan fundings, see the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations of IMH Financial Corporation —  Requirements for Liquidity — Loan Fundings.”

If outside consultants or employees aren’t available to assist us with our loan workouts, we may not be able to realize the full potential value of these loans.

Substantially all of our commercial mortgage loans are in default, and currently performing loans may default in the future. We have historically engaged a team of consultants who are physically located at our premises to assist us in negotiating and managing non-performing and distressed loans. We recently internalized most of these consultants, but continue to engage consultants physically resident on our premises to assist our team. We rely on these consultants to supplement our loan workout department. Some of these consultants are also employed by other unrelated clients to whom the consultant is obligated to provide time and attention and, thus, these consultants may be unavailable to us from time to time. If employees or consultants are not available to assist us in negotiating and managing non-performing or distressed loans, our rights as a lender or creditor could be compromised and we may not be able to realize the full potential value of these loans.

A secondary market for our loans or other assets we acquire may not develop, in which case we may not be able to diversify our assets in response to changes in economic and other conditions, and we may be forced to bear the risk of deteriorating real estate markets, which could increase borrower defaults on our loans and cause us to experience losses.

Many of our target assets, including commercial mortgage loan related assets, generally experience periods of illiquidity, such as the current period of delinquencies and defaults with respect to commercial mortgage loans. In addition, a secondary market for our portfolio loans or other assets we acquire may not develop. We will generally bear all the risk of our assets until the loans mature, are repaid or are sold. A lack of liquidity may result from the absence of a willing buyer or an established market for these assets, as well as legal or contractual restrictions on resale or the unavailability of financing for these assets. In addition, certain of our target assets, such as bridge loans and other commercial real estate mortgage loans may also be particularly illiquid assets due to their short life, their potential unsuitability for securitization and the greater difficulty of recovery in the event of a borrower’s default. The potential illiquidity of our assets may make it difficult for us to sell such assets at advantageous times or at favorable prices, including, if necessary, to maintain our exemption from the Investment Company Act. Moreover, turbulent market conditions, such as those currently in effect, could harm the liquidity of our assets. As a result, our ability to sell our assets and purchase new assets may be relatively limited, which may cause us to incur losses. If we are required to sell

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all or a portion of our assets quickly, we may realize significantly less than the value at which we have previously recorded our assets. This will limit our ability to mitigate our risk in changing real estate markets and may result in reduced returns to our stockholders.

Our access to public capital markets and private sources of financing may be limited and, thus, our ability to make investments in our target assets may be limited.

Our access to public capital markets and private sources of financing will depend upon a number of factors over which we have little or no control, including, among others, the following:

general market conditions;
the market’s view of the quality of our assets;
the market’s view of our management;
the market’s perception of our growth potential;
our eligibility to participate in, and access capital from, programs established by the U.S. government;
our current and potential future earnings and cash distributions; and
the market price of our common stock.

The current dislocations and weaknesses in the capital and credit markets could adversely affect one or more private lenders and could cause one or more lenders to be unwilling or unable to provide us with financing or to increase the costs of such financing to us. In addition, several banks and other institutions that historically have been reliable sources of financing have gone out of business, which has reduced significantly the number of lending institutions and the availability of credit. Moreover, the return on our assets and cash available for distribution to our stockholders may be reduced to the extent that market conditions prevent us from leveraging our assets or cause the cost of our financing to increase relative to the income that can be derived from the assets acquired. If we are unable to obtain financing on favorable terms or at all, we may have to curtail our investment activities, which could limit our growth prospects, and we may be forced to dispose of assets at inopportune times in order to maintain our Investment Company Act exemption.

Under current market conditions, structured financing arrangements are generally unavailable, the shortage of which has also limited borrowings under warehouse and repurchase agreements that are intended to be refinanced by such financings. Consequently, depending on market conditions at the relevant time, we may have to rely more heavily on additional equity issuances, which may be dilutive to our stockholders, or on more expensive forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities, cash dividends to our stockholders and other purposes. We may not have access to such equity or debt capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities or to dispose of assets at inopportune times, and could harm our results of operations and growth prospects.

We may lack control over certain of our commercial mortgage loans and other investments that we participate in with other lenders, which may result in dispositions of these investments that are inconsistent with our economic, business and other interests and goals.

Our ability to manage our portfolio of loans and other investments may be limited by the form in which they are made. Certain of our assets are participations in existing mortgage loans with other lenders, and we may purchase commercial mortgage loans jointly with other lenders, acquire investments subject to rights of senior classes and servicers under inter-creditor or servicing agreements; acquire only a participation interest in an underlying investment; or rely on independent third-party management or strategic partners with respect to the management of an asset. Therefore, we may not be able to exercise control over the loan or investment. Such financial assets may involve risks not present in investments where senior creditors, servicers or third-party controlling investors are not involved. Our rights to enforcement following a borrower default may be subject to the rights of senior creditors or servicers or third-party partners with economic, business or other interests or goals which may be inconsistent with ours. In addition, we may, in certain circumstances, be liable

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for the actions of our third-party partners. These decisions and judgments may be different than those we would make and may be adverse to us.

Short-term loans that we may originate or acquire may involve a greater risk of loss than traditional investment-grade mortgage loans with fully insured borrowers, which could result in greater losses.

We have historically, and intend to continue to, originate or acquire commercial real estate-bridge loans secured by first lien mortgages on properties of borrowers who are typically seeking short-term capital to be used in the acquisition, construction or rehabilitation of properties. The typical borrower under a short-term loan has usually identified what they believe is an undervalued asset that may have been under-managed or located in a recovering market. If the market in which the asset is located fails to recover according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management or the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the short-term loan, and we bear the risk that we may not recover some or all of our loan amount.

In addition, borrowers under a bridge loan usually use the proceeds of a conventional mortgage loan to repay a short-term loan. The risk of a borrower’s inability to obtain permanent financing is increased under current market conditions. Therefore, bridge loans are subject to the risk of a borrower’s inability to obtain permanent financing to repay the short-term loan. Short-term loans are also subject to the risk associated with all commercial mortgage loans — borrower defaults, bankruptcies, fraud, losses and “special hazard” losses that are not covered by standard hazard insurance. In the event of any default under short-term loans held by us as lenders, we bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount and unpaid interest accrued under the short-term loan. To the extent we suffer such losses with respect to our short-term loans, the value of our company and the price of our shares of common stock may be harmed.

The subordinated loan assets that we may acquire, which involve greater risks of loss than senior loans secured by income-producing properties, could result in losses that could harm our results of operations and our ability to make distributions to our stockholders.

We may acquire subordinated loans secured by junior mortgages on the underlying property or loans secured by a pledge of the ownership interests of either the entity owning the property or a pledge of the ownership interests of the entity that owns the interest in the entity owning the property. These types of assets involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property, because the loan may become unsecured as a result of foreclosure by the senior lender. In addition, these loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal. If a borrower defaults on our subordinated loan or debt senior to our loan, or in the event of a borrower bankruptcy, our subordinated loan will be satisfied only after the senior debt is paid in full. Where debt senior to our portfolio loan exists, the presence of intercreditor arrangements between the holder of the mortgage loan and us, as the subordinated lender, may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies and control decisions made in bankruptcy proceedings relating to borrowers. As a result, we may not recover some or all of our investment, which could result in losses to us. In addition, even if we are able to foreclose on the underlying collateral following a borrower’s default on a subordinated loan, we may assume the rights and obligations of the defaulting borrower under the loan and, to the extent income generated on the underlying property is insufficient to meet outstanding debt obligations on the property, we may need to commit substantial additional capital to stabilize the property and prevent additional defaults to lenders with existing liens on the property. Significant losses related to our subordinated loans could harm our results of operations and our ability to make distributions to our stockholders.

Our due diligence may not reveal all of a borrower’s assets or liabilities and may not reveal other investment risks or weaknesses in a business which could result in loan losses.

Before acquiring an asset or making a loan to a borrower, we assess the strength and skills of the asset or potential borrower and other factors that we believe are material to the performance of the asset. In making this assessment and otherwise conducting customary due diligence, we rely on numerous resources reasonably available to us and, in some cases, an investigation by third parties. This process is particularly subjective, and of lesser value than would otherwise be the case, with respect to newly organized entities because there may

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be little or no information publicly available about those entities. There can be no assurance that our due diligence processes will uncover all relevant facts or problems, or that any particular asset will be successful.

We may enter into hedging transactions that could expose us to losses.

We may enter into hedging transactions that could require us to fund cash payments in certain circumstances such as the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument. The amount due upon early termination or as the result of a request for margin securities would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses would be reflected in our results of operations. Our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time. The need to fund these obligations could harm our financial condition. We also may pursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates. Our hedging activity will vary in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging could harm or fail to protect us because, among other things:

interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;
available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;
the duration of the hedge may not match the duration of the related liability;
the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and
the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.

In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying hedging transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in its default. Default by a party with whom we enter into a hedging transaction may result in unrealized losses or the loss of unrealized profits and force us to cover our commitments, if any, at the then current market price. It may not always be possible to dispose of, close out or terminate a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract in order to cover our risk. A liquid secondary market may not exist for any hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses to us. Moreover, there can be no assurance that the hedging agreement would qualify for hedge accounting or that our hedging activities would have the desired beneficial impact on our financial performance and liquidity. Should we choose to terminate a hedging agreement, there could be significant costs and cash requirements involved to fulfill our initial obligation under the hedging agreement. The risks above relating to any of our hedging transactions may harm our results of operations and limit our ability to make distributions to our stockholders.

Recent legislative and regulatory initiatives could harm our business.

The U.S., state and foreign governments have taken or are considering extraordinary actions in an attempt to address the worldwide financial crisis and the severe decline in the global economy, and to seek to address the perceived underlying causes of the financial crisis to prevent or mitigate the recurrence. These actions or other actions under consideration may not ultimately be successful or beneficial to us and could result in unintended consequences or new regulatory requirements which may be difficult or costly to comply with. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act or the Dodd-Frank Act, was signed into law in the U.S. Among other things, the Dodd-Frank Act creates of a Financial Services

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Oversight Council to identify emerging systemic risks and improve interagency communication, creates a Consumer Financial Protection Agency authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank finance companies, imposes a comprehensive new regulatory regime of financial markets, including derivatives and securitization markets and creates an Office of National Insurance within Treasury. While the bill has been signed into law, a number of provisions of the law remain to be implemented through the rulemaking process at various regulatory agencies. We are unable to predict what the final form of these rules will be when implemented by the respective agencies, but we believe that certain aspects of the new legislation, including, without limitation, the additional cost of higher deposit insurance and the costs of compliance with disclosure and reporting requirements and examinations by the new Consumer Financial Protection Agency, could have a significant impact on our business, financial condition and results of operations. Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced or how such changes may affect us. For example, bankruptcy legislation could be enacted that would hinder the ability to foreclose promptly on defaulted mortgage loans or permit limited assignee liability for certain violations in the mortgage origination process, any or all of which could adversely affect our business or result in us being held responsible for violations in the mortgage loan origination process even were we were not the originator of the loan.

Other laws, regulations, and programs at the federal, state and local levels are under consideration that seek to address the economic climate and real estate and other markets and to impose new regulations on various participants in the financial system. These or other actions harm our business, results of operations and financial condition. Further, the failure of these or other actions and the financial stability plan to stabilize the economy could harm our business, results of operations and financial condition.

Our business is subject to regulation by several government agencies and a disciplinary or civil action that occurs as a result of an actual or alleged violation of any rules or regulations to which we are subject could harm our business.

We are subject to extensive regulation and oversight by various state and federal regulatory authorities, including, without limitation, the Arizona Corporation Commission, or the ACC, the Arizona Department of Revenue, the Arizona Department of Financial Institutions (Banking) and the SEC. We believe that many of these authorities have generally increased their scrutiny of the entities they regulate following recent events in the homebuilding, finance and capital markets sectors. We are also subject to various federal and state securities laws regulating the issuance and sale of securities. We also in the future may be required to obtain various approvals and/or licenses from federal or state governmental authorities, government sponsored entities in connection with our mortgage-related activities. There is no assurance that we will be able to obtain or maintain any or all of the approvals that we need in a timely manner. In the event that we do not adhere to these license and approval requirements and other laws and regulations which apply to us, we could face potential fines or disciplinary or other civil action that could restrict or otherwise harm our business.

