NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES

Reclassifications

Certain 2012 and 2011 amounts have been reclassified to conform to the 2013 financial statement presentation. During the year ended December 31, 2013, the Company completed a conversion to a new accounting system which provides more detailed reporting and greater visibility for the Company and its various subsidiaries. As a result of this conversion, we identified various changes in the classifications of certain previously reported income statement amounts and segment information. While these changes had no impact on net loss and basic and diluted net loss per share, there were some significant reclassifications in the consolidated statement of operations which are described as follows:

During the year ended December 31, 2013, we created a line item entitled Operating Property Expenses (exclusive of Interest and Depreciation) and reclassified appropriate amounts primarily from Other Operating Expenses for Real Estate Owned to capture those expenses directly attributable to operating properties, thereby segregating incidental costs of ownership of non-operating REO properties.

During the year ended December 31, 2012 and prior, we reported various costs related to Default and Enforcement Related Expenses as a separate line item. Due to the nature of such costs and the overlapping relationship between these and other professional fees, we elected to reclassify the applicable components of Default and Enforcement Related Expenses between Professional Fees and General and Administrative Expenses in our 2013 presentation. As such, we have reclassified such amounts for the years ended December 31, 2012 and 2011 in the accompanying condensed consolidated statement of operations to conform to our current presentation.

The effect of these reclassifications is presented in the tables below:



	Year Ended December 31, 2012
Reclassifications - Statement of Operations - 2012	As Previously Reported			Reclassification Adjustment			As Reclassified
Rental Income	$	1,475		$	(1,475	)	$	—
Hospitality and Entertainment Income	1,986			(1,986		)	—
Operating Property Revenue	—			3,485			3,485
Investment and Other Income	194			1			195
Operating Property Direct Expenses (exclusive of Interest and Depreciation)	—			4,194			4,194
Property Taxes for REO	1,900			(1,900		)	—
Other Operating Expenses for Real Estate Owned	5,267			(5,267		)	—
Expenses for Non-Operating Real Estate Owned	—			3,206			3,206
Professional Fees	5,307			634			5,941
Default and Enforcement Related Expenses	1,317			(1,317		)	—
General and Administrative Expenses	5,921			476			6,397
Interest Expense	15,216			(1		)	15,215
Total Operating Expenses	39,052			1,015			40,067
Total Provision and Impairment Charges	(2,121		)	2,121			—
Total (Recovery) Provision, Impairment Charges and (Gain) Loss on Disposal of Legacy Assets	—			(3,111		)	(3,111		)



	Year Ended December 31, 2011
Reclassifications - Statement of Operations - 2011	As Previously Reported		Reclassification Adjustment			As Reclassified
Rental Income	$	1,847	$	(1,847	)	$	—
Operating Property Revenue	—		1,912			1,912
Mortgage Loan Income, net	1,327		(53		)	1,274
Investment and Other Income	559		53			612
Operating Property Direct Expenses (exclusive of Interest and Depreciation)	—		2,579			2,579
Property Taxes for REO	2,159		(2,159		)	—
Other Operating Expenses for Real Estate Owned	2,533		(2,533		)	—
Expenses for Non-Operating Real Estate Owned	—		3,618			3,618
Professional Fees	7,201		(1,038		)	6,163
Default and Enforcement Related Expenses	767		(767		)	—
General and Administrative Expenses	10,232		1,076			11,308
Organizational and Offering Costs	509		(509		)	—
Interest Expense	9,842		1			9,843
Restructure Charge	204		(204		)	—
Depreciation and Amortization	1,796		1			1,797
Total Operating Expenses	36,399		266			36,665
Total Provision and Impairment Charges	2,529		(2,529		)	—
Total (Recovery) Provision, Impairment Charges and (Gain) Loss on Disposal of Legacy Assets	—		2,328			2,328

Restatement of Previously Issued Consolidated Financial Statements

Accrued Property Taxes and Notes Payable

The Company identified a misstatement with respect to the manner in which it presented certain liabilities in its consolidated balance sheet as of December 31, 2012. Specifically, as described in note 8, we entered into a settlement agreement with a municipality in June 2012 with respect to outstanding past due property taxes, penalties and interest on various parcels totaling $3.3 million, which had been reported in accrued property taxes in our consolidated balance sheet as of December 31, 2012. However, under the terms of the settlement agreement, we are required to make annual payments over either a five or ten year period, depending on the parcel, and the outstanding obligation bears annual interest of 10%. As a result, the characteristics of this obligation are more akin to a long-term debt obligation. As such, we have restated this balance at December 31, 2012 to present the amount in notes payable in the accompanying consolidated balance sheet.

