8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

Date of report

(Date of earliest event reported): October 2, 2017

IMH FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	000-52611	23-1537126
(State or other jurisdiction	(Commission	(I.R.S. Employer
of incorporation)	File Number)	Identification Number)

7001 N. Scottsdale Rd., Suite 2050

Scottsdale, Arizona 85253

(Address of principal executive office)

Registrant’s telephone number, including area code: (480) 840-8400

Not applicable.

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

EXPLANATORY NOTE

As previously reported, on October 2, 2017, IMH Financial Corporation (“IMH” or the Company”), through various subsidiaries, acquired certain hotel and related assets from 29 East MacArthur, LLC (the “Seller”) pursuant to a Purchase and Sale Agreement (the “Agreement”) in which the Company agreed to purchase the Seller's operating hotel and related restaurant and spa operations located in Sonoma, California (the “Hotel”) for $36.0 million.

The purpose of this Current Report on Form 8-K/A is to file the audited financial statements as of and for the year ended December 31, 2016 and unaudited financial statements as of and for the nine months ended September 30, 2017 of 29 East MacArthur, LLC to comply with the requirements of Rule 3-10(g) of Regulation S-X.

Information relating to the acquisition was reported on a Current Report on Form 8-K, filed with the Securities and Exchange Commission (“the SEC”) on October 5, 2017. This Form 8-K/A is being filed to include the financial information referred to in Item 9.01(a) and (b) below relating to the acquisition.

Forward Looking Statements

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to assumptions related to the valuation of assets and estimates utilized in development of the unaudited pro forma condensed combined financial statements.

Forward-looking statements are not guarantees of future performance, and involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially.

Further information on the risks specific to our business are detailed within this report and our other reports and filings with the Securities and Exchange Commission including our periodic report on Form 10-K for the year ended December 31, 2016, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Forward-looking statements speak only as of the date they are made and should not be relied upon. The Company undertakes no obligation to update or revise forward-looking statements.

Item 9.01 - Financial Statements and Exhibits

a) Financial Statements of Business Acquired.

(1) The audited financial statements of 29 East MacArthur, LLC as of December 31, 2016 and for the year ended December 31, 2016 and the notes thereto, together with the report of Squar Milner LLP, independent registered public accounting firm, with respect thereto, are filed as Exhibit 99.1 to this Current Report on Form 8-K/A and are incorporated into this Item 9.01 by reference.

The unaudited financial statements of 29 East MacArthur, LLC as of September 30, 2017 and for the nine months ended September 30, 2017 and September 30, 2016 and the notes thereto are filed as Exhibit 99.2 to this Current Report on Form 8-K/A and are incorporated into this Item 9.01 by reference.

b) Pro Forma Financial Information.

The following pro forma financial information is filed with this report:

• Introduction to Unaudited Pro Forma Financial Information of the Company.

• Unaudited Pro Forma Condensed Combined Balance Sheet of the Company as of September 30, 2017.

• Unaudited Pro Forma Condensed Combined Statement of Operations of the Company for the year ended December 31, 2016.

• Unaudited Pro Forma Condensed Combined Statement of Operations of the Company for the nine months ended September 30, 2017.

• Notes to Unaudited Pro Forma Condensed Combined Financial Statements of the Company.

c) Not applicable.

d) Exhibits.

The following exhibits are filed as part of this report:

Exhibit	Description
99.1	Audited financial statements of 29 East MacArthur, LLC as of December 31, 2016 and for the year ended December 31, 2016 and the notes thereto.
99.2	Unaudited financial statements of 29 East MacArthur, LLC as of September 30, 2017 and for the nine months ended September 30, 2017 and September 30, 2016 and the notes thereto.
99.3	Unaudited pro forma condensed combined balance sheet of IMH Financial Corporation as of September 30, 2017 and unaudited pro forma condensed combined statement of operations of IMH Financial Corporation for the year ended December 31, 2016 and the nine months ended September 30, 2017.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

IMH FINANCIAL CORPORATION
(Registrant)
By:	/s/ Samuel Montes
	Samuel Montes
	Chief Financial Officer

Date: December 15, 2017

EX-99.1

Exhibit 99.1

29 East MacArthur, LLC

Financial Statements

For the Year Ended December 31, 2016

29 East MacArthur, LLC

December 31, 2016

Financial Statements

Table of Contents

		Page
Independent Auditors’ Report		2
Financial Statements:
	Balance Sheet	3
	Statement of Operations	4
	Statement of Changes in Members' Equity	5
	Statement of Cash Flows	6
	Notes to the Financial Statements	7