We received notice from the SEC on June 8, 2010 that it is conducting an investigation related to us, and, in connection therewith, the SEC requested certain of our documents. Our present intention is to work cooperatively with the SEC in its investigation, however, we do not believe that we have violated any federal securities laws. Regardless of the ultimate outcome, the existence of a pending investigation could harm our business, or make it more difficult or impossible to raise additional financing on attractive terms or at all.

In addition, following the suspension of certain of our activities, including the suspension of our willingness to execute redemption requests from holders of membership units in the Fund, certain of the members have requested that their redemption requests be honored due to financial hardships or other reasons. In each instance, we have responded that we will not grant such requests and are treating all of the members uniformly. Certain of the members have filed grievances with the SEC and possibly other regulatory agencies related to the Manager’s administration of the Fund, and we are unable to predict the outcome of any such grievances.

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An existing SEC investigation could harm our business, including by making it more difficult to raise financing on attractive terms or at all.

We received notice from the SEC on June 8, 2010 that it is conducting an investigation related to us, and, in connection therewith, the SEC requested certain of our documents. Our present intention is to work cooperatively with the SEC in its investigation, however, we do not believe that we have violated any federal securities laws. Regardless of outcome, the existence of a pending investigation could harm our business, or make it more difficult or impossible to raise additional financing on attractive terms or at all, and distract management’s attention from running our business. An adverse resolution of the investigation could also result in fines or disciplinary or other actions that restrict or otherwise harm our business.

Maintenance of our exemption from registration under the Investment Company Act will impose significant limitations on our operations, which may have a material adverse effect on our ability to execute our business strategy.

We currently conduct our business in a manner that will allow us to avoid being regulated as an investment company under the Investment Company Act and intend to continue to do so. If we become subject to the Investment Company Act, we would be required to comply with numerous additional regulatory requirements and restrictions, any or all of which could harm the sustainability of our operations and our ability to pay dividends, and force us to discontinue the business. We believe that we have qualified for the exemption from registration under the Investment Company Act. Pursuant to Section 3(c)(5)(C) of the Investment Company Act, entities that are primarily engaged in the business of purchasing or otherwise acquiring “mortgages and other liens on and interests in real estate” are exempted from regulation thereunder. The staff of the SEC has provided guidance on the availability of this exemption, expressing the position that the SEC would regard an issuer as being engaged primarily in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate if (i) at least 55% of the value of the issuer’s assets consists of mortgages and other liens on, and interests in, real estate, or Qualifying Assets, and (ii) at least an additional 25% of the value of the issuer’s assets consists of Qualifying Assets or other real estate type interests (including loans in respect of which 55% of the fair market value of each such loan is secured by real estate at the time the issuer acquires the loan) or Real Estate-Related Assets. Not more than 20% of the issuer’s assets may consist of miscellaneous investments, including all other loans held by an issuer, cash, government securities, and investments in partnerships or other businesses not qualifying as either Qualifying Assets or Real Estate-Related Assets. Mortgage-related securities that do not represent all of the certificates issued with respect to the underlying pool of mortgages may also not qualify under this 55% test. Therefore, our ownership of these types of loans and equity interests may be limited by the provisions of the Investment Company Act. To the extent we do not comply with the SEC staff’s 55% test, another exemption or exclusion from registration as an investment company under the Investment Company Act or other interpretations of the Investment Company Act, we may be deemed an investment company. If we fail to maintain an exemption or other exclusion from registration as an investment company we could, among other things, be required either to substantially change the manner in which we conduct our operations to avoid being required to register as an investment company, effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or to register as an investment company, either of which could have an adverse effect on us and the market price of our common stock. If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry concentration and other matters. As of September 30, 2010, more than approximately 92% of our total assets were invested in assets we consider to be Qualifying Assets, approximately less than an additional 1% of our total assets were invested in assets we believe to be Real Estate-Related Assets, and less than 7% of our assets constituted other assets.

If the market value or income potential of our real estate-related investments declines as a result of increased interest rates, prepayment rates or other factors, we may need to increase our real estate investments and income or liquidate our non-qualifying assets in order to maintain our exemption from the Investment Company Act. In view of the illiquid nature of certain of our real estate and real estate-related investments, we may not be able to liquidate our non-qualifying assets at opportune times or prices, if at all, in order to maintain our Investment Company Act exemption. Similarly, we may not have sufficient capital or access to

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capital at favorable prices, if at all, if we were required to increase our qualifying real estate assets in order to maintain our Investment Company Act exemption. If the value of our assets fluctuates dramatically, our ability to maintain compliance may be particularly difficult, which may cause us to make investment decisions that we otherwise would not make absent Investment Company Act considerations. Moreover, as the real estate market evolves, we may determine that the commercial real estate market does not offer the potential for attractive risk-adjusted returns pursuant to an investment strategy that is consistent with our intention to operate in a manner to maintain our exemption from registration under the Investment Company Act. For example, if we believe the maintenance of our exemption under the Investment Company Act imposes undue limitations on our ability to generate attractive risk-adjusted returns to our investors, our board of directors may approve the wind down of our assets and liquidation of our business.

If we were required to register as an investment company under the Investment Company Act but failed to do so, the SEC could bring an action to enjoin us from further violating the Investment Company Act. Also, there can be no assurance that the laws and regulations governing the Investment Company Act status of our company, including the Division of Investment Management of the SEC providing more specific or different guidance regarding the treatment of assets as qualifying real estate assets or real estate-related assets, will not change in a manner that adversely affects our operations. As a result, the Investment Company Act may limit our ability to generate returns for our stockholders.

Any borrowing by us will increase our risk, which may reduce the return on our assets, reduce cash available for distribution to our stockholders and increase losses.

Subject to market conditions and availability, we may use borrowings to generate additional liquidity for the payment of operating expenses, costs relative to the ownership of REO assets, obligations under our loans to borrowers or to finance our assets or make other investments. As of September 30, 2010, through wholly-owned subsidiaries, we had secured financing from lenders with a total borrowing capacity of $16.1 million, of which $12.1 million was outstanding at September 30, 2010, for the purpose of funding remaining loan obligations, anticipated development costs for REO assets, and working capital needs. We expect that additional borrowings may be necessary or advisable from time to time. Any borrowings will require us to carefully manage our cost of funds and we may not be successful in this effort. We may borrow funds from a number of sources, including repurchase agreements, resecuritizations, securitizations, warehouse facilities and bank credit facilities (including term loans and revolving facilities), and the terms of any indebtedness we incur may vary. Given current market conditions, we may also seek to take advantage of available borrowings, if any, under government sponsored debt programs, to acquire all types of commercial real estate mortgage loans and other real estate-related assets, to the extent such assets are eligible for funding under such programs. Although we are not currently required to maintain any particular assets-to-equity leverage ratio, the amount of leverage we may deploy will depend on our available capital, our ability to access financing arrangements, our estimated stability of cash flows generated from the assets in our portfolio and our assessment of the risk-adjusted returns associated with those assets, our ability to enter into repurchase agreements, resecuritizations, securitizations, warehouse facilities and bank credit facilities (including term loans and revolving facilities), our ability to participate in and obtain funding under programs established by the U.S. government, available credit limits and financing rates, type or amount of collateral required to be pledged and our assessment of the appropriate amount of leverage for the particular assets we are funding.

Borrowing subjects us to a number of other risks, including, among others, the following:

if we are unable to repay any indebtedness or make interest payments on any loans we incur, our lenders would likely declare us in default, result in acceleration of debt (and any other debt containing a cross-default or cross-acceleration provision) and could require that we repay all amounts outstanding under our loan facilities, which we may be unable to pay from internal funds or refinance on favorable terms or at all;
our inability to borrow unused amounts under our financing arrangements, even if we are current in payments on our borrowings under those arrangements;
the potential loss of some or all of our assets securing the borrowing to foreclosure or sale;

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our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment yields will increase with higher financing costs;
we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, future business opportunities, stockholder distributions or other purposes;
we may not be able to refinance debt that matures prior to an investment it was used to finance on favorable terms, or at all; and
some lenders may require as a condition of making a loan to us that the lender receive a priority on mortgage repayments received by us on our mortgage portfolio, thereby requiring the first dollars we collect to go to our lenders.

Any of these risks could harm our business and financial condition.

Any repurchase agreements and bank credit facilities that we may use in the future to finance our assets may require us to provide additional collateral or pay down debt which could reduce our liquidity, ability to use leverage and return on assets.

We have and may continue to utilize repurchase agreements and bank credit facilities (including term loans and revolving facilities) to finance our assets if such financing becomes available to us on acceptable terms. In the event we utilize such financing arrangements, they would involve the risk that the market value of the loans pledged or sold by us to the repurchase agreement counterparty or provider of the bank credit facility may decline in value, in which case the lender may require us to provide additional collateral or to repay all or a portion of the funds advanced. We may not have the funds available to repay our debt at that time, which would likely result in defaults unless we are able to raise the funds from alternative sources, which we may not be able to achieve on favorable terms or at all. A lender’s requirement that we post additional collateral would reduce our liquidity and limit our ability to leverage our assets. If we cannot meet these requirements, the lender could accelerate our indebtedness, increase the interest rate on advanced funds and terminate our ability to borrow funds from them, which could harm our financial condition and ability to implement our business plan. In addition, in the event that a lender to us files for bankruptcy or becomes insolvent, the loans to us may become subject to bankruptcy or insolvency proceedings, thus depriving us, at least temporarily, of the benefit of these assets. Such an event could restrict our access to bank credit facilities and increase our cost of capital. The providers of repurchase agreement financing and bank credit facilities may also require us to maintain a certain amount of cash or set aside assets sufficient to maintain a specified liquidity position that would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose which could reduce our return on assets. In the event that we are unable to meet these collateral obligations, our financial condition and prospects could deteriorate rapidly.

To the extent that we obtain debt financing as a borrower, we expect that certain of our financing facilities may contain restrictive covenants relating to our operations, which could harm our business, results of operations, ability to pay dividends to our stockholders and the market value of our common stock.

If or when we obtain debt financing as a borrower, lenders (especially in the case of bank credit facilities) may impose restrictions on us that would affect our ability to incur additional debt, make certain acquisitions, reduce liquidity below certain levels, pay dividends to our stockholders, redeem debt or equity securities and impact our flexibility to determine our operating policies and business strategies. For example, such loan documents could contain negative covenants that limit, among other things, our ability to repurchase shares of our common stock, distribute more than a certain amount of our net income or funds from operations to our stockholders, hold portfolio mortgage loans for longer than established time periods, employ leverage beyond certain amounts, sell assets, engage in mergers or consolidations, grant liens, and enter into transactions with affiliates. If we fail to meet or satisfy any of these covenants, we would be in default under these agreements, and our lenders could elect to declare loans outstanding to us due and payable, terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral from us. We also may be subject to cross-default and acceleration rights and, with respect to collateralized debt, requirements for us to post additional collateral, and foreclosure rights upon default. A default also could limit significantly our financing alternatives, which could cause us to curtail our investment activities or prematurely dispose of assets.

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Any warehouse facilities that we may obtain may limit our ability to acquire or originate assets and we may incur losses if the collateral is liquidated.

We may utilize, if available, warehouse facilities pursuant to which we would accumulate mortgage loans, which assets would be pledged as collateral for such facilities. In order to borrow funds to originate or acquire assets under any future warehouse facilities, we expect that our lenders thereunder would have the right to review the potential assets for which we are seeking financing. We may be unable to obtain the consent of a lender to acquire assets that we believe would be beneficial to us and we may be unable to obtain alternate financing for such assets. The lender could liquidate the warehoused collateral and we would then have to pay any amount by which the original purchase price of the collateral assets exceeds its sale price, subject to negotiated caps, if any, on our exposure. Currently, we have no warehouse facilities in place, and may not be able to obtain one or more warehouse facilities on favorable terms, or at all.

We may seek to utilize non-recourse long-term securitizations in the future, and such structures may expose us to risks, which could result in losses to us.