Liabilities of Assets Held for Sale

The Company restated the manner in which it presented liabilities of assets held for sale in its consolidated balance sheet as of December 31, 2012. Under current accounting literature, the assets and liabilities of a disposal group classified as held for sale shall be presented separately in the asset and liability sections of the balance sheet. We historically applied this literature as it pertained to our mortgage loans held for sale and real estate acquired through foreclosure held for sale. However, after further assessment, it was determined that the literature was not applicable. As result, we restated the balance of liabilities of assets held for sale to the applicable respective liability accounts, which consisted of accrued property taxes payable, as of December 31, 2012. Similarly, we restated the presentation of the related accounts in the accompanying consolidated statement of cash flows for the years ended December 31, 2012 and 2011.

Segment Information

As a result of the accounting system conversion described above, we identified various certain misstatements in the classifications of certain previously reported segment information. For balance sheet items, the adjustments related to non-real estate assets and operating liabilities not previously allocated within the proper business segments. We have adjusted our segment disclosure as of and for the years ended December 31, 2012 and 2011 to reflect the proper amounts in each segment. For income statement items, the adjustments primarily related to certain professional fees which were reflected in Mortgage and REO - Legacy Portfolio and Other Operations, but should have been reflected in Corporate and Other business segment.

Assessment of Restatements

These corrections had no impact on consolidated stockholders’ equity as of December 31, 2012 or on net loss or basic and diluted loss per share or cash flows for the years ended December 31, 2012 and 2011. The Company has assessed these misstatements in financial statement presentation and has determined that, on both a qualitative and quantitative basis, the adjustments are immaterial, both individually and in the aggregate, to the consolidated financial statements, and thus the Company did not and will not amend any of its prior quarterly and annual reports on Form 10-Q and 10-K, and it has adjusted its presentation on a prospective basis. In order to provide consistency in the Company's financial reporting, the December 31, 2012 consolidated balance sheet, and the 2012 and 2011 consolidated statements of cash flows presented herein have been restated to appropriately reflect the corrections described above. The following tables summarizes the effects of these corrections and reclassifications on the previously filed consolidated financial statements as of and for the years ended December 31, 2012 and 2011, which was restated for comparative purposes only (in thousands):



	December 31, 2012
	As Previously Reported			Restatement Adjustment			As Restated
Balance Sheet Items
Liabilities
Accrued Property Taxes	$	7,063		$	(2,695	)	$	4,368
Liabilities of Assets Held for Sale	613			(613		)	—
Notes Payable, Net of Discount	6,070			3,308			9,378

	Year Ended December 31, 2012
	As Previously Reported			Restatement Adjustment			As Restated
Statement of Cash Flows
Cash Flows from Operating Activities
Changes in Accrued Property Taxes	$	(375	)	$	(955	)	$	(1,330	)
Changes in Liabilities of Assets Held for Sale	(955		)	955			—

	Year Ended December 31, 2011
	As Previously Reported			Restatement Adjustment			As Restated
Statement of Cash Flows
Cash Flows from Operating Activities
Changes in Accrued Property Taxes	$	702		$	(3,638	)	$	(2,936	)
Changes in Liabilities of Assets Held for Sale	(3,638		)	3,638			—

In addition, the segment information presented in Note 9 as of and for the years ended December 31, 2012 and 2011 has been restated to reflect the classification of expenses in the proper segments and certain balance sheet reclassifications (in thousands):



	December 31, 2012
	As Previously Reported		Restatement Adjustment			As Restated
Segment Information - Balance Sheet Items
Total Assets
Mortgage and REO - Legacy Portfolio and Other Operations	$	172,046	$	(1,037	)	$	171,009
Commercial Real Estate Leasing Operations	19,613		1,872			21,485
Hospitality and Entertainment Operations	2,672		1			2,673
Corporate and Other	26,683		(836		)	25,847

Notes Payable, Special Assessment Obligations, Capital Leases and Other Long Term Obligations
Mortgage and REO - Legacy Portfolio and Other Operations	11,251		3,308			14,559

Operating Liabilities
Mortgage and REO - Legacy Portfolio and Other Operations	5,405		(176		)	5,229
Commercial Real Estate Leasing Operations	323		246			569
Hospitality and Entertainment Operations	2,171		(1,178		)	993
Corporate and Other	8,530		(2,200		)	6,330



	Year Ended December 31, 2012
	As Previously Reported	Restatement Adjustment		Reclassification Adjustment		As Restated
Segment Information - Income Statement Items
Revenue
Mortgage and REO - Legacy Portfolio and Other Operations	1,165	—		25		1,190
Commercial Real Estate Leasing Operations	1,475	—		(47	)	1,428
Corporate and Other	113	—		47		160
Expenses
Expenses Mortgage and REO - Legacy Portfolio and Other Operations	9,604	(4,848	)	(4,756	)	—
Mortgage and REO - Legacy Portfolio and Other Operations - Expenses for Non-Operating REO	—	—		3,206		3,206
Mortgage and REO - Legacy Portfolio and Other Operations - Professional Fees	—	—		2,368		2,368
Mortgage and REO - Legacy Portfolio and Other Operations - General and Administrative	—	—		34		34
Mortgage and REO - Legacy Portfolio and Other Operations - Interest	—	—		2,247		2,247
Mortgage and REO - Legacy Portfolio and Other Operations - Gain on disposal of Assets	—	—		(982	)	(982	)
Mortgage and REO - Legacy Portfolio and Other Operations - Credit Loss Provision (Recoveries)	—	—		(2,117	)	(2,117	)
Total Expenses Mortgage and REO - Legacy Portfolio and Other Operations	9,604	(4,848	)	—		4,756