1

Independent Auditors’ Report

To the Members

29 East MacArthur, LLC

We have audited the accompanying financial statements of 29 East MacArthur, LLC (the “Company”), which comprise the balance sheet as of December 31, 2016, the related statements of operations, changes in members’ equity, and cash flows for the year then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 29 East MacArthur, LLC as of December 31, 2016, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ SQUAR MILNER LLP

Newport Beach, California

December 8, 2017

2

29 East MacArthur, LLC

Balance Sheet

December 31, 2016

(In thousands)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,452
Accounts receivable	99
Inventories	192
Supplies	7
Prepaid expenses and other assets	138
Total current assets	2,888
PROPERTY AND EQUIPMENT, NET:
Land improvements	1,059
Buildings and improvements	10,741
Furniture, fixtures and equipment	2,752
	14,552
Less accumulated depreciation	(9,191		)
	5,361
Land	953
Total property and equipment, net	6,314
OTHER ASSETS	21
TOTAL ASSETS	$	9,223
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	132
Accounts payable	55
Interest payable	20
Accrued expenses	512
Guest deposits and gift certificates	736
Total current liabilities	1,455
LONG-TERM LIABILITIES:
Long-term debt, net of current portion	5,036
TOTAL LIABILITIES	6,491
MEMBERS' EQUITY	2,732
TOTAL LIABILITIES AND MEMBERS' EQUITY	$	9,223

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

3

29 East MacArthur, LLC

Statement of Operations

For the Year Ended December 31, 2016

(In thousands)

REVENUES:
Room rental	$	5,489
Sales – food and beverage (net of discounts of $66 thousand)	3,150
Sales – other	60
Spa operations (net of discounts of $55 thousand)	724
Other	90
Total revenues	9,513
OPERATING EXPENSES:
Cost of sales – food and beverage	1,124
Cost of sales – other	26
Cost of spa operations	80
Payroll and employee benefits	4,731
General and administrative	2,144
Depreciation	559
Total operating expenses	8,664
INCOME FROM OPERATIONS	849
OTHER EXPENSES (INCOME):
Interest expense	246
Due diligence fees	75
Interest income	(1		)
Total other expenses, net	320
NET INCOME	$	529

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

4

29 East MacArthur, LLC

Statement of Changes in Members' Equity

 For the Year Ended December 31, 2016

(In thousands)

MEMBERS' EQUITY, BEGINNING OF YEAR	$	3,091
Net income	529
Distributions to members	(888		)
MEMBERS' EQUITY, END OF YEAR	$	2,732

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

5

29 East MacArthur, LLC

Statement of Cash Flows

 For the Year Ended December 31, 2016

(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	529
Adjustments to reconcile net income to net cash provided by operating activities -
Depreciation	559
Amortization of debt issuance costs	6
Decrease in accounts receivable	68
Increase in inventories	(17		)
Decrease in prepaid expenses and other assets	3
Decrease in accounts payable	(35		)
Increase in accrued expenses	216
Increase in guest deposits and gift certificates	60
Net cash provided by operating activities	1,389
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to land	(57		)
Acquisition of furniture, fixtures and equipment	(65		)
Net cash used in investing activities	(122		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt	(126		)
Distributions to members	(888		)
Net cash used in financing activities	(1,014		)
NET INCREASE IN CASH AND CASH EQUIVALENTS	253
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	2,199
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	2,452
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	240
Cash paid for taxes	$	13

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

6

29 East MacArthur, LLC

Notes to the Financial Statements

December 31, 2016

Note 1 - Description of the Business

The accompanying financial statements include the historical accounts of 29 East MacArthur, LLC, (referred to as “MacArthur" or the “Company”) as of and for the year ended December 31, 2016. On October 2, 2017, certain assets and liabilities of the Company were sold (the “Transaction”) to IMH Financial Corporation for a purchase price of approximately $36 million.

