DEBT, NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS

At June 30, 2016 and December 31, 2015, our notes payable and special assessment obligations consisted of the following (in thousands):



	June 30, 2016			December 31, 2015
Notes Payable, Net of Discount
$50.0 million non-recourse note payable secured by first liens on operating hotel properties and related assets, bears annual interest at the greater of a) 7.25% or b) LIBOR plus 6.75%, actual interest at minimum rate of 7.25% at June 30, 2016 and December 31, 2015, matures February 1, 2018, interest only payable monthly, principal due at maturity, subject to a carve-out guarantee by the Company	$	50,000		$	50,000
$5.9 million note payable secured by real estate in New Mexico, annual interest only payments based on annual interest rate of prime plus 2.0% for the first two years, and prime plus 3.0% thereafter (5.5% at June 30, 2016 and December 31, 2015), matures December 31, 2019	5,940			5,940
Unsecured note payable under class action settlement, face value of $10.2 million, net of discount of $2.4 million at June 30, 2016, 4% annual interest rate (14.6% effective yield), interest payable quarterly, matures April 28, 2019	7,730			7,385
$5.4 million note payable secured by a mortgage receivable totaling $7.2 million at December 31, 2015, monthly interest only payments based on annual interest rate of 4.5%, scheduled maturity on April 30, 2016 (repaid in full in February 2016)	—			5,400
Notes Payable and Special Assessment Obligations, Assets Held for Sale
$24.0 million construction note payable to a bank dated October 2014 for the construction of Gabella, secured by real property and improvements, bears annual interest of LIBOR plus 3.75%, with a floor of 4.25% (4.40% at June 30, 2016 and 4.36 % at December 31, 2015), matures October 20, 2017, reported as Notes Payable, Net at December 31, 2015	20,935			16,861
$3.7 million community facility district bonds dated 2005, secured by residential land located in Buckeye, Arizona, annual interest rate ranging from 5%-6%, maturing various dates through April 30, 2030, reported as Special Assessment Obligations at December 31, 2015	3,067			3,207
$2.3 million special assessment bonds dated between 2002 and 2007, secured by residential land located in Dakota County, Minnesota, annual interest rate ranging from 6%-7.5%, maturing various dates through 2022, reported as Special Assessment Obligations at December 31, 2015	851			927
$1.1 million development assistance note payable to Apple Valley Economic Development Authority, dated March 29, 2013, secured by developmental real estate, annual interest rate 6%, matures December 31, 2016. Expected to be forgiven upon completion of Gabella project, subject to various requirements, reported as Notes Payable, Net at December 31, 2015	762			762
Notes Payable to Related Party
$5.0 million unsecured note payable to an affiliate of a director and shareholder dated December 31, 2014, bears interest at 16% per annum, all amounts due and payable upon maturity, original maturity of April 24, 2015, extended to September 19, 2016	5,000			5,000
$4.0 million line of credit from an affiliate of a director and shareholder dated March 23, 2016, secured by residential land, bears interest at 5% per annum, all amounts due and payable upon maturity, original maturity of June 23, 2016, extended to September 23, 2016	2,500			—
Total debt, notes payable and special assessment obligations	96,785			95,482
Deferred financing costs, net	(1,120		)	(1,365		)
Total debt, notes payable and special assessment obligations, net	$	95,665		$	94,117

Interest expense for the three months ended June 30, 2016 and 2015 was $2.3 million and $2.4 million, respectively. Interest expense for the six months ended June 30, 2016 and 2015 was $4.4 million and $5.2 million, respectively.

Senior Indebtedness

In January 2015, the Company, through various of its subsidiaries, entered into a series of loan agreements, promissory notes and related agreements with Calmwater Capital 3, LLC (“Calmwater”) for three loans in the aggregate principal amount of $78.8 million for the purposes of refinancing 1) the Company’s prior $36.0 million senior secured loan with NWRA Ventures I, LLC (“NW Capital”) and 2) a prior $24.8 million note payable from a bank, as well as to provide working capital for certain development activities and operational costs. The Company used $4.0 million of the loan proceeds to fund a portion of its equity commitment for the construction of Gabella and $2.0 million to partially fund the capital improvement program at the Company’s hotel properties and restaurants located in Sedona, Arizona. The balance of the loan proceeds have been or are being used for working capital, reserves, and certain fees.