Expenses Commercial Real Estate Leasing Operations	2,448	414		(2,862	)	—
Commercial Real Estate Leasing Operations - Operating Property Direct Expense	—	—		1,532		1,532
Commercial Real Estate Leasing Operations - Interest	—	—		12		12
Commercial Real Estate Leasing Operations - Depreciation and Amortization	—	—		1,323		1,323
Commercial Real Estate Leasing Operations - Credit Loss Provision (Recoveries)	—	—		(5	)	(5	)
Total Expenses Commercial Real Estate Leasing Operations	2,448	414		—		2,862

Expenses Hospitality and Entertainment Operations	3,082	9		(3,091	)	—
Hospitality and Entertainment Operations - Operating Property Direct Expense	—	—		2,662		2,662
Hospitality and Entertainment Operations - Interest	—	—		93		93
Hospitality and Entertainment Operations - Depreciation and Amortization	—	—		336		336
Total Expenses Hospitality and Entertainment Operations	3,082	9		—		3,091

Expenses Corporate and Other	21,797	4,450		(26,247	)	—
Corporate and Other - Professional Fees	—	—		3,573		3,573
Corporate and Other - General and Administrative	—	—		6,363		6,363
Corporate and Other - Interest	—	—		12,863		12,863
Corporate and Other - Depreciation and Amortization	—	—		892		892
Corporate and Other - Gain on disposal of Assets	—	—		(7	)	(7	)
Corporate and Other - Settlement and related	—	—		2,563		2,563
Total Expenses Corporate and Other	21,797	4,450		—		26,247



	Year Ended December 31, 2011
	As Previously Reported		Restatement Adjustment			Reclassification Adjustment			As Restated
Segment Information - Income Statement Items
Revenue
Mortgage and REO - Legacy Portfolio and Other Operations	$	1,327	$	—		$	287		$	1,614
Commercial Real Estate Leasing Operations	1,847		—			204			2,051
Corporate and Other	559		—			(426		)	133
Expenses
Expenses Mortgage and REO - Legacy Portfolio and Other Operations	15,403		(6,329		)	(9,074		)	—
Mortgage and REO - Legacy Portfolio and Other Operations - Expenses for Non-Operating REO	—		—			3,592			3,592
Mortgage and REO - Legacy Portfolio and Other Operations - Professional Fees	—		—			957			957
Mortgage and REO - Legacy Portfolio and Other Operations - General and Administrative	—		—			55			55
Mortgage and REO - Legacy Portfolio and Other Operations - Interest	—		—			2,143			2,143
Mortgage and REO - Legacy Portfolio and Other Operations - Gain on disposal of Assets	—		—			(202		)	(202		)
Mortgage and REO - Legacy Portfolio and Other Operations - Credit Loss Provision (Recoveries)	—		—			1,000			1,000
Mortgage and REO - Legacy Portfolio and Other Operations - Impairment of Real Estate Owned	—		—			1,529			1,529
Total Expenses Mortgage and REO - Legacy Portfolio and Other Operations	15,403		(6,329		)	—			9,074

Expenses Commercial Real Estate Leasing Operations	2,262		2,601			(4,863		)	—
Commercial Real Estate Leasing Operations - Operating Property Direct Expense	—		—			2,579			2,579
Commercial Real Estate Leasing Operations - Interest	—		—			964			964
Commercial Real Estate Leasing Operations - Depreciation and Amortization	—		—			1,320			1,320
Total Expenses Commercial Real Estate Leasing Operations	2,262		2,601			—			4,863


Expenses Corporate and Other	21,263		3,793			(25,056		)	—
Corporate and Other - Expenses for Non-Operating REO	—		—			26			26
Corporate and Other - Professional Fees	—		—			5,206			5,206
Corporate and Other - General and Administrative	—		—			11,253			11,253
Corporate and Other - Interest	—		—			6,736			6,736
Corporate and Other - Depreciation and Amortization	—		—			477			477
Corporate and Other - Gain on disposal of Assets	—		—			1			1
Corporate and Other - Settlement and related	—		—			1,357			1,357
Total Expenses Corporate and Other	21,263		3,793			—			25,056

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. The Company evaluates its estimates and assumptions on a regular basis. The Company uses historical experience and various other assumptions that are believed to be reasonable under the circumstances to form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. The financial statement areas where significant judgment and estimation are involved include revenue recognition, valuation of loans and REO assets, contingencies, income taxes and stock-based compensation. Actual results may materially differ from these estimates and assumptions used in preparation of the consolidated financial statements.