In the future, we may seek to utilize non-recourse long-term securitizations of our mortgage loans, especially loan originations, if and when they become available and to the extent consistent with the maintenance of our exemption from the Investment Company Act, in order to generate cash for funding new assets. This would involve conveying a pool of assets to a special purpose vehicle (or the issuing entity) which would issue one or more classes of non-recourse promissory notes pursuant to the terms of an indenture. The notes would be secured by the pool of assets. In exchange for the transfer of assets to the issuing entity, we would receive the cash proceeds on the sale of the non-recourse notes and a 100% interest in the equity of the issuing entity. The securitization of our assets might magnify our exposure to losses on those assets because any equity interest we retain in the issuing entity would be subordinate to the notes issued to investors and we would, therefore, absorb all of the losses sustained with respect to a securitized pool of assets before the owners of the notes experience any losses. Moreover, we may not be able to access the securitization market, or be able to do so at favorable rates. The inability to consummate securitizations of our assets to finance our assets on a long-term basis could require us to seek other forms of potentially less attractive financing or to dispose of assets at an inopportune time or price, which could harm our performance and our ability to grow our business.

If we are unable to sell our existing assets, or are only able to do so at a loss, we may be unable to continue as a “going concern” or implement our investment strategy.

We are marketing a significant portion of our existing assets, individually or in bulk, to generate liquidity and capital to redeploy in our target assets and implement our investment strategy. In addition, we are pursuing enforcement (in most cases foreclosure) on almost all our loans that are currently in default, and expect to take ownership of the underlying collateral and position the asset for future monetization. As a result of the rapid decline in the economy and substantial disruptions in the real estate, capital, credit and other markets, we may be unable to sell our existing assets or be required to do so at a price below our adjusted carrying value, which could harm our business and our ability to implement our investment strategy. In addition, our ability to continue as a “going concern” for the next 12 months is predicated on our ability to sell a substantial portion of our existing assets.

If we do not resume our mortgage lending or investing activities, we will not be able to grow our business and our financial results and financial condition will be harmed.

We suspended certain of our activities as of October 1, 2008, including, among other things, the funding and origination of any new commercial mortgage loans. This election was made in order to preserve our capital and to seek to stabilize our operations and liquid assets in order to assist us in our efforts to meet our future obligations, including those pursuant to current loan commitments we have made to borrowers. The inability to fund new loans or instruments prevents us from capitalizing on interest or other fee paying assets, and managing interest rate and other risk as our existing assets are sold, restructured or refinanced, which could harm our results and financial condition.

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Due to the decline of the economy and real estate and credit markets, we anticipate defaults on our commercial mortgage loan assets and foreclosures to continue, which may harm our business.

We are in the business of acquiring, originating, marketing and selling commercial mortgage loans and, as such, we are at risk of default by borrowers. Any failure of a borrower to repay the mortgage loans or to pay interest on such loans will reduce our (i) revenue and distributions, if any, to stockholders, and (ii) potentially, the trading price of our common stock. At September 30, 2010, 36 of our loans with principal balances totaling $480.6 million were in default, and we had commenced foreclosure proceedings on 10 of these 36 loans with outstanding principal balances totaling $108.6 million. We are negotiating with the borrowers for possible discounted payoff or assessing the possibility of modifying the loan terms of the remaining nine loans in default. In addition, during the nine months ended September 30, 2010, we acquired real estate assets through foreclosure of the ten related mortgage loans with a carrying value of $25.4 million. The actual net realizable value of such properties may not exceed the carrying value of these properties at September 30, 2010. Due to the decline of the economy and real estate and credit markets and our intent to proactively pursue foreclosure of loans in default so we can dispose of REO assets, we anticipate defaults and foreclosures to continue, which will likely result in continuing high levels of non-accrual loans and REO assets, which are generally non-interest earning assets. As such, we anticipate our mortgage loan interest income to remain at significantly reduced levels until we invest the proceeds from the disposition of REO assets and this offering or other debt or equity financing in new investments and begin generating income from those investments.

Our borrowers are exposed to risks associated with owning real estate and unexpected expenses or liabilities resulting from such ownership could reduce the likelihood that our borrowers will be able to develop or sell the real estate that serves as collateral for our loans, which will increase the likelihood that our borrowers will default on the loans that we fund or acquire.

Among other matters, our borrowers are subject to risks, expenses and liabilities associated with owning real estate, including, among others:

the expense of maintaining, operating, developing and protecting the real estate that serves as collateral for our loans;
the risk of a decline in value of such real estate due to market or other forces;
the absence of financing for development and construction activities, if financing is required;
the risk of default by tenants who occupy such real estate and have rental obligations to the owners of such real estate;
the risks of zoning, rezoning, and many other regulatory matters affecting such real estate;
acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses;
acts of war or terrorism;
adverse changes in national and local economic and market conditions;
changes in, related costs of compliance with, or fines or private damage awards for failure to comply with existing or future federal, state and local laws and regulations, fiscal policies and zoning ordinances;
costs of remediation and liabilities associated with environmental conditions;
the potential for uninsured or under-insured property losses;
the impact of economic, market, environmental and political conditions on the ability to market or develop properties;
financial and tort liability risks, including construction defect claims, associated with the ownership, development and construction on such real estate; and

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market risk and the possibility that they will not be able to develop, sell or operate such real estate to generate the income expected from such real estate.

Any or all of these risks, if not properly managed by the borrower, could impose substantial costs or other burdens on our borrower or such real estate, or result in a reduction in the value of such real estate, thereby increasing the likelihood of default by the borrower on our portfolio loan and reducing or eliminating our ability to make distributions to our stockholders. In addition, to the extent we foreclose on any such real estate securing our portfolio loans, we become directly subject to these same risks.

Acquiring ownership of property through foreclosure or otherwise subjects us to the various risks of owning real property and we could incur unexpected costs and expenses, which could harm our business.

We have acquired real property in connection with foreclosures of our commercial mortgage loans in which we have invested, and we may acquire additional real property in this manner in the future. As of September 30, 2010, we owned 34 properties with an aggregate net carrying value of $109.3 million and had commenced enforcement action on 27 additional properties. As an owner of real property, we will incur some of the same obligations and be exposed to some of the same risks as the borrower was prior to our foreclosure on the applicable loan. See the risk factor above starting with “Our borrowers are exposed to risks associated with owning real estate”.

If commercial property borrowers are unable to generate net income from operating the property, we may experience losses on those loans.

The ability of a commercial mortgage loan borrower to repay a loan secured by an income-producing property, such as a multi-family or commercial property, typically is dependent primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of an income producing property can be affected by, among other things, tenant mix, success of tenant businesses, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expenses or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty at the property, changes in national, regional or local economic conditions or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances.

Although we have recourse to the borrower or in some cases, guarantors of the borrower, most of our commercial mortgage loans against an insolvent or financially distressed borrower means in practice there is generally no recourse against the borrower’s assets other than the underlying collateral. In the event of any default under a recourse or non-recourse commercial mortgage loan held directly by us, we generally bear a risk of loss of principal to the extent of any deficiency between the value of the collateral (or our ability to realize such value through foreclosure) and the principal and accrued interest on the mortgage loan, which could harm our results of operations and cash flow from operations and limit amounts available for distribution to our stockholders. In the event of the bankruptcy of a commercial mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the commercial mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a commercial mortgage loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated return on the foreclosed commercial mortgage loan.

We rely on the value of our real estate collateral to protect our commercial mortgage loans, and that real estate collateral is subject to appraisal errors and the collateral’s realizable value is subject to decrease based on events beyond our control, which may result in losses on our loans.

We depend upon the value of our real estate collateral to protect the commercial mortgage loans that we make or acquire. We depend upon the skill of independent appraisers and other techniques to value the collateral of the commercial mortgage loans we hold. However, notwithstanding the experience of the

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appraisers we select or approve, they may make mistakes or may err in their judgment. Also, the realizable value of the real estate securing our loans may decrease due to subsequent events, such as the precipitous decline in value experienced as a result of the real estate market downturn. As a result, the value of the collateral may be less than anticipated at the time the applicable commercial mortgage loan was originated or acquired. In this regard, in recent periods, the real estate markets across the United States have declined. If the value of the collateral supporting our commercial mortgage loans declines and a foreclosure sale occurs, we may not recover the full amount of our commercial mortgage loan, thus reducing the amount of our cash available, if any, and may harm our business.

Our underwriting standards and procedures may not have protected us from loan defaults, which could harm our business.

Due to the nature of our business model, we believe the underwriting standards and procedures we use are different from conventional lenders. While several procedures in our underwriting process are similar to those of traditional lenders, there are also some differences that provide us with more flexibility in underwriting and closing loans. Due to the nature of our loan approval process, there is a risk that the underwriting we performed did not, and the underwriting we perform in the future will not, reveal all material facts pertaining to the borrower and the collateral, and there may be a greater risk of default by our borrowers which, as described above, could harm our business. In addition, the underwriting standards we applied to our existing assets did not anticipate the current unprecedented downturn in the real estate market and general economy, and as a result we may recognize additional losses from loan defaults.

Guarantors of our loans may not have sufficient assets to support their guarantees, which could make enforcing such guarantees difficult and costly and could harm our operations.

Our commercial mortgage loans are not insured or guaranteed by any federal, state or local government agency. Our loans may be guaranteed by individuals or entities which are typically affiliated with the borrower. These guarantors may not have sufficient assets to back up their guarantees in whole or in part, and collections pursuant to any such guarantees may be difficult and costly. Consequently, if there is a default on a particular commercial mortgage loan and the guarantee, our only recourse may be to foreclose upon the mortgaged real property. The value of the foreclosed property may have decreased and may not be equal to the amount outstanding under the corresponding loan, resulting upon sale in a decrease of the amount of our cash available, if any, and may harm our business.

We have limited experience in managing and developing real estate and, following a foreclosure, we may not be able to manage the real estate we foreclose upon or develop the underlying projects in a timely or cost-effective manner, or at all, which could harm our results of operations.

We have limited experience in managing and developing real estate. When we acquire real estate through foreclosure on one of our loans or otherwise, we may seek to complete the underlying projects, either alone or through joint ventures. We may not be able to manage the development process in a timely or cost-effective manner or at all.

We require third-party assistance in managing or developing projects, and may obtain such assistance in the future either through joint ventures or selling the rights to manage or develop projects in whole, and we may be unable to find such assistance at an attractive cost or at all. Even if we are able to locate such assistance, we may be exposed to the risks associated with the failure of the other party to complete the development of the project as expected or desired. These risks include the risk that the other party would default on its obligations, necessitating that we complete the other components ourselves (including providing any necessary financing).

If we enter into joint ventures to manage or develop projects, such joint ventures involve certain risks, including, without limitation, that:

we may not have voting control over the joint venture;
we may not be able to maintain good relationships with the joint venture partners;
the joint venture partner may have economic or business interests that are inconsistent with our interests;

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the joint venture partner may fail to fund its share of operations and development activities, or to fulfill its other commitments, including providing accurate and timely accounting and financial information to us; and
the joint venture or venture partner could lose key personnel.

Any one or more of these risks could harm our results of operations.

We may experience a decline in the fair value of our assets, which could harm our results of operations, financial condition and our ability to make distributions to our stockholders.

A decline in the fair value of our assets may require us to recognize a provision for credit losses or impairment charge against such assets under accounting principles generally accepted in the United States, or GAAP, if we were to determine that, with respect to any assets in unrealized loss positions, we do not have the ability and intent to hold such assets to maturity or for a period of time sufficient to allow for recovery to the amortized cost of such assets. If such a determination were to be made, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair value of such assets on the date they are considered to be impaired. For example, we recorded a provision for credit losses totaling $296.0 million and $79.3 million, respectively, for the years ended December 31, 2008 and 2009, and $34.4 million for the nine months ended September 30, 2010, as well as impairment charges on REO assets of $27.2 million, $8.0 million and $13.2 million, respectively. For further information, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of IMH Financial Corporation — Results of Operations for the Years Ended December 31, 2007, 2008, and 2009 — Revenues — Provision for Credit Losses.” We could be required to record additional valuation adjustments in the future. Even in the absence of decreases in the value of real estate, we may be required to recognize provisions for credit losses as a result of the accrual of unpaid taxes on collateral underlying a loan. We also may be required to recognize impairment charges if we reclassify particular REO assets from being held for development to being held for sale. Such a provision for credit losses or impairment charges reflect non-cash losses at the time of recognition; subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and carrying value of such assets at the time of sale. If we experience a decline in the fair value of our assets, our results of operations, financial condition and our ability to make distributions to stockholders could be harmed.