The general terms of the respective loans are as follows:

•

A $50.0 million non-recourse loan secured by first liens on the Company’s two operating hotel properties and restaurants located in Sedona, Arizona (“the Sedona Loan”). The Sedona Loan requires interest only payments which began on March 1, 2015 and bears annual interest at a base equal to the sum of: (i) the greater of (A) 0.50% per annum or (B) LIBOR (as defined) plus (ii) 6.75% per annum. In connection with this loan, the Company entered into an interest rate cap agreement for the initial two-year term of the loan with a LIBOR-based strike rate, which the Company elected to expense upon execution. The Sedona Loan has a maturity date of February 1, 2018. The Company has an option to extend the maturity date for two consecutive 12-month periods, provided that 1) there are no outstanding events of default, 2) the Company obtains an extended interest rate cap agreement and 3) the Company complies with the other applicable terms set forth in the loan agreement including the payment of an extension fee of $0.5 million. The Sedona Loan is subject to a non-recourse carve-out guaranty by the Company which also includes a guarantee of completion of certain capital improvements at the Company’s hotel properties.

The Sedona Loan contains customary affirmative and negative covenants, including, but not limited to: (i) a $5.0 million liquidity balance during 2016; (ii) a minimum net worth of the Company of no less than $50.0 million; and (iii) DSCR and minimum NOI requirements measured on a trailing 12 month basis. During the three months ended March 31, 2016, the hotels did not meet these DSCR and NOI requirements during the first quarterly measurement period, for which the lender provided a one-time forbearance through June 30, 2016. While the hotels met the DSCR and NOI requirements during the second quarterly reporting period ended June 30, 2016, there is no assurance that the hotels will meet the DSCR and/or NOI requirements in future quarterly reporting periods. In the event that they do not meet such requirements, we would seek a supplemental forbearance from the lender, although there is no assurance that such a forbearance would be granted. For purposes of the minimum net worth requirement, the lender has agreed that the carrying value of our redeemable convertible preferred stock is considered a component of shareholder’s equity. The Sedona Loan also requires the Company to fund customary annual interest, tax, insurance, and furniture, fixtures and equipment reserve accounts, each of which are pledged as additional collateral for the Sedona Loan. Additional construction reserves were required in connection with the capital improvement program as well as funding for contractor liens filed in connection with the project. The Sedona Loan also contains customary events of default, the occurrence of which could result in the acceleration of the obligations under the loan and, under certain circumstances, the application of a default interest rate during the existence of an event of default at a rate equal to 5.0% in excess of the note rate. The Company is permitted to make optional prepayments at any time, subject to a .50% prepayment premium if paid prior to February 1, 2017, and other conditions set forth in the loan agreement. Thereafter, the Company may prepay the Sedona Loan in full or in part without prepayment premium costs.

•

A $24.4 million non-recourse loan secured by a) first liens on certain operating and non-operating real estate assets owned by affiliates of the Company, b) pledges by certain Company affiliates of their interests in certain mortgage loan documents evidencing payment obligations owed to such affiliates, and c) the Company’s membership interest in IMH Gabella. The loan required interest only payments beginning on March 1, 2015 and bore annual interest at a base equal to the sum of: (i) the greater of (A) 0.50% per annum or (B) LIBOR (as defined) plus (ii) 8.5% per annum. The loan had a maturity date of February 1, 2017 and was repaid in full during the fourth quarter of 2015.