Restricted Cash

Restricted cash includes cash items that are legally or contractually restricted as to usage or withdrawal. At December 31, 2013 and 2012, restricted cash and cash equivalents totaled $5.8 million and $14.9 million, respectively. Restricted cash includes cash items that are legally or contractually restricted as to usage or withdrawal, which include amounts relating to: a) to the Collateral Account which is required under the terms of NW Capital loan and related agreements, and is subject to NW Capital approval and release. While the funds in the Collateral Account are not restricted for a specified purpose and are expected to be used to fund on-going operations, capital purchases and investments, the availability of such funds is restricted as to withdrawal and subject to NW approval and release; b) as described in Note 8, under the terms of our loan agreement with Canpartners Realty Holding Company IV LLC (Canpartners), we are required to maintain a minimum $5.0 million balance of cash and cash equivalents at all times during the term of the loan, which may include balances in the Collateral Account, as well as other reserve accounts required under the Canpartners' loan agreement; and c) amounts maintained in escrow accounts for contractually specified purposes. Subsequent to December 31, 2013, we repaid the CanPartners loan in full thereby removing this restriction.

Revenue Recognition

Operating Property Revenue

Revenues for the hospitality and entertainment operations include hotel, spa, golf and related food and beverage operations. Hotel, spa and golf revenues are recognized as services are provided. Food and beverage revenue is derived from the sale of prepared food and beverage and select retail items and is recognized at the time of sale. Revenue derived from gift card sales is recognized at the time the gift card is redeemed. Until the redemption of gift cards occurs, the outstanding balances on such cards are included in accrued expenses in the accompanying consolidated balance sheets.

Rental income arising from operating leases is recognized on a straight-line basis over the life of the lease.

Investment Income

During the year ended December 31, 2013, we entered into a limited liability agreement to form a joint venture with unrelated parties for the purpose of acquiring a multi-family portfolio comprised of 14 apartment communities across six states, which is being managed by a third party, national firm, specializing in multi-family assets. Under the terms of the joint venture agreement, were entitled to, among other things, a 15% annualized return on our preferred equity investment. In addition, we were further entitled to an exit fee equal to the greater of 4% of our original investment or 1.5% of the fair market value of the portfolio assets of the joint venture at the 2 year preferred equity redemption date. At the date of execution of the agreement, we estimated that the fair market value of the underlying assets at the redemption date and computed the exit fee using an applicable discount rate.

As a result of the passive nature of this investment by us, the mandatory redemption feature of the investment, the defined preferred return, and other repayment and security features of the investment, the investment was accounted for as a debt security investment held to maturity, whereby we were recording the 15% annual preferred return over the term of the investment period using the effective interest method. The exit fee was recorded as a derivative investment receivable in our consolidated balance sheet and the offsetting amount was treated as a discount on the investment which was being amortized as an adjustment to investment income over the term of the investment using the effective interest method. Similarly, the deferred origination fees, net of direct costs was being amortized over the term of the investment using the effective interest method as an adjustment to yield. We disposed of this investment in the fourth quarter of 2013 and recognized a gain which is included in investment and other interest income in the accompanying consolidated statement of operations.

Mortgage Loan Income

Interest on mortgage loans is recognized as revenue when earned using the interest method based on a 365 day year. We do not recognize interest income on loans once they are deemed to be impaired and placed in non-accrual status. Generally, a loan is placed in non-accrual status when it is past its scheduled maturity by more than 90 days, when it becomes delinquent as to interest due by more than 90 days or when the related fair value of the collateral is less than the total principal, accrued interest and related costs. We may determine that a loan, while delinquent in payment status, should not be placed in non-accrual status in instances where the fair value of the loan collateral significantly exceeds the principal and the accrued interest, as we expect that income recognized in such cases is probable of collection. Unless and until we have determined that the value of underlying collateral is insufficient to recover the total contractual amounts due under the loan term, generally our policy is to continue to accrue interest until the loan is more than 90 days delinquent with respect to accrued, uncollected interest or more than 90 days past scheduled maturity, whichever comes first.

A loan is typically not removed from non-accrual status until the borrower has brought the respective loan current as to the payment of past due interest, and unless we are reasonably assured as to the collection of all contractual amounts due under the loan based on the value of the underlying collateral of the loan, the receipt of additional collateral required and the financial ability of the borrower to service our loan.

We do not generally reverse accrued interest on loans once they are deemed to be impaired and placed in non-accrual status. In conducting our periodic valuation analysis, we consider the total recorded investment for a particular loan, including outstanding principal, accrued interest, anticipated protective advances for estimated outstanding property taxes for the related property and estimated foreclosure costs, when computing the amount of valuation allowance required. As a result, our valuation allowance may increase based on interest income recognized in prior periods, but subsequently deemed to be uncollectible as a result of our valuation analysis.

Cash receipts are generally first allocated to interest, except when such payments are specifically designated by the terms of the loan as a principal reduction. Loans with a principal or interest payment one or more days delinquent are in technical default and are subject to various fees and charges including default interest rates, penalty fees and reinstatement fees. Often these fees are negotiated in the normal course of business and, therefore, not subject to estimation. Accordingly, income pertaining to these types of fees is recorded as revenue when received.