Organization and Nature of Operations

The Company was organized on August 4, 1997 as a limited liability company pursuant to the laws of the state of California for constructing, owning and operating a 35-room hotel, restaurant, spa and conference center located in Sonoma, California. The hotel opened for business on September 26, 1998 doing business as MacArthur Place. During the year ended December 31, 2000, the Company completed an expansion project which added 29 guest rooms and enlarged the restaurant and spa operations. As of December 31, 2016, the Company had 29 members, one of which is the Company’s manager. Company transactions with the manager are described in Note 5. In the normal course of business, the Company extends credit to certain customers. The Company’s operating agreement provides that the Company will dissolve on July 31, 2042 unless earlier dissolved. As a limited liability company, each member’s liability is limited to amounts reflected in their respective member accounts.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the 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. Actual results may materially differ from these estimates and assumptions used in the preparation of the financial statements.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains deposits at various financial institutions. At December 31, 2016, and periodically throughout the year, the balances in these accounts were in excess of federally insured limits.

Revenue Recognition

Revenues derived from hotel room rentals 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 as current liabilities in the accompanying balance sheet. Advance deposits received from guests for hotel rooms or for event facility rentals are recorded as deferred revenue in guest deposits in the accompanying balance sheet, and are recognized as income at the time service is provided for the related deposit.

Accounts Receivable

Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for credit losses for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectibility of specific customer accounts: customer credit-worthiness, past transaction

7

29 East MacArthur, LLC

Notes to the Financial Statements

December 31, 2016

Note 2 - Summary of Significant Accounting Policies - continued

history with the customer, current economic industry trends, and changes in customer payment terms. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectibility. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. There was no allowance for doubtful accounts as of December 31, 2016.

Inventories

Inventories consist of food, beverage and spa retail items stated at the lower of cost (first-in, first-out) or market. The Company records an obsolescence reserve if inventories are deemed no longer recoverable. There was no inventory obsolescence reserve as of December 31, 2016.

Property and Equipment, net

Property and equipment are recorded at cost. Depreciation expense is computed using the straight-line method over the following useful lives:

Land	Not depreciated
Land improvements, such as paving	15 years
Buildings and improvements	30 years
Furniture and fixtures	5 years
Computers and equipment	3 years

Total depreciation for the year ended December 31, 2016 was $559 thousand.

The Company evaluates its property and equipment for impairment whenever indicators of impairment exist. Accounting standards require that if the sum of the future cash flows expected to result from a company’s asset, undiscounted and without interest charges, is less than the reported value of the asset, an asset impairment must be recognized in the financial statements. The amount of impairment to recognize is calculated by subtracting the fair value of the asset from the reported value of the asset. The Company does not believe that any indicators of impairment exist as of December 31, 2016.

Maintenance and repairs are charged to expenses as incurred; major renewals and betterments are capitalized. When items of property or equipment are sold or retired, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is included in operations.

Marketing and Advertising

The Company expenses marketing and advertising costs as they are incurred. Marketing and advertising expense was $205 thousand for the year ended December 31, 2016 and is included in general and administrative expense on the statement of operations.

Sales Taxes

The Company collects and remits taxes assessed by different governmental authorities that are both imposed on and concurrent with a revenue-producing transaction between the Company and its customers. These taxes may include, but are not limited to, sales, use, and occupancy taxes. The Company reports collection of these taxes on a net basis (excluded from revenues).

8

29 East MacArthur, LLC

Notes to the Financial Statements

December 31, 2016

Note 2 - Summary of Significant Accounting Policies - continued

Income Taxes

As a limited liability company, the Company is not a taxpaying entity for federal income tax purposes. Accordingly, the Company’s taxable income or loss is allocated to its members in accordance with their respective percentage ownership. Therefore, no provision or liability for income taxes has been included in the accompanying financial statements. The Company is subject to a limited liability company tax and a limited liability company fee based on gross receipts to the state of California. Management believes the Company has no uncertain tax positions as of December 31, 2016.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") which states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for interim and annual periods beginning after December 15, 2018 and may be applied either retrospectively or on a modified retrospective basis. Subsequent to the issuance of the May 2014 guidance, several clarifications and updates have been issued on this topic, the most recent of which was issued in December 2016. The Company is evaluating the impact, if any, that ASU 2014-09 and any amendments thereto, will have on its financial statements.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ("ASU 2014-15"). ASU 2014-15 introduces an explicit requirement for management to assess and provide certain disclosures if there is substantial doubt about an entity’s ability to continue as a going concern. ASU 2014-15 is effective for the annual period ending after December 15, 2016. The adoption of ASU 2014-15 did not have a material impact on the Company’s operating results, financial position or disclosures.