•

A $4.4 million non-recourse loan secured by a) first liens on certain operating and non-operating real estate assets owned by affiliates of the Company and b) pledges by certain Company affiliates of their interests in certain mortgage loan documents evidencing payment obligations owed to such affiliates. The loan required interest only payments beginning on March 1, 2015 and bore annual interest at a base equal to the sum of: (i) the greater of (A) 0.50% per annum or (B) LIBOR (as defined) plus (ii) 8.5% per annum. The loan had a maturity date of February 1, 2017 and was repaid in full during the fourth quarter of 2015.

Exchange Notes

Under the terms of a previous class action settlement, we conducted an offering of our five-year, 4%, unsecured notes in exchange for common stock held by participating shareholders (“Exchange Offering”). The Exchange Offering was completed in April 2014 and we issued Exchange Offering notes (“EO Notes”) with an aggregate face value of $10.2 million, which were recorded by the Company at fair value. The estimated fair value of the EO Notes was $6.4 million based on an imputed effective yield of such notes of 14.6% (as compared to the note rate of 4%) resulting in an original debt discount of the EO Notes of $3.8 million, with a balance of $2.4 million and $2.8 million as of June 30, 2016 and December 31, 2015, respectively. This discount amount is being amortized as an adjustment to interest expense using the effective interest method over the term of the EO Notes. The amortized discount added to the principal balance of the EO Notes during the three and six months ended June 30, 2016 totaled $0.2 million and $0.3 million, respectively. Interest is payable quarterly in arrears each January, April, July and October. The EO Notes mature on April 28, 2019, and may be prepaid in whole or in part without penalty at the option of the Company. However, subject to certain minimum cash and profitability conditions, the terms of the EO Notes may require a 50% prepayment on April 29, 2018.

Notes Payable and Special Assessment Obligations, Assets Held for Sale

During the quarter ended June 30, 2016, the Company reclassified certain of its assets to REO held for sale as a result of management’s decision and actions to dispose of such assets. In accordance with GAAP, we have similarly reclassified the corresponding debt relating to such assets which includes each of the following notes payable and special assessment obligations. In addition to these liabilities, we have a $2.5 million line of credit obligation due to a related party as described below whose payoff is tied to the sale of one of our assets held for sale. We have classified that indebtedness in notes payable to related parties in the accompanying condensed consolidated balance sheet.

Construction Loan

In October 2014, the Company secured a construction loan in connection with the Gabella development in the amount of $24.0 million pursuant to a Construction Loan Agreement entered into between Bank of the Ozarks (“Ozarks”) and IMH Gabella (the “Construction Loan”). The Company has made draws totaling $20.9 million on the Construction Loan as of June 30, 2016. The Construction Loan is secured by a first lien mortgage on the project, as well as certain adjacent parcels that are planned for future development, improvements thereon, and an assignment of rents and revenues. As of June 30, 2016 and December 31, 2015, the total carrying value of the land and improvements totaled $30.3 million and $27.8 million, respectively. Unless there is an event of default, the Construction Loan bears annual interest at the greater of (i) three-month LIBOR plus 375 basis points, or (ii) 4.25%. The loan matures October 20, 2017, provided, however, that the initial term may be extended for two additional one-year terms subject to the satisfaction of certain conditions, including the payment of an extension fee equal to 0.25% of the then outstanding principal balance of the Construction Loan. Interest only payments on the outstanding principal commenced on November 1, 2014 and monthly payments of principal and interest will commence on the earlier of (i) December 1, 2016 and (ii) the first month following stabilization (as defined in the loan agreement).

The Construction Loan is also subject to a completion and repayment carve-out guaranty by the Company and requires the Company to maintain a minimum liquidity balance of $7.5 million throughout the term of the loan. During the three months ended March 31, 2016 and again subsequent to June 30, 2016, we fell below the $7.5 million liquidity requirement, resulting in a non-compliance event under the terms of our guaranty. The lender has, to-date, not taken any enforcement action with respect to this non-compliance event. While we restored our unrestricted cash balance to above $7.5 million during the quarter ended June 30, 2016, there is no assurance that we will be able to maintain adequate cash and cash equivalents to be available to meet this liquidity requirement or that the lender will not elect to exercise its non-compliance event rights under the loan.