Fees for loan originations, processing and modifications, net of direct origination costs, are deferred at origination and amortized as an adjustment to interest income over the contractual term of the related loan. Non-refundable commitment fees are recognized as revenue when received.

(Gain)/Loss on Disposal of Legacy Assets

Gains from sales of real estate related assets are recognized in full in accordance with applicable accounting standards only when all of the following conditions are met: 1) the sale is consummated, 2) the buyer has demonstrated a commitment to pay and the collectability of the sales price is reasonably assured, 3) if financed, the receivable from the buyer is collateralized by the property and is subject to subordination only by an existing first mortgage and other liens on the property, and 4) the seller has transferred the usual risks and rewards of ownership to the buyer, and is not obligated to perform significant activities after the sale. If a sale of real estate does not meet the foregoing criteria, any potential gain relating to the sale is deferred until such time that the criteria is met.

Advertising Costs

Advertising costs are charged to expense as incurred. For 2013, 2012 and 2011, our continuing operations incurred advertising costs of $0.3 million, $35 thousand and $17 thousand, respectively. Advertising costs related to continuing operations are included in operating property direct expenses and general and administrative expense in the accompanying consolidated statements of operations.

Valuation Allowance

A loan is deemed to be impaired when, based on current information and events, it is probable that we will be unable to ultimately collect all amounts due according to the contractual terms of the loan agreement and the amount of loss can be reasonably estimated.

Our mortgage loans held for sale, which are deemed to be collateral dependent, are subject to a valuation allowance based on our determination of the fair value of the subject collateral in relation to the outstanding mortgage balance, including accrued interest and related expected costs to foreclose and sell. We evaluate our mortgage loans for impairment losses on an individual loan basis, except for loans that are cross-collateralized within the same borrowing group. For cross-collateralized loans within the same borrowing group, we perform both an individual loan evaluation as well as a consolidated loan evaluation to assess our overall exposure for such loans. As such, we consider all relevant circumstances to determine impairment and the need for specific valuation allowances. In the event a loan is determined not to be collateral dependent, we measure the fair value of the loan based on the estimated future cash flows of the note discounted at the note’s contractual rate of interest.

Under GAAP definitions, certain of the loans that we classify as “in default” status would qualify as impaired under GAAP while others would not, depending on the extent of value of the underlying collateral. Since our loan portfolio is considered collateral dependent, the extent to which our loans are considered collectible, with consideration given to personal guarantees provided under such loans, is largely dependent on the fair value of the underlying collateral.

Fair Value

Fair value estimates are based upon certain market assumptions and pertinent information available to management. As of the dates of the balance sheets, the respective carrying value of all balance sheet financial instruments approximated their fair values. These financial instruments include cash and cash equivalents, mortgage loans held for sale, accrued interest, and notes payable. Fair values of cash equivalents are assumed to approximate carrying values because these instruments are short term in duration. Fair values of notes payable are assumed to approximate carrying values because the terms of such indebtedness are deemed to be at current market rates.

We perform an evaluation for impairment for all loans in default as of the applicable measurement date based on the fair value of the collateral if we determine that foreclosure is probable. We generally measure impairment based on the fair value of the underlying collateral of the loans because our entire loan portfolio is considered collateral dependent. Impairment is measured at the balance sheet date based on the then fair value of the collateral, less costs to sell, in relation to contractual amounts due under the terms of the loan. In the case of loans that are not deemed to be collateral dependent, we measure impairment based on the present value of expected future cash flows. In addition, we perform a similar evaluation for impairment for all real estate held for sale as of the applicable measurement date based on the fair value of the real estate.

In determining fair value, we have adopted applicable accounting guidance, which establishes a framework for measuring fair value in accordance with GAAP, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. This guidance applies whenever other accounting standards require or permit fair value measurement. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (the “exit price”) in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset or liability that are (a) independent of the reporting entity; that is, they are not related parties; (b) knowledgeable, having a reasonable understanding about the asset or liability and the transaction based on all available information, including information that might be obtained through due diligence efforts that are usual and customary; (c) able to transact for the asset or liability; and (d) willing to transact for the asset or liability; that is, they are motivated but not forced or otherwise compelled to do so.

Under applicable accounting guidance, a fair value measurement assumes the highest and best use of the asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date. Highest and best use is determined based on the use of the asset by market participants, even if the intended use of the asset by the reporting entity is different. Determination of the highest and best use of the asset establishes the valuation premise used to measure the fair value of the asset. Two asset categories are established under applicable accounting guidance: in-use assets, and in-exchange assets. When using an in-exchange valuation premise, the fair value of the asset is determined based on the price that would be received in a current transaction to sell the asset on a stand-alone basis. All of our loans and REO held for sale are deemed to be in-exchange assets.