Some of our assets are and will be recorded at fair value and, as a result, there will be uncertainty as to the value of these assets.

The fair value of our assets may not be readily determinable, requiring us to make certain estimates and adjustments. We will value certain of these investments quarterly at fair value, as determined in accordance with applicable accounting guidance, which may include unobservable inputs. Because such valuations are subjective, the fair value of certain of our assets may fluctuate over short periods of time and our determinations of fair value may differ materially from the values that would have been used if a ready market for these assets existed. The value of our common stock could be harmed if our determinations regarding the fair value of these assets were materially higher than the values that we ultimately realize upon their disposal.

Valuations of certain assets may be difficult to obtain or unreliable. In general, third-party dealers and pricing services heavily disclaim their valuations. Dealers may claim to furnish valuations only as an accommodation and without special compensation, and so they may disclaim any and all liability for any direct, incidental or consequential damages arising out of any inaccuracy or incompleteness in valuations, including any act of negligence or breach of any warranty. Depending on the complexity and illiquidity of an asset, valuations of the same asset can vary substantially from one dealer or pricing service to another. Therefore, conflicts of interest exist to the extent that we are involved in the determination of the fair value of our investments. Additionally, our results of operations for a given period could be harmed if our determinations regarding the fair value of these investments were materially higher than the values that we ultimately realize upon their disposal. The valuation process has been particularly challenging recently as market events have made valuations of certain assets more difficult, unpredictable and volatile.

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If we refinance existing loans at lower rates, the corresponding reduction in interest income and decline in the value of such loans may harm our results of operations.

Substantially all of the variable rate loans we own contain provisions for interest rate floors, which have allowed us to benefit from interest rate terms in excess of the current Prime rate. However, given current market conditions and the likely necessity to extend loans to 24-month terms, or longer, we have negotiated in the past, and expect to continue to renegotiate in the future, certain of the commercial mortgage loans in our portfolio at terms that are more reflective of current market rates, which may be lower than current contractual rates. The corresponding reduction in interest income and decline in the value of such loans may harm our results of operations.

Increases in interest rates could adversely affect the value of our assets and cause our interest expense to increase, which could result in reduced earnings or losses and negatively affect our profitability as well as the cash available for distribution to our stockholders.

Certain of our assets will generally decline in value if long-term interest rates increase. Declines in market value may ultimately reduce earnings or result in losses to us, which may negatively affect cash available for distribution to our stockholders. A significant risk associated with our target assets is the risk that both long-term and short-term interest rates will increase significantly. If long-term rates increased significantly, the market value of these investments would decline, and the duration and weighted average life of the investments would increase.

In addition, in a period of rising interest rates, our operating results will depend in large part on the difference between the income from our assets and financing costs. We anticipate that, in most cases, the income from such assets will respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net interest income, which is the difference between the interest income we earn on our interest-earning investments and the interest expense we incur in financing these assets. Increases in these rates will tend to decrease our net income and market value of our assets.

Rising interest rates may also cause our target assets that were originated or acquired prior to an interest rate increase to provide yields that are below prevailing market interest rates. If rising interest rates cause us to be unable to acquire a sufficient volume of our target assets with a yield that is above our borrowing cost, our ability to satisfy our investment objectives and to generate income and pay dividends may be harmed. An increase in interest rates may cause a decrease in the volume of certain of our target assets, which could harm our ability to acquire target assets that satisfy our investment objectives and to generate income and make distributions to our stockholders.

The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” Ordinarily, short-term interest rates are lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on our assets. Because we expect our investments, on average, generally will bear interest based on longer-term rates than our borrowings, a flattening of the yield curve would tend to decrease our net income and the market value of our net assets. Additionally, to the extent cash flows from assets that return scheduled and unscheduled principal are reinvested, the spread between the yields on the assets and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and we could incur operating losses. As a result of the foregoing, significant fluctuations in interest rates could harm affect our results of operations, financial conditions and our ability to make distributions to our stockholders.

An increase in prepayment rates on our loans or the risk of prepayments as a result of declining interest rates could reduce the value of our loans or require us to invest in assets with lower yields than existing investments.

The value of our assets may be harmed by prepayment rates on mortgage loans. If we purchase assets at a premium to par value, when borrowers prepay their mortgage loans faster than expected, these prepayments may reduce the expected yield on such loans because we will have to amortize the related premium on an

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accelerated basis. Our loans do not currently provide for any prepayment penalties or fees. Conversely, if we purchase assets at a discount to par value, when borrowers prepay their mortgage loans slower than expected, the decrease in corresponding prepayments on the mortgage assets may reduce the expected yield on such loans because we will not be able to accrete the related discount as quickly as originally anticipated. Prepayment rates on loans may be affected by a number of factors, including, without limitation, the availability of mortgage credit, the relative economic vitality of the geographic area in which the related properties are located, the servicing of the mortgage loans, possible changes in tax laws, other opportunities for investment, and other economic, social, geographic, demographic, legal and other factors beyond our control. Consequently, such prepayment rates cannot be predicted with certainty and no strategy can completely insulate us from prepayment or similar risks. In periods of declining interest rates, prepayment rates on mortgage loans generally increase. If general interest rates decline at the same time, we are likely to reinvest the proceeds of such prepayments received during such periods in assets yielding less than the yields on the assets that were prepaid. In addition, as a result of the risk of prepayment, the market value of the prepaid assets may benefit less than other fixed income assets from declining interest rates.

Our loans generally contain provisions for balloon payments upon maturity, which are riskier than loans with fully amortized payments and which increases the likelihood that a borrower may default on the loan.

Substantially all of our existing loans provide for monthly payment of interest only with a “balloon” payment of principal payable in full upon maturity of the loan. To the extent that a borrower has an obligation to pay us mortgage loan principal in a large lump sum payment, its ability to repay the loan may depend upon its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial amount of cash. A borrower may not have sufficient resources available to make a balloon payment when it becomes due. As a result, these loans may involve a higher risk of default than amortizing loans.

Competition for buyers of real estate that we own, or for permanent take-out financing for our borrowers, places severe pressure on asset values, and we may not be able to realize the full value of any of our assets as a result.

The industry in which we operate is serviced primarily by conventional mortgage lenders and loan investors, which include commercial banks, insurance companies, mortgage brokers, pension funds, and private and other institutional lenders. There are also a relatively smaller number of non-conventional lenders that are similar to us. If we resume lending operations, we expect to compete with these same lenders as well as new entrants to the competitive landscape who are also focused on originating and acquiring commercial mortgage loans. We continue to compete with many market participants. Additionally, as we seek to locate purchasers for real estate we have acquired, or for permanent take-out financing for our borrowers, we are competing with a large number of persons and entities that have acquired real estate, whether through foreclosure or otherwise, and that have originated commercial mortgage loans, in the past few years. Many of these persons and entities utilized leverage to purchase the real estate or fund the loans, and many are selling collateral or accepting permanent take-out financing worth less than the original principal investment in order to generate liquidity and satisfy margin calls or other regulatory requirements. If we are not able to compete successfully, our ability to realize value from our existing loans may be harmed or delayed, and we may not be able to grow our asset portfolio.

Our historical focus on originating and acquiring construction loans exposes us to risks associated with the uncertainty of completion of the underlying project, which may result in losses on those loans.

We have historically originated and acquired, and may continue to originate and acquire, construction loans, which are inherently risky because the collateral securing the loan typically has not been built or is only partially built. As a result, if we do not fund our entire commitment on a construction loan, or if a borrower otherwise fails to complete the construction of a project, there could be adverse consequences to us associated with the loan, including: a loss of the potential value of the property securing the loan, especially if the borrower is unable to raise funds to complete it from other sources; claims against us for failure to perform our obligations as a lender under the loan documents; increased costs for the borrower that the borrower is unable to pay, that could lead to default on the loan; a bankruptcy filing by the borrower that could make it difficult to collect on the loan on a timely basis, if at all; and abandonment by the borrower of the collateral for our loan, which could significantly decrease the value of the collateral.

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Risks of cost overruns and non-completion of renovation of the properties underlying rehabilitation loans may result in losses.

We have historically originated and acquired, and may continue to originate and acquire, rehabilitation loans. The renovation, refurbishment or expansion by a borrower of a mortgaged property involves risks of cost overruns and non-completion. Estimates of the costs of improvements to bring an acquired property up to standards established for the market position intended for that property may prove inaccurate. Other risks may include: rehabilitation costs exceeding original estimates, possibly making a project uneconomical; environmental risks; and rehabilitation and subsequent leasing of the property not being completed on schedule. If such renovation is not completed in a timely manner, or if renovation costs are more than expected, the borrower may experience a prolonged impairment of net operating income and may not be able to make payments to us on our loan on a timely basis or at all, which could result in significant losses to us.

We may acquire non-Agency residential mortgage-backed securities, or RMBS, collateralized by subprime and Alt A mortgage loans, which are subject to increased risks that could result in losses.

We may acquire non-Agency RMBS, which are backed by residential real estate property but, in contrast to Agency RMBS, their principal and interest are not guaranteed by federally chartered entities such as the Federal National Mortgage Association, or Fannie Mae, or the Federal Home Loan Mortgage Corporation, or Freddie Mac and, in the case of the Government National Mortgage Association, or Ginnie Mae, the U.S. Government. We may acquire non-Agency RMBS backed by collateral pools of mortgage loans that have been originated using underwriting standards that are less restrictive than those used in underwriting “prime mortgage loans” and “Alt A mortgage loans.” These lower standards include mortgage loans made to borrowers having imperfect or impaired credit histories, mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified. Due to current economic conditions, including fluctuations in interest rates and lower home prices, as well as aggressive lending practices, subprime mortgage loans have in recent periods experienced increased rates of delinquency, foreclosure, bankruptcy and loss, and they are likely to continue to experience delinquency, foreclosure, bankruptcy and loss rates that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner. Thus, because of the higher delinquency rates and losses associated with subprime mortgage loans, the performance of non-Agency RMBS backed by subprime mortgage loans that we may acquire could be adversely affected, which could materially and adversely impact our results of operations, financial condition and business.

Past or future actions to manage us through the recession may not be successful, in part or at all, and a failure of any one or more of these actions could harm us.

We have taken various actions to seek to manage us through the recession, including, among other things, marketing certain of our whole loans and participation interests for sale, and disposing of REO properties that were acquired by us through foreclosure. We also continue to evaluate other options. Many of the challenges being faced by us are beyond our control, including a lack of adequate lender credit availability in the marketplace, the general illiquidity in financial markets in the United States, and the decline in real estate prices and the prices of real estate-related assets. These or other actions we may take may not be successful, in part or at all, and a failure of any one or more of these actions could harm us.

Our loans and real estate assets are concentrated geographically and a further downturn in the economies or markets in which we operate could harm our asset values.

We have commercial and residential mortgage loans and real property in Arizona, California, New Mexico, Idaho, and Utah, and previously in Texas and Nevada. Declines in general economic conditions and real estate markets in these states have been worse than in certain other areas of the United States and the world. Because we are generally not diversified geographically and are not required to observe any specific geographic diversification criteria, a further downturn in the economies of the states in which we own real estate or have commercial mortgage loans, or a further deterioration of the real estate market in these states, could harm our loan and real estate portfolio.

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We may have difficulty protecting our rights as a secured lender, which could reduce the value or amount of collateral available to us upon foreclosure and harm our business.

We believe that our loan documents enable us to enforce our rights thereunder with our borrowers. However, the rights of borrowers and the rights of other secured lenders may limit our practical realization of those benefits. For example:

Foreclosure is subject to the delays in the legal processes involved. Judicial foreclosure could involve protracted litigation. Although we expect to generally use non-judicial foreclosure, which is generally quicker, our collateral may deteriorate and decrease in value during any delay in the foreclosure process.
The borrower’s right of redemption following foreclosure proceedings can delay or deter the sale of our collateral and can, for practical purposes, require us to own and manage any property acquired through foreclosure for an extended period of time.
Unforeseen environmental hazards may subject us to unexpected liability and procedural delays in exercising our rights.
The rights of junior secured creditors in the same property can create procedural hurdles for us when we foreclose on collateral.
We may not be able to obtain a deficiency judgment after we foreclose on collateral. Even if a deficiency judgment is obtained, it may be difficult or impossible to collect on such a judgment.
State and federal bankruptcy laws can temporarily prevent us from pursuing any actions against a borrower or guarantor, regardless of the progress in any suits or proceedings and can, at times, permit our borrowers to incur liens with greater priority than the liens held by us.
Lawsuits alleging lender liabilities, regardless of the merit of such claims, may delay or preclude foreclosure.