In July 2015, as part of its simplification initiative, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 simplifies the subsequent measurement of inventory by requiring entities to remeasure inventory at the lower of cost and net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU does not apply to inventory measured using the last-in, first-out or the retail inventory method. The Company is required to adopt this standard in the first quarter of 2017. This standard is required to be applied prospectively with earlier application permitted as of the beginning of an interim or annual period. The Company does not expect the adoption of ASU 2015-11 to have a material impact on its financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”) which includes a lessee accounting model that recognizes two types of leases - finance leases and operating leases. The standard requires that a lessee recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or an operating lease. The standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact that ASU 2016-02 will have on its financial statements.

Note 3 - Long-Term Debt

The following is a summary of the Company's long-term debt as of December 31, 2016:

First Republic Bank – Note payable in monthly installments of $31 thousand, including interest at a variable rate (4.50% at December 31, 2016), secured by a first deed of trust on the Company’s property and equipment; due June 1, 2019.	$	5,183
Less unamortized debt issuance costs	(15		)
Long-term debt, less unamortized debt issuance costs	5,168
Less current portion	(132		)
Total long-term debt, net of current portion (1)	$	5,036

The terms of the note payable include certain financial covenants including restrictions on subordinate financing. The Company was in compliance with such covenants as of and for the year ended December 31, 2016.

9

29 East MacArthur, LLC

Notes to the Financial Statements

December 31, 2016

Note 3 - Long-Term Debt - continued

As of December 31, 2016, future maturities of long-term debt were as follows:

	Total
2017	$	132
2018	140
2019	4,896
	$	5,168

(1) The note payable was paid off in connection with the Transaction, as described in Note 1.

Note 4 - Retirement Plan

The Company sponsors a 401(k) deferred compensation plan for the benefit of eligible employees. The plan allows eligible employees to defer a portion of their annual compensation, pursuant to Section 401(k) of the Internal Revenue Code. The Company’s policy is to match 25% of employee contributions to the plan up to a maximum of 10% of the employee’s compensation. Employer contributions to the plan were $24 thousand for the year ended December 31, 2016 and are included in general and administrative expense on the statement of operations. In connection with the Transaction as described in Note 1, the plan was frozen.

Note 5 - Related Party Transactions

The operating agreement requires the Company to pay the manager, who is a member of the Company, a management fee equal to 10% of the Company’s “net distributable funds” as defined by the operating agreement. For the year ended December 31, 2016, $98 thousand in such fees were incurred by the Company. Management fees in the amount of $14 thousand remain unpaid at December 31, 2016 and are included in accrued expenses in the accompanying balance sheet.

Note 6 - Subsequent Events

Management has evaluated subsequent events through December 8, 2017, the date the financial statements were available to be issued.

2017 California Wildfires

In mid-October 2017, several areas surrounding the hotel were impacted by wildfires that caused damage to numerous nearby structures and caused the displacement of thousands of individuals.  While the hotel did not sustain any structural damage, it evacuated its staff and guests and shut down its operations for approximately one week.  Current management is evaluating the financial impact from this event.

10

EX-99.2

Exhibit 99.2

29 East MacArthur, LLC

Unaudited Interim Financial Statements

For the Nine Months Ended September 30, 2017 and 2016

		Page
Financial Statements (Unaudited):
	Balance Sheets	3
	Statements of Operations	4
	Statement of Changes in Members' Equity	5
	Statements of Cash Flows	6
	Notes to the Unaudited Financial Statements	7

2

29 East MacArthur, LLC

Balance Sheets

As of September 30, 2017 and December 31, 2016

(In thousands)

	September 30, 2017			December 31, 2016
ASSETS	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	3,299		$	2,452
Accounts receivable	172			99
Inventories	169			192
Supplies	3			7
Prepaid expenses and other assets	145			138
Total current assets	3,788			2,888
PROPERTY AND EQUIPMENT, NET:
Land improvements	1,059			1,059
Buildings and improvements	10,741			10,741
Furniture, fixtures and equipment	2,775			2,752
	14,575			14,552
Less accumulated depreciation	(9,575		)	(9,191		)
	5,000			5,361
Land	953			953
Total property and equipment, net	5,953			6,314
OTHER ASSETS	34			21
TOTAL ASSETS	$	9,775		$	9,223
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	138			132
Accounts payable	20			55
Interest payable	19			20
Accrued expenses	554			512
Guest deposits and gift certificates	1,039			736
Total current liabilities	1,770			1,455
LONG-TERM LIABILITIES:
Long-term debt, net of current portion	4,934			5,036
TOTAL LIABILITIES	6,704			6,491
MEMBERS' EQUITY	3,071			2,732
TOTAL LIABILITIES AND MEMBERS' EQUITY	$	9,775		$	9,223