The accounting guidance establishes a fair value hierarchy that prioritizes the inputs into valuation techniques used to measure fair value. The three levels of the fair value hierarchy under this accounting guidance are as follows:


Level 1-	Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date;


Level 2-	Valuations based on quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active or models for which all significant inputs are observable in the market either directly or indirectly; and


Level 3-	Valuations based on models that use inputs that are unobservable in the market and significant to the fair value measurement.

The accounting guidance gives the highest priority to Level 1 inputs, and gives the lowest priority to Level 3 inputs. The value of a financial instrument within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value instrument.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability, rather than an entity-specific measurement. Therefore, even when market assumptions are not readily available, our own assumptions attempt to reflect those that market participants would use in pricing the asset or liability at the measurement date. Further, fair value measurements are market-based measurements with an exit price notion, not entity-specific measurements. Therefore, an entity cannot disregard the information obtained from the current market simply because the entity is a “willing” seller at that price. If the best information available in the circumstances indicates that market participants would transact at a price, it does not matter whether the reporting entity is actually willing to transact at that particular price.

In the case of collateral dependent loans or REO held for sale, the amount of any improvement in fair value attributable to the passage of time is recorded as a credit to the provision for credit losses or impairment of REO with a corresponding reduction in the valuation allowance.

In connection with our assessment of fair value, we may utilize the services of one or more independent third-party valuation firms to provide a range of values for selected properties. With respect to valuations received from third-party valuation firms, one of four valuation approaches, or a combination of such approaches, is used in determining the fair value of the underlying collateral of each loan: the development approach, the income capitalization approach, the sales comparison approach and the cost approach. The valuation approach taken depends on several factors including the type of property, the current status of entitlements and level of development (horizontal or vertical improvements) of the respective project, the likelihood of a bulk sale as opposed to individual unit sales, whether the property is currently or nearly ready to produce income, the current sales price of property in relation to cost of development and the availability and reliability of market participant data. In a declining market, except in limited circumstances, the valuation approach taken has shifted from primarily a development approach to a comparable sales approach.

In subsequent periods, we may obtain a letter from the third-party valuation firms to determine whether there is a material diminution in the fair value indications from the previously reported values. In the absence of updated third party valuations, we review and update valuation assumptions and perform other in-house analysis using available market participant data to determine fair value at the reporting date.

When a third party valuation is obtained, we generally select a fair value within a determinable range as provided by the valuation firm, unless we or the borrower have received a bona fide written third-party offer on a specific loan or underlying collateral. In determining a single best estimate of value from the range provided, we consider the macro and micro economic data provided by the third-party valuation specialists, supplemented by management’s knowledge of the specific property condition and development status, borrower status, level of interest by market participants, local economic conditions, and related factors. See Note 6 for further discussion regarding selection of values within a range.

As an alternative to the third-party valuations obtained, we will utilize bona fide written third-party offer amounts received, executed purchase and sale agreements, internally prepared discounted cash flow analysis, or internally prepared market comparable assessments, whichever may be determined to be most relevant.

Loan Charge Offs

Loan charge offs generally occur under one of two scenarios: (i) the foreclosure of a loan and transfer of the related collateral to REO status, or (ii) we elect to accept a loan payoff at less than the contractual amount due. Under either scenario, the loan charge off is generally recorded through the valuation allowance.

When a loan is foreclosed and transferred to a REO status, an assessment of the most current valuation is made and updated as necessary, and the asset is transferred to a REO status at its then current fair value, less estimated costs to sell. Our REO assets are classified as either held for development, operating (i.e., a long-lived asset) or held for sale.

A loan charged off is recorded as a charge to the valuation allowance at the time of foreclosure in connection with the transfer of the underlying collateral to REO status. The amount of the loan charge off is equal to the difference between the contractual amounts due under the loan and the fair value of the collateral acquired through foreclosure, net of selling costs. At the time of foreclosure, the contractual value less the related valuation allowance is compared with the estimated fair value, less costs to sell, on the foreclosure date and the difference, if any, is included in the provision for credit losses (recovery) in the statement of operations. The valuation allowance is netted against the gross carrying value of the loan, and the net balance is recorded as the new basis in the REO assets. Once in a REO status, the asset is evaluated for impairment based on accounting criteria for long-lived assets.

Classification of Loans

Historically, we generally expected that upon origination, mortgage investments would be held until maturity or payoff. While we had the ability to do so, we did not originate or acquire loans with the intent of reselling them as whole loans. In addition, we did not have any mandatory delivery contracts or forward commitments to sell loans in the secondary whole loan market. Because we had the ability and the intent to hold these loans until maturity, they were generally classified as held for investment pursuant to applicable accounting guidance. In connection with the Conversion Transactions, we modified our business strategy such that all mortgage investments are acquired with the intent to sell or participate such investments.