We may be subject to substantial liabilities if claims are made under lender liability laws.

A number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty by the lender to the borrower or its other creditors or stockholders. Such claims may arise and we may be subject to significant liability if a claim of this type did arise.

If potential losses are not covered by insurance, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from the loans secured by those properties.

Through foreclosure, as a lender, we have acquired a substantial number of real property assets. We carry comprehensive liability, fire, extended coverage, earthquake, business interruption and rental loss insurance covering all of our properties under various insurance policies. Furthermore, we maintain title insurance to protect us against defects affecting the security for our loans. We select policy specifications and insured limits which we believe to be appropriate given the perceived relative risk of loss, the cost of the coverage and our understanding of industry practice. We do not carry insurance for generally uninsured losses such as loss from riots, war or nuclear reactions. Our policies are insured subject to certain limitations, including, among others, large deductibles or co-payments and policy limits which may not be sufficient to cover losses. In addition, we may discontinue certain policies on some or all of our properties in the future if the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage relative to the perceived risk of loss. If we, or one or more of our borrowers, experiences a loss which is uninsured or which exceeds policy limits or which our carriers will not or cannot cover, we could lose the capital invested in the loans secured by damaged properties as well as the anticipated future cash flows from the loans secured by those properties (or, in the event of foreclosure, from those properties themselves).

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We may be exposed to liabilities for risks associated with the use of hazardous substances on any of our properties.

Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of hazardous substances may harm an owner’s ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of a property underlying one of our loans becomes liable for removal costs, the ability of the owner to make payments to us may be reduced, which in turn may diminish the value of the relevant mortgage asset held by us and our ability to make distributions to our stockholders. If we acquire a property through foreclosure or otherwise, the presence of hazardous substances on such property may harm our ability to sell the property and we may incur substantial remediation costs, which could harm our results of operations, financial condition and our ability to make distributions to our stockholders.

Other Risk Factors

We may not be able to utilize our built-in losses as anticipated, which could result in greater than anticipated tax liabilities.

Due to the significant decline in the real estate markets in recent years, we believe that the tax basis of our existing assets exceeds the fair market value of such assets by approximately $267.8 million. Subject to certain limitations, such “built-in losses” may be available to offset future taxable income and gain from our existing assets as well as potentially income and gain from new assets we acquire. Our ability to use our built-in losses is dependent upon our ability to generate taxable income in future periods. In addition, the use of our built-in losses is subject to various limitations. For example, there will be limitations on our ability to use our built-in losses or other net operating losses if we undergo a “change in ownership” for U.S. federal income tax purposes. In addition, it is possible that our built-in losses may not be fully available or usable in the manner anticipated. To the extent these limitations occurred or governmental challenges were asserted and sustained with respect to such built-in losses, we may not be permitted to use our built-in losses to offset our taxable income, in which case our tax liabilities could be greater than anticipated.

The decline in economic conditions and disruptions to markets may not improve for the foreseeable future, which could cause us to suffer continuing operating losses, adversely affect our liquidity, and create other business problems for us.

The global and U.S. economies experienced a rapid decline in 2008 and 2009 from which they have not recovered. The real estate and other markets suffered unprecedented disruptions, causing many major institutions to fail or require government intervention to avoid failure, which has placed severe pressure on liquidity and asset values. These conditions were brought about largely by the erosion of U.S. and global credit markets, including a significant and rapid deterioration of the mortgage lending and related real estate markets.

These events have caused, among other things, numerous foreclosures and an excess of residential housing inventory and finished residential lots, and a glut of stalled commercial real estate projects. Excess inventory could result in a decline in the values of real estate that we own or that secures the loans we hold in our portfolio. This, in turn, could reduce the proceeds we realize upon sale and that are available to our borrowers to repay our portfolio mortgage loans.

The foregoing could result in defaults on our portfolio mortgage loans and might require us to record reserves with respect to non-accrual loans, write-down our REO assets, and realize credit losses with respect to our portfolio mortgage loans. These factors could harm our business, financial condition, results of operations and cash flows.

As a consequence of the difficult economic environment, we have recorded significant losses, resulting primarily from significant provisions for credit losses and impairment charges resulting in substantial decreases in the net carrying value of our assets. Economic conditions or the real estate and other markets generally may not improve in the near term, in which case we could continue to experience additional losses and write-downs of assets, and could face capital and liquidity constraints and other business challenges.

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We depend on key personnel and an error in judgment or the loss of their services could harm our business.

Our success depends upon the experience, skill, resources, relationships, contacts and continued efforts of certain key personnel, including, among others, Shane Albers, our chief executive officer, William Meris, our president, and Steven Darak, our chief financial officer. If any of these individuals were to make an error in judgment in conducting our operations, our business could be harmed. If either of these individuals were to cease employment with us, our operating results could suffer. Our future success also depends in large part upon our ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense. Should we be unable to attract and retain such key personnel, our ability to make prudent investment decisions may be impaired, which could harm our results of operations and prospects.

We will face conflicts of interest that may arise with respect to our business activities and also may limit the allocation of investments to us.

We may face conflicts of interest with other funds managed by us. For example, one of our wholly-owned subsidiaries, SWI Management, LLC, or SWIM, is the manager of the SWI Fund and has obligations to the SWI Fund and its members pursuant to the operating agreement between SWIM and the SWI Fund. The SWI Fund, which had $11.4 million under management as of September 30, 2010, is a real estate investment fund with target asset classes that are substantially similar to ours. The management fees we receive from SWIM for managing the SWI Fund may be less than the income we would receive from investment opportunities allocated to SWI Fund that we may have otherwise been able to invest in.

Any policy or procedural protections we adopt to address potential conflicts of interest may not adequately address all of the conflicts that may arise or will address such conflicts in a manner that results in the allocation of a particular investment opportunity to us or is otherwise favorable to us. Since our executive officers are also executive officers of SWIM, subject to oversight from our independent directors (or a committee thereof), the same personnel may determine the price and terms of the investments for both us and other entities managed by us or affiliated with our executive officers, and there can be no assurance that any procedural protections, such as obtaining market prices or other reliable indicators of value, will prevent the consideration we pay for these investments from exceeding the fair market value or ensure that we receive terms for a particular investment that are as favorable as those available to a third-party.

We may compensate broker-dealers to eliminate contingent claims under existing selling agreements, which could result in additional expense for us or dilation of our stockholders.

The Manager is also party to selling agreements with certain broker-dealers who assisted the Manager in raising equity capital for us, which provide for a 2% selling commission and either a 25 or 50 basis point trailing commission. Such commissions totaled $6.1 million, $5.4 million and $0 for the years ended December 31, 2007, 2008 and 2009, respectively. Pursuant to amendments to such selling agreements, certain broker-dealers representing approximately 97% of the Fund’s committed capital agreed to forego these amounts and accept, in lieu of such obligation, a pro rata portion (representing either the 25 or 50 basis points described above) of 50% of any amount “earned and received” by the Manager under the terms of the Fund’s operating agreement, which provided that the Manager receives 25% of any net proceeds (including late fees and penalties and excluding repayment of principal and contractual note interest rates) from the sale of a foreclosed asset. Because the operating agreement has been terminated pursuant to the Conversion Transactions, no fees will be payable to the Manager pursuant to the operating agreement, but the broker-dealers may argue that they should nonetheless receive from us 50% of any amounts “earned and received” that would have been otherwise payable to the Manager under the Fund’s operating agreement had the operating agreement still been in effect or, alternatively, that they are entitled to the trailing commission under the original selling agreement. Although we may terminate the selling agreements at any time (but not the commissions and additional compensation payable for certain investments or in connection with certain investors), we have not entered into any agreements, arrangements or understandings to terminate the selling agreement or any trail obligations because we believe the relationships with the broker-dealers established through these selling agreements remain useful to our business. If we terminate the selling agreements, we may decide to compensate the broker-dealers to eliminate any residual contingent commission claims on gains

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or trail commissions under the selling agreements or for future services provided by the broker-dealers through the issuance of warrants or equity, payment of fees or otherwise, which could result in additional expense for us or dilution of our stockholders.

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

Accounting rules for commercial mortgage loan sales and securitizations, valuations of financial instruments, asset consolidations and other aspects of our anticipated operations are highly complex and involve significant judgment and assumptions. These complexities could lead to a delay in the preparation of financial information and the delivery of this information to our stockholders. Changes in accounting rules, interpretations or our assumptions could undermine our ability to prepare timely and accurate financial statements, which could result in a lack of investor confidence in our publicly filed information and could harm the market price of our common stock.

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information, which could lead to a decline in the value of our common stock.

Substantial work has been required, and may continue to be required, to implement, document, assess, test and remediate our system of internal controls. This process has been and will continue to be both costly and challenging for us. Implementing any appropriate changes to our internal controls may entail substantial costs to modify our existing financial and accounting systems, take a significant period of time to complete, and distract us from the operation of our business. These changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or a consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could impair our ability to operate our business. In addition, the existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, all of which could lead to a decline in the value of our common stock. Although not currently applicable, in the future we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our auditors have issued an attestation report on effectiveness of our internal controls. If in the future we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of our internal controls, investors could lose confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our common stock.

Our ability to change our business, leverage and financing strategies without stockholder consent could result in harm to our financial condition, results of operations and ability to pay dividends to stockholders.

We may change our business and financing strategies without a vote of, or notice to, our stockholders, which could result in our making investments and engaging in business activities that are different from, and possibly riskier than, other businesses. In particular, a change in our business strategy, including the manner in which we allocate our resources across our commercial mortgage loans or the types of assets we seek to acquire, may increase our exposure to interest rate risk, default risk and real estate market fluctuations. In addition, we may in the future use leverage at times and in amounts deemed prudent by our management in its discretion, and such decisions would not be subject to stockholder approval. Changes to our strategies regarding the foregoing could harm our financial condition, results of operations and our ability to pay dividends to our stockholders.

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Risks Related to our Common Stock

There has been no public market for our common stock prior to this offering and an active trading market may not develop, which may cause our common stock to trade at a discount and make it difficult to sell the common stock you purchase.

Prior to this offering, there has been no public market for our common stock, and there can be no assurance that an active trading market will develop or be sustained or that shares of our common stock will be resold at or above the initial public offering price. We intend to apply to have our common stock listed on the NYSE under the symbol “        .” However, listing on the NYSE would not ensure that an actual market will develop for our common stock. The market value of our common stock could be substantially affected by general market conditions, including the extent to which a secondary market develops for our common stock following the completion of this offering, the extent of institutional investor interest in us, the general reputation of real estate-based companies and the attractiveness of their equity securities in comparison to other equity securities, our financial performance and general stock and bond market conditions. If no liquid trading market develops, you may have difficulty reselling your shares or the shares may be discounted to reflect the absence of such liquidity.

The price of our common stock and trading volume may be volatile, which could result in substantial losses for our stockholders.

The initial public offering price for our common stock will be determined by negotiations between the underwriters and us. We cannot assure you that the initial public offering price for our common stock will correspond to the price at which our common stock will trade in the public market subsequent to this offering or that the price of our shares available in the public market will reflect our actual financial performance. The market price of our common stock may be highly volatile and be subject to wide fluctuations. The stock markets, including the NYSE, on which we intend to apply to list our common stock, have experienced significant price and volume fluctuations. As a result, the market price of shares of our common stock is likely to be similarly volatile, and investors in shares. Some of the factors that could negatively affect the share price of our common stock or result in fluctuations in the price or trading volume of our common stock include those listed in the section entitled “Risk Factors” in this prospectus, as well as others, such as:

general market and economic conditions, including factors unrelated to our performance;
actual or anticipated changes or fluctuations in our future financial performance and the performance of similar companies, including fluctuations in quarterly operating reports;
changes in market interest rates;
the outcome of pending SEC investigations and other litigation matters in which we are a named defendant;
strategic decisions by us or our competitors such as acquisitions, divestments, spin-offs, joint ventures, strategic partnerships or capital commitments;
the operations and stock performance of our competitors or similar companies;
developments in the commercial mortgage lending industry or the financial services sector generally;
the impact of new legislation, regulatory developments or court decisions that adversely affect us or the assets in which we seek to invest or that restrict the activities of commercial mortgage lenders or suppliers of credit in our market;
changes in financial estimates by securities analysts or publications of research reports about us or the real estate industry;
changes in accounting principles;
terrorist acts;
the reliability of our dividend policy and amount of our dividends;
additions or departures of senior management and key personnel;

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actions by institutional or other stockholders; and
speculation in the press or investment community.