In the event of prepayment of the Construction Loan prior to October 20, 2016, the Company would have to pay a prepayment penalty equal to two years of contractual interest less non-default interest paid through the prepayment date. After October 20, 2016, the Construction Loan may be prepaid without penalty.

Special Assessment Obligations

As of June 30, 2016 and December 31, 2015, obligations arising from our allocated share of certain community facilities district special revenue bonds and special assessments had carrying values of $3.9 million and $4.1 million, respectively. These obligations are described below.

One of the special assessment obligations had an outstanding balance of $3.1 million and $3.2 million as of June 30, 2016 and December 31, 2015, respectively, and has an amortization period that extends through April 30, 2030, with an annual interest rate ranging from 5% to 6%. This special assessment obligation is secured by certain real estate held for sale consisting of 171 acres of unentitled land located in Buckeye, Arizona which had a carrying value of $5.3 million at June 30, 2016.

The other special assessment obligations are comprised of a series of special assessments that collectively had an outstanding balance of $0.9 million as of June 30, 2016 and December 31, 2015. These special assessment obligations have amortization periods that extend through 2022, with annual interest rates ranging from 6% to 7.5%. These special assessment obligations are secured by certain real estate consisting of 7 acres of unentitled land located in Dakota County, Minnesota, which land has a carrying value of approximately $3.7 million at June 30, 2016.

The responsibility for the repayment of each of the foregoing special assessment obligations rests with the owner of the property and would transfer to the buyer of the related real estate upon sale. Accordingly, if the assets to which these obligations relate are sold before the full amortization period of such obligations, the Company would be relieved of any further liability since the buyer would assume the remaining obligations. Nevertheless, these special assessment obligations are deemed to be obligations of the Company in accordance with GAAP because they are fixed in amount and for a fixed period of time. During the six months ended June 30, 2016, we made principal repayments in the amount of $0.2 million on these special assessment obligations.

Development Assistance Note Payable

In connection with the Gabella project, we entered into, among other agreements, a business subsidy agreement and related loan agreement dated March 29, 2013, as amended on July 10, 2014, with the EDA. Under the terms of the business subsidy agreement, the EDA agreed to advance to us up to $1.1 million as a loan. As of June 30, 2016 and December 31, 2015, the total amount advanced to us under the EDA loan agreement was $0.8 million. In no event is the EDA loan to exceed the amount received from Dakota County, Minnesota, for the statutory penalty and interest on special assessment taxes which were assessed in the tax years 2007 through 2011. The special assessment taxes and related statutory penalties and interest were fully repaid as of December 31, 2015. The EDA loan bears interest at the rate of 6.0% per annum which accrues until the loan is paid in full or is forgiven by the EDA. The Company met its performance obligation to complete the Gabella project prior to April 30, 2016, and has received a certificate of occupancy for the project. If it is determined that we did not meet the specified requirements, the loan principal and all accrued unpaid interest is due December 31, 2016. In addition, in order to retain the benefits received under the business subsidy agreement, we are not allowed to sell, transfer or otherwise convey all or part of the property for a period of five years following completion without the prior written consent of the EDA. This would also require a buyer’s consent to assume any ongoing obligations under the business subsidy agreement. We have neither sought nor received such consents to date.

Other Notes Payable Activity

During the fourth quarter of 2015, a wholly-owned subsidiary of the Company borrowed $5.4 million pursuant to a non-revolving credit facility with the Banc of California, National Association (the “BOC Facility”). The BOC Facility was secured by a $7.2 million mortgage receivable, was guaranteed by the Company, was scheduled to mature on April 30, 2016, and bore interest at a per annum rate equal to the greater of (i) the prime rate as published by The Wall Street Journal (the “WSJ Prime Rate”) plus 1.25%, or (ii) 4.5%. During the six months ended June 30, 2016, we repaid the BOC Facility in full upon collection of the mortgage receivable that served as collateral for that loan.