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

3

29 East MacArthur, LLC

Statements of Operations

For the Nine Months Ended September 30, 2017 and 2016

(In thousands)

	2017			2016
	(Unaudited)			(Unaudited)
REVENUES:
Room rental	$	3,968		$	4,139
Sales – food and beverage (net of discounts of $66 thousand)	2,333			2,264
Sales – other	53			46
Spa operations (net of discounts of $55 thousand)	517			555
Other	237			67
Total revenues	7,108			7,071
OPERATING EXPENSES:
Cost of sales – food and beverage	863			815
Cost of sales – other	26			19
Cost of spa operations	64			62
Payroll and employee benefits	3,637			3,446
General and administrative	1,570			1,527
Depreciation	395			414
Total operating expenses	6,555			6,283
INCOME FROM OPERATIONS	553			788
OTHER EXPENSES (INCOME):
Interest expense	180			185
Due diligence fees	36			—
Interest income	(2		)	(1		)
Total other expenses, net	214			184
NET INCOME	$	339		$	604

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

4

29 East MacArthur, LLC

Statement of Changes in Members' Equity

For the Nine Months Ended September 30, 2017

(In thousands)

MEMBERS' EQUITY, JANUARY 1, 2017	$	2,732
Net income	339
MEMBERS' EQUITY, SEPTEMBER 30, 2017 (Unaudited)	$	3,071

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

5

29 East MacArthur, LLC

Statements of Cash Flows

For the Nine Months Ended September 30, 2017 and 2016

(In thousands)

	2017			2016
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	339		$	604
Adjustments to reconcile net income to net cash provided by operating activities -
Depreciation	395			414
Amortization of debt issuance costs	5			5
(Increase) decrease in accounts receivable	(73		)	45
Decrease (increase) in inventories	23			(9		)
Decrease in supplies	4			3
Increase in prepaid expenses	(21		)	(65		)
Decrease in accounts payable	(36		)	(19		)
Increase in accrued expenses	42			185
Increase in guest deposits and gift certificates	303			193
Net cash provided by operating activities	981			1,356
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to land	—			(41		)
Acquisition of furniture, fixtures and equipment	(35		)	(18		)
Net cash used in investing activities	(35		)	(59		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt	(99		)	(99		)
Distributions to members	—			(555		)
Net cash used in financing activities	(99		)	(654		)
NET INCREASE IN CASH AND CASH EQUIVALENTS	847			643
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	2,452			2,199
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	3,299		$	2,842
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	176		$	186
Cash paid for taxes	$	13		$	13

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

6

29 East MacArthur, LLC

Notes to the Unaudited Financial Statements

September 30, 2017 and 2016

Note 1 - Description of the Business

The accompanying unaudited financial statements include the historical accounts of 29 East MacArthur, LLC, (collectively referred to as “MacArthur” or the “Company”) as of and for the nine months ended September 30, 2017 and 2016. On October 2, 2017, certain assets and liabilities of the Company were sold (the “Transaction”) to IMH Financial Corporation in an arms-length transaction for a purchase price of approximately $36 million.

Organization and Nature of Operations

The Company was organized on August 4, 1997 as a limited liability company pursuant to the laws of the state of California for constructing, owning and operating a 35-room hotel, restaurant, spa and conference center located in Sonoma, California. The hotel opened for business on September 26, 1998 doing business as MacArthur Place. During the year ended December 31, 2000, the Company completed an expansion project which added 29 guest rooms and enlarged the restaurant and spa operations. As of September 30, 2017, the Company had 29 members, one of which is the Company’s manager. Company transactions with the manager are described in Note 5. In the normal course of business, the Company extends credit to certain customers. The Company’s operating agreement provides that the Company will dissolve on July 31, 2042 unless earlier dissolved. As a limited liability company, each member’s liability is limited to amounts reflected in their respective member accounts.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of the financial position and operations for the periods presented, have been included. Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the 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. Actual results may materially differ from these estimates and assumptions used in the preparation of the financial statements.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains deposits at various financial institutions. As of September 30, 2017 and December 31, 2016, and periodically throughout the year, the balances in these accounts are in excess of federally insured limits.