Loans Held for Sale

Loans that we intend to sell, subsequent to origination or acquisition, are classified as loans held for sale, net of any applicable valuation allowance. Loans classified as held for sale are generally subject to a specific marketing strategy or a plan of sale. Loans held for sale are accounted for at the lower of cost or fair value on an individual basis. Direct costs related to selling such loans are deferred until the related loans are sold and are included in the determination of the gains or losses upon sale. Valuation adjustments related to loans held for sale are reported net of related principal on the consolidated balance sheets and the provision for credit losses in the statements of operations.

The loans we sell generally are non-performing and therefore have no cash flows from interest income or anticipated principal payments benefiting the holder of such assets. As a result, in most cases, a buyer is generally interested in the underlying real estate collateral. Accordingly, we consider the criteria applied to our sales of real estate assets, as described above, in recording the sale of loans. In addition, we also consider the applicable accounting guidance for derecognition of financial assets in connection with our loan sales. Since we do not retain servicing rights, nor do we have any rights or obligations to repurchase such loans, derecognition of such assets upon sale is appropriate.

Discounts on Acquired Loans

We account for mortgages acquired at a discount in accordance with applicable accounting guidance which requires that the amount representing the excess of cash flows estimated by us at acquisition of the note over the purchase price is to be accreted into interest income over the expected life of the loan (accretable discount) using the interest method. Subsequent to acquisition, if cash flow projections improve, and it is determined that the amount and timing of the cash flows related to the nonaccretable discount are reasonably estimable and collection is probable, the corresponding decrease in the nonaccretable discount is transferred to the accretable discount and is accreted into interest income over the remaining life of the loan using the interest method. If cash flow projections deteriorate subsequent to acquisition, or if the probability of the timing or amount to be collected is indeterminable, the decline is accounted for through the provision for credit loss.

No accretion is recorded until such time that the timing and amount to be collected under such loans is determinable and probable as to collection.

Real Estate Held for Development or Sale

Real estate held for development or held for sale consists primarily of assets that have been acquired in satisfaction of a loan receivable, such as in the case of foreclosure. When a loan is foreclosed upon and transferred to a REO status, an assessment of the fair value is made, and the asset is transferred to real estate held for development or held for sale at this amount less estimated costs to sell. We typically obtain a fair value report on REO assets within 90 days of the date of foreclosure of the related loan. Valuation adjustments required at the date of transfer are charged off against the valuation allowance.

Our determination of whether to classify a particular REO asset as held for development or held for sale depends on various factors, including our intent to sell or develop the property, the anticipated timing of such disposition and whether a formal plan of disposition has been adopted, among other circumstances. If management undertakes a specific plan to dispose of real estate owned within twelve months and the real estate is transferred to held for sale status, the fair value of the real estate may be less than the estimated future undiscounted cash flows of the property when the real estate was held for development, and that difference may be material.

Subsequent to transfer, real estate held for sale is carried at the lower of carrying amount (transferred value) or fair value, less estimated selling costs. Our real estate held for development is carried at the transferred value, less cumulative impairment charges. Real estate held for development requires periodic evaluation for impairment which is conducted at each reporting period. When circumstances indicate that there is a possibility of impairment, we will assess the future undiscounted cash flows of the property and determine whether they are sufficient to exceed the carrying amount of the asset. In the event these cash flows are insufficient, we determine the fair value of the asset and record an impairment charge equal to the difference between the fair value and the then-current carrying value. The impairment charge is recognized in the consolidated statement of operations.

Upon sale of REO assets, any difference between the net carrying value and net sales proceeds are charged or credited to operating results in the period of sale as a gain or loss on sale, assuming certain revenue recognition criteria are met. See revenue recognition policy above.

Operating Properties Acquired Through Foreclosure

Operating properties acquired through foreclosure consist of certain operating assets acquired through foreclosure that the Company has elected to hold for on-going operations. At December 31, 2013, operating properties consisted of a two operating hotels and spa located in Sedona, Arizona, an 18-hole golf course and clubhouse in Bullhead City, Arizona, and a partially leased medical office building located in Houston, Texas.

Derivative Financial Instruments

We recognize our derivative financial instruments at their estimated fair value. Our derivative did not qualify as a hedge. Accordingly, we recognized future gains and losses on the derivative investment receivable for accounting purposes in investment and other income in the condensed consolidated statement of operations. Under the terms of the related joint venture agreement, the exit fee receivable was to be equal to the greater of 4% of our original investment or 1.5% of the fair market value of the portfolio assets of the joint venture at the two year preferred equity redemption date. The initial fair value of the derivative exit fee receivable was derived by taking the present value using an annual discount rate of approximately 12% of the estimated exit fee which was determined by applying capitalization rates ranging from 5.0% to 7.2% to the forecasted stabilized net operating income of each of the operating properties of the joint venture. The Company's investment in the joint venture and related derivative receivable were liquidated during the fourth quarter of 2013.