If the market price of our common stock declines significantly, you may be unable to resell any of our common stock at or above the price immediately after this offering. The market price of our common stock may fluctuate or decline significantly in the future. In addition, the stock market in general can experience considerable price and volume fluctuations. In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources.

We have not established a minimum dividend and distribution level and we may not have the ability to pay dividends and other distributions to you in the future.

There have been no cash dividends declared on our common stock since our company was formed from our predecessor entity, but our predecessor made periodic distributions to its members prior to suspending distributions in the third quarter of the year ended December 31, 2008. We have not established a minimum distribution level and we may not be able to make any distributions at all. In addition, some of our distributions may include a return of capital. All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition and other factors as our board of directors may deem relevant from time to time. Subject to the availability of legally available funds, completion of this offering, and raising more than $50 million from this offering or certain financings, we are required to declare and pay to all shares of our Class B common stock issued and outstanding on the 12-month anniversary of the consummation of this offering a one-time dividend equal to $0.95 per share of Class B common stock, or the Special Dividend. The aggregate amount of the Special Dividend if paid in full will be approximately $16.0 million, assuming no shares of Class C common stock are redeemed in this offering. The Special Dividend will not be payable to any other shares of our capital stock, including the common stock offered in this offering. We cannot predict our ability to make distributions to you in the future.

Future sales of shares of our common stock, including sales of shares of common stock issuable when shares of Class B common stock become eligible for conversion into common stock or sales of shares of common stock by our insiders, may depress the price of our common stock.

Any sales of a substantial number of shares of our common stock, or the perception that those sales might occur, may cause the market price of our common stock to decline. In addition, a significant number of shares of our common stock could also be sold in the open market in anticipation of or following a sale by insiders. We have approximately 17 million shares of Class B and Class C common stock outstanding. The shares of Class C common stock are generally non-transferable and the shares of Class B-1, B-2 and B-3 common stock are not eligible for conversion into common stock until, and subject to transfer restrictions that lapse, between six and 12 months of the anniversary of the consummation of this offering, subject to limited exceptions. The shares of Class B-4 common stock received by Messrs. Albers and Meris in the Conversion Transactions are subject to four-year restrictions on transfer that expire on the four-year anniversary of the consummation of the Conversion Transactions. The conversion and transfer restrictions also lapse upon certain change of control events, and shares of Class B-1, B-2 and B-3 common stock are also eligible for conversion and transfer after the five-month anniversary of this offering if the closing price of our common stock price is greater than or equal to 125% of the initial public offering price for 20 consecutive trading days. Further, the four-year transfer restrictions applicable to the shares of Class B-4 common stock held by Messrs. Albers and Meris will terminate if, any time after five months from the first day of trading on a national securities exchange, either our market capitalization (based on the closing price of our common stock) or book value will have exceeded $730.4 million (subject to upward adjustment by the amount of any net proceeds from new capital raised in this offering or otherwise, and to downward adjustment by the amount of any dividends or distributions paid on membership units of the Fund or our equity securities after the Conversion Transactions). The four-year transfer restrictions will also terminate if the restrictions on the Class B common stock are eliminated as a result of change of control of the shares of Class B common stock under our certificate of incorporation, or if, after entering into an employment agreement approved by our compensation committee, the holder of Class B common stock is terminated without cause, as will be defined in their employment agreements.

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The sale or future sale of authorized but unissued shares, or the perception that such an issuance or sale could occur, could also cause a decrease in our stock price. Following the completion of this offering, up to 1.8 million shares may be issuable under our 2010 Stock Incentive Plan and we have agreed to issue 50,000 shares to ITH Partners, LLC, or ITH, upon the completion of this offering and warrants to acquire 150,000 additional shares if we raise debt or equity proceeds in excess of $50 million in this offering or otherwise.

In addition, we and each of our executive officers, directors and certain of our other existing employee security holders have agreed, with certain limited exceptions, for a period of 180 days after the date of this prospectus, to certain restrictions on transfer of their shares of our common stock without the prior consent of the representatives of the underwriters. However, the representatives may, at any time, release all or a portion of the securities subject to these lock-up agreements. See the section titled “Underwriting” for more information. In addition, certain transfer restrictions applicable to our shares of Class B common stock may be waived at the discretion of our board of directors. If the transfer restrictions applicable to shares of our Class B common stock or otherwise are waived or terminated and our board of directors waives the transfer restrictions, or upon expiration of the restrictive periods, approximately 599,553 shares of Class B common stock and 200,000 shares of common stock (including 150,000 shares issuable upon exercise of warrants to be issued upon completion of this offering) will be available for sale into the market. Once the sale of all or a portion of the shares of Class B common stock becomes possible, the sale or potential sale of a substantial number of shares of our common stock into which shares of Class B common stock may convert could depress the market price of all our common stock and impair our ability to raise capital through the sale of additional shares. Because we suspended accepting redemption requests effective October 1, 2008, and suspended distributions to members of the Fund in the second quarter of 2009, there may be a pent-up demand for liquidity among our stockholders, which could lead to the sale of a substantial number of shares of our common stock and a corresponding decrease in the market price of our common stock. In the future, we may issue warrants, grant stock options or restricted stock, or grant registration rights with respect to our outstanding securities, all of which may result in additional sales of common stock.

Offerings of debt or equity securities, which would be senior to our common stock in liquidation, or equity securities, which would dilute our existing stockholders’ interests, may be senior to our common stock for the purposes of distributions, and may harm the market price of our common stock.

In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes, preferred stock or common stock. The terms of our charter documents do not preclude us from issuing additional debt or equity securities. Our certificate of incorporation permits our board of directors, without your approval, to authorize the issuance of common or preferred stock in connection with equity offerings, acquisitions of securities or other assets of companies, classify or reclassify any unissued common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares, including the issuance of shares of preferred stock that have preference rights over the common stock with respect to dividends, liquidation, voting and other matters or shares of common stock that have preference rights over your common stock with respect to voting. Additional equity offerings by us may dilute your interest in us or reduce the market price of our common stock, or both. Any preferred stock could have a preference on distribution payments that could limit our ability to make a distribution to our stockholders. If we issue additional debt securities, we could become more highly leveraged, resulting in (i) an increase in debt service that could harm our ability to make expected distributions to our stockholders, and (ii) an increased risk of default on our obligations. If we were to liquidate, holders of our debt and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets before the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future. Thus, you will bear the risk that any future offerings by us could reduce the market price of our common stock and dilute your interest in us.

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Certain provisions of our certificate of incorporation, bylaws, debt instruments and the Delaware General Corporation Law could make it more difficult for a third-party to acquire us, even if doing so would benefit our stockholders.

Certain provisions of the Delaware General Corporation Law, or DGCL, may have the effect of deterring hostile takeovers or otherwise delaying or preventing changes in our management or in the control of our company, including transactions in which our stockholders might otherwise receive a premium over the fair market value of their securities. In particular, Section 203 of the DGCL may, under certain circumstances, make it more difficult for a person who would be an “interested stockholder” (defined generally as a person with 15% or more of a corporation’s outstanding voting stock) to effect a “business combination” (defined generally as mergers, consolidations and certain other transactions, including sales, leases or other dispositions of assets with an aggregate market value equal to 10% or more of the aggregate market value of the corporation) with the corporation for a three-year period. Under Section 203, a corporation may under certain circumstances avoid the restrictions imposed by Section 203. Moreover, a corporation’s certificate of incorporation or bylaws may exclude a corporation from the restrictions imposed by Section 203. We have not made this election, and accordingly we are subject to the restrictions of Section 203 of the DGCL. Furthermore, as discussed under the heading entitled “Description of IMH Financial Corporation’s Capital Stock,” upon any “change of control” transaction, the restrictions on transfer applicable to the shares of our Class B and Class C common stock will terminate, which could act to discourage certain change of control transactions.

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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements which relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “potential,” “should” and “would” or the negative of these terms or other comparable terminology.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance. These beliefs, assumptions and expectations can change, and actual results and events may differ materially, as a result of many possible events or factors, not all of which are known to us or are within our control. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section above entitled “Risk Factors,” along with the following factors that could cause actual results to vary from our forward-looking statements:

Various disputes have arisen regarding the Conversion Transactions, and we are a named defendant in three class-action proceedings and a separate suit initiated by two members of the Fund. Additionally, the SEC has notified us that it is conducting an investigation related to us. We cannot predict when or how these matters will be resolved and we could be subject to significant money damages, which could harm our business and results of operations;
The decline in economic conditions and disruptions to markets may not improve for the foreseeable future, which could cause us to suffer continuing operating losses, adversely affect our liquidity and create other business problems for us;
We are subject to the risk that, despite recent actions and proposals by the U.S. government and governments around the world, the economy and real estate and other markets will not improve, which could continue to harm our ability to sell or dispose of the assets we own and the ability of our borrowers to pay obligations under, or repay our commercial mortgage loans on maturity or obtain permanent take-out financing in a timely manner, on reasonable terms, or at all, which would harm our liquidity and operating results;
We believe that our ability to continue as a “going concern” for the next 12 months is predicated on our cash and cash equivalents, coupled with liquidity derived from the credit facility currently under negotiation and the disposition of certain of the loans and real estate assets held for sale;
The suspension of certain of our activities resulting from current market conditions and our liquidity status may persist for an extended period of time, and we may not resume historical levels of activities, or at all;
If our liquidity continues to dissipate and we are unable to meet our obligations, we may be forced to sell certain of our assets for a price at or below the current book value of the assets, which could result in a loss to us;
We are subject to risks generally associated with the lending to, and ownership of, real estate-related assets, including changing economic conditions, environmental risks, unforeseen statutory and regulatory changes, the cost of and ability to obtain insurance and risks related to developing and leasing of properties;
Real estate assets we may acquire in foreclosure or through other means, are generally non-earning assets that would correspondingly reduce the distributable yield to our investors, if any. In the event of foreclosure, we would also be responsible for the payment of past due property taxes, a liability not currently recorded but is reflected in our asset valuation, which approximates $7.6 million as of September 30, 2010. Moreover, the ultimate disposition of such assets may not occur for an extended period of time or at prices we seek, which would harm our liquidity;
As a commercial real estate mortgage lender, we are subject to a variety of external forces that could harm our operations and results, including, without limitation, fluctuations in interest rates,

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fluctuations in economic conditions (which are exacerbated by our limited geographic diversity), and the effect that regulators or bankruptcy courts could have on our operations and rights as a secured commercial real estate mortgage lender; and
Our commercial real estate mortgage loans, which are not guaranteed by any government agency, are risky and are not sold on any well established secondary market, and the underwriting standards that we previously utilized may not be sufficient to protect stockholders from our borrowers’ loan defaults or to ensure that sufficient collateral, including collateral pledged by guarantors, will exist to protect our stockholders from any such defaults in the context of the continued market stress currently applicable in the real estate sector.

Except to the extent required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the events described by our forward-looking statements might not occur. We qualify any and all of our forward-looking statements by these cautionary factors. Please keep this cautionary note in mind as you read this prospectus and the documents incorporated by reference into this prospectus.

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CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2010:

on an actual basis;
on an as adjusted basis to give effect to (i) the sale of    shares of common stock by us in this offering at an assumed initial public offering price of $    per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and (ii) the use of $   million of proceeds to redeem up to 838,448 shares of Class C common stock.

The adjusted information set forth in the table below is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of IMH Financial Corporation,” “Use of Proceeds” and our consolidated financial statements and related notes included elsewhere in this prospectus.