Revenue Recognition

Revenues derived from hotel room rentals 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 as current liabilities in the accompanying balance sheet. Advance deposits received from guests for hotel rooms or for event facility rentals are recorded as deferred revenue in guest deposits in the accompanying balance sheets, and are recognized as income at the time service is provided for the related deposit.

7

29 East MacArthur, LLC

Notes to the Unaudited Financial Statements

September 30, 2017 and 2016

Note 2 - Summary of Significant Accounting Policies - continued

Accounts Receivable

Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for credit losses for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectibility of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectibility. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. There was no allowance for doubtful accounts as of September 30, 2017 and December 31, 2016.

Inventories

Inventories consist of food, beverage and spa retail items stated at the lower of cost (first-in, first-out) or market. The Company records an obsolescence reserve if inventories are deemed no longer recoverable. There was no inventory obsolescence reserve as of September 30, 2017 and December 31, 2016.

Property and Equipment

Property and equipment are recorded at cost. Depreciation expense is computed using the straight-line method over the following useful lives:

Land	Not depreciated
Land improvements, such as paving	15 years
Buildings and improvements	30 years
Furniture and fixtures	5 years
Computers and equipment	3 years

Total depreciation for the nine months ended September 30, 2017 and 2016 was $395 thousand and, $414 thousand, respectively.

The Company evaluates its property and equipment for impairment whenever indicators of impairment exist. Accounting standards require that if the sum of the future cash flows expected to result from a company’s asset, undiscounted and without interest charges, is less than the reported value of the asset, an asset impairment must be recognized in the financial statements. The amount of impairment to recognize is calculated by subtracting the fair value of the asset from the reported value of the asset. The Company does not believe that any indicators of impairment exist as of September 30, 2017.

Maintenance and repairs are charged to expenses as incurred; major renewals and betterments are capitalized. When items of property or equipment are sold or retired, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is included in income.

Marketing and Advertising

The Company expenses marketing and advertising costs as they are incurred. Marketing and advertising expense was $115 thousand and $146 thousand, respectively, for the nine months ended September 30, 2017 and 2016 and is included in general and administrative expense on the statements of operations.

Sales Taxes

The Company collects and remits taxes assessed by different governmental authorities that are both imposed on and concurrent with a revenue-producing transaction between the Company and its customers. These taxes may include, but are not limited to, sales, use, and occupancy taxes. The Company reports collection of these taxes on a net basis (excluded from revenues).

8

29 East MacArthur, LLC

Notes to the Unaudited Financial Statements

September 30, 2017 and 2016

Note 2 - Summary of Significant Accounting Policies - continued

Income Taxes

As a limited liability company, the Company is not a taxpaying entity for federal income tax purposes. Accordingly, the Company’s taxable income or loss is allocated to its members in accordance with their respective percentage ownership. Therefore, no provision or liability for income taxes has been included in the accompanying financial statements. The Company is subject to a limited liability company tax and a limited liability company fee based on gross receipts to the state of California. Management believes the Company has no uncertain tax positions as of September 30, 2017 and December 31, 2016.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") which states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for interim and annual periods beginning after December 15, 2018 and may be applied either retrospectively or on a modified retrospective basis. Subsequent to the issuance of the May 2014 guidance, several clarifications and updates have been issued on this topic, the most recent of which was issued in December 2016. The Company is evaluating the impact, if any, that ASU 2014-09 and any amendments thereto, will have on its financial statements.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ("ASU 2014-15"). ASU 2014-15 introduces an explicit requirement for management to assess and provide certain disclosures if there is substantial doubt about an entity’s ability to continue as a going concern. ASU 2014-15 is effective for the annual period ending after December 15, 2016. The adoption of ASU 2014-15 did not have a material impact on the Company’s operating results, financial position or disclosures.

In July 2015, as part of its simplification initiative, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 simplifies the subsequent measurement of inventory by requiring entities to remeasure inventory at the lower of cost and net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU does not apply to inventory measured using the last-in, first-out or the retail inventory method. The Company is required to adopt this standard in the first quarter of 2017. This standard is required to be applied prospectively with earlier application permitted as of the beginning of an interim or annual period. The Company does not expect the adoption of ASU 2015-11 to have a material impact on its financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”) which includes a lessee accounting model that recognizes two types of leases - finance leases and operating leases. The standard requires that a lessee recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or an operating lease. The standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact that ASU 2016-02 will have on its financial statements.