In addition, during the fourth quarter of 2015, we purchased real estate located in New Mexico that was previously owned by certain partnerships in which the Company was awarded equity interests, and such real estate was foreclosed by the prior lien holder/seller. The purchase price for that real estate was $6.8 million, for which the seller provided seller-financing of $5.9 million. The note bears interest at the WSJ Prime Rate as of December 31, 2015 (recalculated annually) plus 2.00% for the first two years, and the WSJ Prime Rate plus 3.00% thereafter. Interest only payments are due on December 31 of each year with the principal balance and any accrued unpaid interest due at maturity on December 31, 2019. The note may be prepaid in whole or in part without penalty.

Note Payable to Related Party

In December 2014, the Company borrowed $5.0 million from SRE Monarch Lending, LLC (“SRE Monarch”) pursuant to an unsecured non-revolving credit facility (“SRE Note”). The Company used the loan proceeds to make a scheduled payment under the Company’s then-senior loan. SRE Monarch is a related party of Seth Singerman, one of the Company’s directors and an affiliate of one of our preferred equity holders. The SRE Note bears interest at a per annum base rate of 16%, and is subject to increase in the event it is not repaid in full on or prior to the or extended maturity date.

The SRE Note was originally scheduled to mature on the 91st day after full repayment of the Company’s then-senior loan. During 2015 and 2016, the Company entered into a series of amendments to extend the SRE Note’s maturity date. The current maturity date is September 19, 2016. The Company paid all accrued interest at the date of each amendment and paid various extension fees totaling $0.3 million in 2015 and $0.2 million during the six months ended June 30, 2016, which fees have been or are being amortized over the loan term.

Revolving Line of Credit with Related Party

In March 2016, a subsidiary of the Company executed an agreement with SRE Monarch for a revolving secured line of credit facility (“SRE Revolver”). The SRE Revolver bears interest at a per annum base rate of 5% and has a term that expires on the earliest to occur of 1) June 23, 2016 (which may be extended for an additional three months subject to the payment of a $50,000 extension fee), 2) the sale of the land serving as collateral under the SRE Revolver, or 3) the sale of Gabella. The SRE Revolver is secured by certain land owned by a subsidiary of the Company with a carrying value of $5.3 million, and is guaranteed by the Company. The SRE Revolver had an initial advance limit of $2.5 million that may be increased to $4.0 million with 12 days written notice and the payment of a $25,000 fee. Additionally, upon each advance, the Company must pay a $50,000 advance fee. Upon entering into the SRE Revolver, the Company paid a facility fee and other closing costs totaling approximately $0.2 million. All amounts advanced under the SRE Revolver may be prepaid in whole or in part without premium or penalty. During April 2016, we drew our initial advance in the amount of $2.5 million in order to provide additional working capital for the Company. In connection with the advance, we paid fees totaling $50,000 which are being amortized to interest expense using the effective interest method over the term of the line of credit. Additionally, we exercised our option to extend the SRE Revolver’s maturity date from June 23, 2016 to September 23, 2016, and paid extension fees of $50,000 to SRE Monarch.

In the event of a sale of the land serving as collateral under the SRE Revolver prior to March 31, 2017 ("Facility Exit Date"), we are obligated to pay SRE Monarch an amount equal to five percent (5%) of the net sale proceeds. In the event that no sale of the collateral has occurred or is expected to occur prior to the Facility Exit Date, we are obligated to pay SRE Monarch an amount equal to five percent (5%) of the presumed net sales proceeds based on the appraised value of the collateral. As of June 30, 2016, the Company reclassified the related asset to REO held for sale as a result of management’s decision and actions to dispose of the related collateral.

Our debt, notes payable and special assessment obligations have the following scheduled maturities as of June 30, 2016 (in thousands):



Year	Amount
2016	$	8,339
2017	21,235
2018	50,306
2019	13,985
2020	315
Thereafter	2,605
Total	$	96,785