   
  As of September 30, 2010
(Unaudited)
     Actual   As Adjusted(1)(2)
     (in thousands, except share data)
Cash and cash equivalents   $ 4,580     $  
Capital lease obligations, less current portion            
Long-term debt     16,963       16,963  
Stockholders’ equity (deficit):
                 
Preferred stock, par value $0.01; 100 million shares authorized, no shares issued and outstanding.                  
Common stock, par value $0.01; 150,208,500 shares authorized, no shares issued and outstanding, actual, and               shares issued and outstanding as adjusted.                  
Class B-1 common stock, par value $0.01; 4,023,400 shares authorized, 3,811,342 shares issued and outstanding, actual and as adjusted.     38           
Class B-2 common stock, par value $0.01; 4,023,400 shares authorized, 3,811,342 shares issued and outstanding, actual and as adjusted.     38           
Class B-3 common stock, par value $ 0.01; 8,165,700 shares authorized 7,721,055 shares issued and outstanding, actual and as adjusted.     77           
Class B-4 common stock, par value $0.01; 781,644 shares authorized 627,579 shares issued and outstanding, actual and as adjusted.     7           
Class C common stock, par value $ 0.01; 15,803,212 shares authorized, 838,448 shares issued and outstanding, actual, and               shares issued and outstanding as adjusted.     8           
Class D common stock, par value $0.01; 16,994,144 shares authorized, no shares issued and outstanding.                  
Additional paid-in capital     726,866           
Accumulated deficit     (474,079 )          
Total stockholders’ equity (deficit)     252,955           
Total capitalization   $ 274,498     $     

(1) Each $    increase or decrease in the assumed initial public offering price of $    per share, the midpoint of the range reflected on the cover page of this prospectus, would increase or decrease, as applicable, our cash and cash equivalents, total stockholders’ equity (deficit) and total capitalization by approximately $ , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(2) The number of shares of common stock set forth in the table above includes common stock to be issued in this offering, 16,809,766 shares of Class B and Class C common stock outstanding as of December 31, 2010 that are convertible into 16,809,766 shares of our common stock and 50,000 shares to be issued to ITH Partners upon completion of this offering and excludes (i)    shares of common stock issuable upon exercise of the underwriters’ overallotment option and (ii) 1.2 million shares of our common stock reserved for future issuance pursuant to our 2010 Stock Incentive Plan, which number will automatically increase to 1.8 million shares upon consummation of this offering, and (iii) 150,000 shares issuable upon exercise of warrants to be issued to ITH Partners upon completion of this offering.

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share. Our pro forma net tangible book value as of December 31, 2010 was approximately $             million, or approximately $             per share. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of common stock in this offering and the pro forma net tangible book value per share of common stock immediately after the closing of this offering.

After giving effect to the sale of     shares of common stock at an assumed initial public offering price of $     per share, the mid-point of the range of prices set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us of $    per share the receipt by us of the net proceeds from this offering and the use of these funds as described under “Use of Proceeds,” our pro forma net tangible book value as of December 31, 2010 would have been approximately $     million, or $     per share of common stock. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $     per share to new investors purchasing shares of common stock in this offering at the initial offering price.

The following table illustrates this dilution on a per share basis:

 
Assumed initial public offering price per share of common stock   $  
Net tangible book value per share as of December 31, 2010   $               
Increase in net tangible book value per share attributable to this offering         
Net tangible book value per share as of December 31, 2010 after giving effect to this offering         
Dilution in net tangible book value per share to new investors   $     

The following table summarizes as of December 31, 2010, on the pro forma basis described above, the number of shares of our common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and to be paid by new investors purchasing shares of our common stock in this offering. The table assumes an initial public offering price of $     per share, the mid-point of the range of prices set forth on the cover of this prospectus, and the deduction of underwriting discounts and commissions and estimated offering expenses payable by us:

         
  Shares Purchased   Total Consideration   Average
Price Per
Share
     Number   Percent   Amount   Percent
     (in thousands, except percentage and unit data)
Stockholders prior to this offering                 %    $          %    $  
New investors                 %    $             %    $  
Total               100 %    $          100 %       

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DIVIDENDS AND DISTRIBUTION POLICY

Dividends

There have been no cash dividends declared on our common stock since our company was formed from our predecessor entity, but our predecessor made periodic distributions to its members prior to suspending distributions in the third quarter of the year ended December 31, 2008. Dividends are declared at the sole discretion of our board of directors.

Distributions Following Consummation of this Offering

After the consummation of this offering, we will seek to initiate a quarterly dividend policy, subject to various considerations and qualifications, including, without limitation, liquidity requirements, our distribution yield relative to our peers, and other relevant factors identified and considered by our board of directors. In particular, our ability to pay dividends in the future will be subject to using any net proceeds from this offering or other financing to resume the pursuit of new investments, which may require a significant amount of time, and the disposition of existing and future portfolio investments on sufficiently attractive terms to generate liquidity for us.

All distributions will be made at the sole discretion of our board of directors, and will depend on a number of factors affecting us, including, without limitation, the following:

our financial condition;
general business conditions;
our actual results of operations;
the timing of the deployment of capital and leverage;
debt service requirements of us and our subsidiaries;
cash distributions from our subsidiaries;
our operating expenses;
our taxable income;
our capital expenditure requirements;
our liquidity requirements;
distribution restrictions contained in our current or future financing facilities;
our distribution yield relative to our peers;
restrictions under Delaware law;
any contractual, legal and regulatory restrictions on the payment of distributions by us to holders of our common stock or by our subsidiaries to us; and
other factors the board of directors in its discretion deems relevant.

Special Conversion Dividend

We agreed to declare and pay to all holders of our Class B common stock issued and outstanding on the 12-month anniversary of the consummation of this offering a one-time dividend equal to $0.95 per share of Class B common stock, or the Special Dividend, to all stockholders who have retained continuous ownership of their shares through the 12-month period following this offering. The aggregate amount of the Special Dividend will be between $15.1 million and $16.0 million depending on the number of outstanding Class C shares that are redeemed in connection with the offering. The Special Dividend will not be payable to any other shares of our capital stock, including the common stock offered in this offering and Class C common stock. Further, we do not intend to pay the Special Dividend, if any, from the net proceeds of this offering. Rather, we intend to use the net proceeds of this offering to make investments that will position us to make future distributions. Under the DGCL, a corporation may declare and pay dividends upon the shares of its

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capital stock either out of its surplus or, in case there is no surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. “Surplus” is defined under the DGCL as the excess, if any, at any given time, of the net assets of a corporation over the amount determined to be capital. If the investments funded by the proceeds of this offering do not perform as we anticipate, if the decline in the credit and real estate markets continues or worsens, or if other unforeseen occurrences arise, we may not have sufficient legally distributable funds on the one-year anniversary of the consummation of this offering to enable us to declare and pay the Special Dividend. The Special Dividend will not be payable if sufficient legally distributable funds are not available on the one year anniversary of the consummation of this offering. We do not plan to use the net proceeds of this offering to pay the Special Dividend, however, other than the requirement that we have sufficient legally distributable funds available, there are no additional limitations on the source of funds that could be used to fund the Special Dividend.

Class C Redemption

We plan to use up to 30% of the net proceeds of the offering to effect a pro rata redemption of the 838,448 outstanding shares of our Class C common stock at the initial public offering price, less underwriting discounts and commissions paid to the underwriters in this offering; if the proceeds available to effect the redemption are insufficient to redeem all outstanding shares of Class C common stock, the redemption will be effected on a pro rata basis among the holders of Class C common stock (based upon the number of shares of Class C common stock held by each stockholder) and the remaining shares of Class C common stock will automatically be converted into shares of Class B common stock as follows: each share of Class C common stock will convert into 0.25 shares of Class B-1 common stock; 0.25 shares of Class B-2 common stock; 0.50 shares of Class B-3 common stock.

Historical Distributions

Historically, members of the Fund elected to either reinvest distributable monthly earnings or have earnings distributed to them in cash. Effective October 1, 2008, we suspended the option by which Fund members could reinvest monthly distributions. For the nine months ended September 30, 2010 and the years ended December 31, 2009, 2008 and 2007, our total net distributions were zero, $11.7 million, $64.1 million, and $46.9 million, respectively, which translated into net distributions of zero, $0.73, $4.32, and $5.00 per weighted average common share over the same periods, respectively. The year to year increase in total distributions is attributed to the increase in member equity. During the second quarter of the year ended December 31, 2009, we revised our member distribution program and ceased further distributions to members until we generate sufficient liquidity to enable us to cover all borrower obligations and operating costs.

The annualized yield based on distributions made to our members was 1.60%, 9.45%, and 11.09% for the years ended December 31, 2009, 2008 and 2007, respectively. The year over year reduction in the annualized yield is attributable to the reduction in the deployment ratio of available capital to loans funded, an increase in the number of portfolio loans placed in non-accrual status, the change in the Prime rate over these periods (which has resulted in lower interest bearing loans), the increase in real estate held for development (which is a non-earning asset) and the suspension of member distributions in the second quarter of the year ended December 31, 2009.

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $     from the sale of our common stock in this offering, after deducting underwriting discounts and commissions and estimated offering expenses of approximately $     payable by us, based on an assumed initial public offering price of $     per share, which is the mid-point of the range of prices set forth on the cover of this prospectus. We intend to utilize the net proceeds of this offering for working capital, to fund the acquisition and origination of new investments in our target assets to redeem all or a portion of the outstanding shares of common stock, and for other general corporate purposes. For approximately 70% of the net proceeds of this offering, we expect to establish working capital and liquidity guidelines under which a specified number of months of operating cash and debt service needs would be held in working capital reserves, with the balance of the proceeds allocated for investment purposes. Of the portion of proceeds allocated to new investments, we expect our target allocations for new investments from the proceeds of this offering to be approximately 45% in interim loans or other short-term loans originated by us, 25% in performing whole, or participating interests in, commercial real-estate mortgage loans we acquire, 15% in whole non-performing commercial real estate loans we acquire and 15% in other types of real estate related assets and real estate debt instruments, although the exact allocations will depend on real estate and financial market conditions and the investment opportunities we decide to pursue. We expect to monitor and update the concentrations in these category allocations on not less than a quarterly basis. We also anticipate using the net proceeds of this offering for operating expenses and other general working capital requirements. In addition, we plan to use up to 30% of the proceeds of this offering to effect a pro rata redemption of the 838,448 outstanding shares of Class C common stock at the initial public offering price, less underwriting discounts and commissions paid to the underwriters in this offering. Assuming we receive net proceeds of approximately $    , and based on the above assumed initial public offering price of $    , we expect to redeem all outstanding shares of Class C common stock for approximately $   million.

The amount and timing of the amount of proceeds we actually spend for these purposes may vary and will depend on a number of factors, including our future revenue and cash generated by operations and the other factors described under the section entitled “Risk Factors.” Accordingly, our management will have discretion and flexibility in applying the net proceeds of this offering. Pending use of the net proceeds as described above, we intend to invest the net proceeds in money market funds, investment grade debt securities or cash. We do not intend to use the net proceeds of this offering to pay the Special Dividend.

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SELECTED HISTORICAL FINANCIAL DATA

The following tables show financial data of IMH Financial Corporation (as successor to the Fund), including the results of operations from the June 18, 2010 acquisition date of the Manager and Holdings, for the periods indicated. The summary financial data are derived from our audited and unaudited consolidated financial statements and other financial records. The summary consolidated statements of financial condition data as of December 31, 2008 and 2009 and the summary consolidated statements of income data for each of the three years in the period ended December 31, 2009 have been derived from our audited consolidated financial statements and accompanying notes included elsewhere in this prospectus and should be read together with those consolidated financial statements and accompanying notes. The summary consolidated statements of financial condition data as of December 31, 2006, 2007 and 2008, and the summary consolidated statements of income data for the years ended December 31, 2005 and 2006 have been derived from audited consolidated financial statements not included in this prospectus. The summary consolidated financial and other data should be read together with the sections entitled “Selected Historical Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements and accompanying notes, and unaudited financial statements and accompanying notes, included elsewhere in this prospectus.