Segment Reporting

Our operations are organized and managed according to a number of factors, including product categories and geographic locations. As our business has evolved from that of a lender to an owner and operator of various types of real properties, our reportable segments have also changed in order to more effectively manage and assess operating performance. As permitted under Accounting Standards Codification (“ASC”) Topic 280 (“ASC 280”), “Segment Reporting,” certain operations have been aggregated into operating segments having similar economic characteristics and products. Accordingly, in the first quarter of 2012, we changed the composition of the Company’s reportable segments based on the products and services offered and management’s intent for such assets to include the following: Mortgage and REO-Legacy Portfolio and Other Operations, Commercial Real Estate Leasing Operations, Hospitality and Entertainment Operations, and Corporate and Other, as described in Note 9 of these consolidated financial statements.

Statement of Cash Flows

Certain loans in our portfolio contain provisions which provide for the establishment of interest reserves which are drawn from the existing note obligation for the satisfaction of monthly interest due in accordance with the terms of the related notes. Consistent with industry standards, for purposes of reporting, interest draws are generally reflected as cash transactions in accrued interest and mortgage loan fundings in the accompanying consolidated statements of cash flows.

Changes in restricted cash and cash equivalents activity is reflected in cash flows from financing activities because the primary purpose of the restricted cash is to serve as collateral for borrowings.

Stock-Based Compensation

Our 2010 Employee Stock Incentive Plan provides for awards of stock options, stock appreciation rights, restricted stock units and other performance based awards to our officers, employees, directors and certain consultants. The maximum number of shares of common stock that may be issued under such awards shall not exceed 1,200,000 common shares, subject to increase to 1,800,000 shares after an initial public offering. We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award.

Income Taxes

We recognize deferred tax assets and liabilities and record a deferred income tax (benefit) provision when there are differences between assets and liabilities measured for financial reporting and for income tax purposes. We regularly review our deferred tax assets to assess our potential realization and establish a valuation allowance for such assets when we believe it is more likely than not that we will not recognize some portion of the deferred tax asset. Generally, we record any change in the valuation allowance in income tax expense. Income tax expense includes (i) deferred tax expense, which generally represents the net change in the deferred tax asset or liability balance during the year plus any change in the valuation allowance and (ii) current tax expense, which represents the amount of taxes currently payable to or receivable from a taxing authority plus amounts accrued for income tax contingencies (including both penalty and interest). Income tax expense excludes the tax effects related to adjustments recorded to accumulated other comprehensive income (loss) as well as the tax effects of cumulative effects of changes in accounting principles.

In evaluating the ability to recover our deferred tax assets, we consider all available positive and negative evidence regarding the ultimate realizability of our deferred tax assets, including past operating results and our forecast of future taxable income. In addition, general uncertainty surrounding the future economic and business conditions have increased the likelihood of volatility in our future earnings. Further, to date we have not demonstrated the ability to be profitable. Accordingly, we have recorded a full valuation allowance against our net deferred tax assets.

Prior to consummation of the Conversion Transactions, because we were a partnership for tax purposes, no income taxes were paid by us. Instead, the members separately paid taxes based on their pro rata shares of the Fund’s income, deductions, losses and credits and members could elect to either reinvest or receive cash distributions from the Fund. Whether received in cash or reinvested, members are individually responsible to pay their respective income taxes on income allocated to them for all periods prior to the conversion.

Recent Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs.

On January 1, 2013, the Company adopted ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The amendments in ASU 2011-11 require the disclosure of information on offsetting and related arrangements for financial instruments to enable users of its financial statements to understand the effect of those arrangements on its financial position. Amendments under ASU 2011-11 will be applied retrospectively for fiscal years, and interim periods within those years, beginning after January 1, 2013. Adoption of this update did not have a material impact on the condensed consolidated financial statements.

On January 1, 2013, the Company adopted ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This update clarifies that the scope of ASU No. 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should also provide the required disclosures retrospectively for all comparative periods presented. Adoption of this update did not have a material impact on the condensed consolidated financial statements.

On January 1, 2013, the Company adopted ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account instead of directly to income or expense in the same reporting period. Adoption of this update did not have a material impact on our consolidated financial statements.

In February 2013, the FASB issued ASU 2013-04, Liabilities (Topic 405) - Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. The objective of this update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Adoption of this update is not expected to have a material impact on our consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.

Accounting Standard Update No 2014-04, Receivables - Troubled Debt Restructuring by Creditors Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, was created to provide conformity from when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage so that the asset would be derecognized in the receivable and recognized as real estate property. This updates specifies that an in substance repossession occurs when either the creditor has obtained the legal title to the property after a foreclosure or the borrower has transferred all interest in the property to the creditor through a deed in lieu of foreclosure or similar legal agreement so that at that time the asset should be reclassified from a loan receivable to real estate property. This update also provides that a disclosure of the amount of foreclosed residential real estate property and the recorded investment in consumer mortgage loans collateralized by residential real estate property that is the process of foreclosure must be included in both interim and annual financial reports. This amendment update is effective for periods for fiscal years beginning after December 15, 2014. The adoption of ASU 2014-04 is not expected to have a material impact on our financial condition, liquidity or results of operations.