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  As of and for the Year Ended December 31,   As of and for the Nine
Months Ended September 30,
  2005   2006   2007   2008   2009   2009   2010
  (in thousands, except percentage and unit data)   (unaudited)
Summary balance sheet items
                                         
Cash and cash equivalents   $ 12,089     $ 12,159     $ 73,604     $ 23,815     $ 963     $ 2,463     $ 4,580  
Mortgage loan principal outstanding   $ 92,945     $ 258,615     $ 510,797     $ 613,854     $ 544,448     $ 553,356     $ 490,882  
Allowance for credit losses   $     $     $ (1,900 )    $ (300,310 )    $ (330,428 )    $ (337,000 )    $ (334,881 ) 
Mortgage loans, net   $ 92,945     $ 258,615     $ 508,897     $ 313,544     $ 214,020     $ 216,356     $ 156,001  
Real estate owned   $     $     $     $ 62,781     $ 104,231     $ 97,305     $ 109,306  
Total assets   $ 105,981     $ 273,374     $ 590,559     $ 414,804     $ 337,796     $ 334,577     $ 281,045  
Notes Payable   $     $     $     $     $ 4,182     $     $ 16,963  
Total liabilities   $ 8,145     $ 13,193     $ 13,726     $ 6,753     $ 15,928     $ 13,406     $ 28,090  
Total owners’ equity   $ 97,835     $ 260,181     $ 576,833     $ 408,051     $ 321,868     $ 321,171     $ 252,955  
Summary income statement items
                                         
Mortgage loan interest   $ 7,846     $ 20,547     $ 47,929     $ 65,497     $ 21,339     $ 20,256     $ 1,112  
Total revenue   $ 7,961     $ 21,145     $ 49,763     $ 67,420     $ 22,522     $ 20,750     $ 2,782  
Operating expenses   $ 166     $ 430     $ 968     $ 2,454     $ 9,433     $ 5,924     $ 20,745  
Provision for credit losses                 1,900       296,000       79,299       82,000       34,380  
Impairment charges on Real Estate Owned                       27,175       8,000       8,000       13,221  
Total costs and expenses   $ 542     $ 1,043     $ 4,088     $ 325,707     $ 96,999     $ 95,924     $ 68,346  
Net earnings (loss)   $ 7,419     $ 20,102     $ 45,675     $ (258,287 )    $ (74,477 )    $ (75,174 )    $ (65,564 ) 
Earnings/Distributions per share data:(1)
                                         
Basic and diluted net earnings (loss) per share   $ 5.50     $ 5.40     $ 4.87     $ (17.41 )    $ (4.63 )    $ (4.67 )    $ (4.01 ) 
Net distributions per weighted average common share   $ 4.93     $ 5.20     $ 5.00     $ 4.32     $ 0.73     $     $  
Loan Related items
                                         
Note balances originated   $ 139,354     $ 266,101     $ 428,777     $ 329,952     $ 47,557     $ 392     $ 3,314  
Number of notes originated     48       37       38       23       3       1       3  
Average note balance originated   $ 2,903     $ 7,192     $ 11,284     $ 14,346     $ 15,852     $ 392     $ 1,105  
Number of loans outstanding     41       44       61       62       55       58       43  
Average loan carrying value   $ 2,267     $ 5,878     $ 8,343     $ 5,057     $ 3,891     $ 3,730     $ 3,628  
% of portfolio principal – fixed interest rate     84.4 %      69.0 %      30.3 %      31.3 %      50.4 %      50.1 %      55.5 % 
% of portfolio principal – variable interest rate     15.6 %      31.0 %      69.7 %      68.7 %      49.6 %      49.9 %      44.5 % 
Weighted average interest rate – all loans     12.41 %      12.33 %      12.44 %      12.18 %      11.34 %      11.56 %      11.27 % 
Principal balance % by state:
                                            
Arizona     81.5 %      57.9 %      44.8 %      47.9 %      55.5 %      53.0 %      62.8 % 
California     18.5 %      37.4 %      33.7 %      28.9 %      28.3 %      31.1 %      26.0 % 
Texas     0.0 %      4.4 %      6.3 %      9.1 %      3.2 %      3.1 %      0.0 % 
Idaho     0.0 %      0.0 %      9.6 %      8.1 %      5.0 %      4.9 %      4.2 % 
Other     0.0 %      0.3 %      5.6 %      6.0 %      8.0 %      7.9 %      7.0 % 
Total     100 %      100 %      100 %      100 %      100 %      100 %      100 % 
Credit Quality
                                         
Extension fees included in mortgage loan principal   $ 475     $ 2,160     $ 6,204     $ 10,895     $ 18,765     $ 10,895     $ 17,096  
Interest payments over 30 days delinquent   $     $     $ 2,741     $ 1,134     $ 7,530     $ 7,687     $ 6,767  
Principal balance of loans past scheduled maturity   $     $ 13,901     $ 133,532     $ 210,198     $ 347,135     $ 370,255     $ 347,233  
Carrying value of loans in non accrual status   $     $     $ 73,346     $ 95,624     $ 192,334     $ 450,568     $ 145,721  
Allowance for credit loss / valuation allowance   $     $     $ (1,900 )    $ (300,310 )    $ (330,428 )      (337,000 )      (334,881 ) 
Allowance for credit loss / valuation allowance as % of loan principal outstanding     0.0 %      0.0 %      0.4 %      48.9 %      60.7 %      60.9 %      68.2 % 
Charge-offs                             49,181       45,310       29,927  

(1) As described in the notes to financial statements, effective June 18, 2010, the Company converted IMH Secured Loan Fund, LLC from a Delaware limited liability company into a Delaware corporation name IMH Financial Corporation. The per share information in the “Earnings/Distributions per share” section of this table is presented on a retrospective basis, assuming the conversion occurred and the member units were exchanged for common shares during each respective period.

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  As of December 31,   As of
September 30,
2010
  2007   2008   2009
Return on Equity and Assets Ratio
                       
Return on assets     10.3 %      -42.0 %      -19.4 %      (20.8%)  
Return on equity     9.8 %      -43.5 %      -19.9 %      (22.5%)  
Dividend payout ratio     102.7 %      -24.8 %      -15.7 %      0 % 
Equity to assets ratio     105.5 %      96.6 %      97.5 %      92.8 % 

       
  As of December 31,   As of
September 30,
2010
  2007   2008   2009
  (in thousands)
Average Balance Sheets*
                       
Cash and cash equivalents   $ 45,199     $ 78,379     $ 7,719     $ 3,233  
Mortgage loan principal outstanding     392,457       551,174       584,551       518,002  
Allowance for credit loss / valuation allowance     (380 )      (70,290 )      (306,711 )      (334,199 ) 
Mortgage loans, net     392,077       480,884       277,840       183,803  
Real estate owned, net           45,055       79,292       109,825  
Other assets     4,810       10,808       18,884       17,665  
Total assets   $ 442,086     $ 615,126     $ 383,735     $ 314,526  
Total liabilities     16,901       21,184       9,517       22,684  
Total owners’ equity     425,185       593,942       374,218       291,842  
Total liabilities and owners’ equity   $ 442,086     $ 615,126     $ 383,735     $ 314,526  

* The average balance sheets were computed using the quarterly average balances during each fiscal period presented.

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  As of and for the Years
Ended December 31,
  As of
September 30,
2010
  2007   2008   2009
  (in thousands)
Analysis of Mortgage Loan Income by Loan Classification
                       
Pre-entitled Land:
                       
Held for Investment   $ 62     $ 780     $ 60     $  
Processing Entitlements     21,443       20,145       6,977       70  
Entitled Land:
                       
Held for Investment     10,299       14,262       2,385       27  
Infrastructure under Construction     4,792       5,586       2,163       315  
Improved and Held for vertical Construction     1,574       5,656       1,384        
Construction and Existing Structures:
                       
New Structure – Construction in process     7,841       10,976       1,058       512  
Existing Structure Held for Investment     1,848       2,825       1,201        
Existing Structure – Improvements     70       5,267       6,111       188  
Total Mortgage Loan Income   $ 47,929     $ 65,497     $ 21,339     $ 1,112  
Average Mortgage Loan Balances by Loan Classification*
                       
Pre-entitled Land:
                       
Held for Investment   $ 559     $ 5,673     $ 12,478     $ 14,442  
Processing Entitlements     180,643       198,886       193,261       184,342  
Entitled Land:
                       
Held for Investment     80,120       117,468       116,521       89,716  
Infrastructure under Construction     38,695       59,192       66,399       66,663  
Improved and Held for vertical Construction     17,109       43,208       47,909       43,897  
Construction and Existing Structures:
                       
New Structure – Construction in process     59,179       52,480       40,329       46,418  
Existing Structure Held for Investment     15,672       26,839       26,394       15,073  
Existing Structure – Improvements     480       47,428       81,260       57,451  
Total Average Mortgage Loan Balances   $ 392,457     $ 551,174     $ 584,551     $ 518,004  
Average Interest Rate by Loan Classification**
                       
Pre-entitled Land:
                       
Held for Investment     12.2 %      12.0 %      10.8 %      9.9 % 
Processing Entitlements     12.5 %      11.5 %      9.6 %      9.2 % 
Entitled Land:
                       
Held for Investment     12.1 %      12.2 %      12.4 %      13.6 % 
Infrastructure under Construction     12.9 %      12.2 %      11.0 %      13.1 % 
Improved and Held for vertical Construction     12.2 %      11.8 %      12.1 %      13.3 % 
Construction and Existing Structures:
                       
New Structure – Construction in process     12.1 %      12.3 %      11.5 %      12.0 % 
Existing Structure Held for Investment     11.5 %      13.8 %      12.0 %      19.7 % 
Existing Structure – Improvements     12.5 %      12.5 %      12.4 %      13.8 % 
Total Overall Average Interest Rate     12.3 %      12.3 %      11.5 %      13.1 % 

* Amounts were computed using the quarterly average balances during each fiscal period presented.
** Average Interest Rates by Loan Classification were computed by taking an average balance over the trailing five quarters.

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  As of and for the Years Ended December 31,   As of
September 30,
  2007   2008   2009
Average Yield***
                       
Pre-entitled Land:
                       
Held for Investment     11.1 %      13.7 %      0.5 %      0.0 % 
Processing Entitlements     11.9 %      10.1 %      3.6 %      0.0 % 
Entitled Land:
                       
Held for Investment     12.9 %      12.1 %      1.9 %      0.0 % 
Infrastructure under Construction     12.4 %      9.4 %      3.6 %      0.5 % 
Improved and Held for vertical Construction     9.2 %      13.1 %      2.9 %      0.0 % 
Construction and Existing Structures:
                       
New Structure – Construction in process     13.2 %      20.9 %      2.7 %      1.1 % 
Existing Structure Held for Investment     11.8 %      10.5 %      4.6 %      0.0 % 
Existing Structure – Improvements     14.4 %      11.1 %      8.9 %      0.3 % 
Overall Average Yield     10.9 %      12.1 %      3.7 %      0.1 % 

*** Average Yield is computed using Mortgage Loan Income by Loan Classification as a percent of Average Mortgage Loan Balances by Loan Classification
Note: Overall Average Yields have decreased due to loans being placed in non-accrual status

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  As of and for the Year Ended December 31,   As of
September 30,
2010
     2005   2006   2007   2008   2009
     (in thousands)
Principal Balances Outstanding by Loan Classification
                                                     
Pre-entitled Land:
                                                  
Held for Investment   $     $     $     $ 7,178     $ 13,834     $ 18,303  
Processing Entitlements   $ 43,237     $ 145,219     $ 203,166     $ 200,902     $ 185,608     $ 180,424  
Entitled Land:
                                                     
Held for Investment   $ 7,102     $ 41,894     $ 135,060     $ 114,307     $ 101,942     $ 73,082  
Infrastructure under Construction   $ 11,344     $ 17,621     $ 60,037     $ 57,908     $ 69,839     $ 57,062  
Improved and Held for vertical Construction   $ 8,409     $ 29,388     $ 14,800     $ 54,486     $ 47,227     $ 35,918  
Construction and Existing Structures:
                                                     
New Structure – Construction in process   $ 19,461     $ 16,316     $ 70,864     $ 43,814     $ 46,325     $ 51,801  
Existing Structure Held for Investment   $ 3,392     $ 8,177     $ 26,870     $ 37,482     $ 23,640     $ 12,584  
Existing Structure – Improvements