Note 3 - Long Term Debt

The following is a summary of the Company's long-term debt as of:

	September 30, 2017			December 31, 2016
First Republic Bank – Note payable in monthly installments of $31 thousand, including interest at a variable rate (4.50% at September 30, 2017), secured by a first deed of trust on the Company’s property and equipment; due June 1, 2019.	$	5,084		$	5,183
Less unamortized debt issuance costs	(12		)	(15		)
Long-term debt, less unamortized debt issuance costs	5,072			5,168
Less current portion	(138		)	(132		)
Total long-term debt, net of current portion (1)	$	4,934		$	5,036

The terms of the note payable include certain financial covenants including restrictions on subordinate financing. The Company was in compliance with such covenants as of and for the nine months ended September 30, 2017 .

9

29 East MacArthur, LLC

Notes to the Unaudited Financial Statements

September 30, 2017 and 2016

Note 3 - Long Term Debt - continued

As of September 30, 2017, future maturities of long-term debt were as follows:

	Total
2017	$	138
2018	141
2019	4,793
	$	5,072

(1) The note payable was paid off in connection with the Transaction, as described in Note 1.

Note 4 - Retirement Plan

The Company sponsors a 401(k) deferred compensation plan for the benefit of eligible employees. The plan allows eligible employees to defer a portion of their annual compensation, pursuant to Section 401(k) of the Internal Revenue Code. The Company’s policy is to match 25% of employee contributions to the plan up to a maximum of 10% of the employee’s compensation. Employer contributions to the plan were $19 thousand and $18 thousand for the nine months ended September 30, 2017 and 2016, respectively, and is included in general and administrative expense on the statements of operations. In connection with the Transaction as described in Note 1, the plan was frozen.

Note 5 - Related Party Transactions

The operating agreement requires the Company to pay the manager, who is a member of the Company, a management fee equal to 10% of the Company’s “net distributable funds” as defined by the operating agreement. For the nine months ended September 30, 2017 and 2016, $29 thousand and $30 thousand, respectively, in such fees were incurred by the Company. No management fees were unpaid as of September 30, 2017 and $14 thousand remain unpaid as of December 31, 2016 and are included in accrued expenses in the accompanying balance sheet.

Note 6 - Subsequent Events

Management has evaluated subsequent events through December 8, 2017, the date the financial statements were available to be issued.

2017 California Wildfires

In mid-October 2017, several areas surrounding the hotel were impacted by wildfires that caused damage to numerous nearby structures and caused the displacement of thousands of individuals.  While the hotel did not sustain any structural damage, it evacuated its staff and guests and shut down its operations for approximately one week.  Current management is evaluating the financial impact from this event.

10

EX-99.3

Exhibit 99.3

IMH Financial Corporation

Unaudited Pro Forma Condensed Combined Balance Sheet of IMH Financial Corporation as of September 30, 2017

Unaudited Pro Forma Condensed Combined Statement of Operations of IMH Financial Corporation for the year ended December 31, 2016 and the Nine Months Ended September 30, 2017

INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL INFORMATION

On October 2, 2017, IMH Financial Corporation (“IMH” or the “Company”), through various subsidiaries, completed an acquisition from 29 East MacArthur, LLC (the “MacArthur Place”) pursuant to the amended Purchase and Sale Agreement, dated September 1, 2017, in which the Company agreed to purchase the Seller's operating hotel consisting of 64 luxury guest rooms, indoor and outdoor function space, full-service food and beverage outlet and restaurant operations, and spa operations located in Sonoma, California (the “MacArthur Hotel”) for a purchase price of $36.0 million.

IMH treated the acquisition of the MacArthur Hotel as a purchase of a business pursuant to the Financial Accounting Standards Board’s (“FASB") Accounting Standards Codification ("ASC") 805, Business Combinations, which requires, among other things, that the assets to be acquired and liabilities to be assumed be recognized at their fair values as of the acquisition date using the acquisition method of accounting, and that the excess of consideration over the fair value of the acquired net assets to be allocated to goodwill.

The Unaudited Pro Forma Condensed Combined Financial Statements (including notes thereto) appended hereto are qualified in their entirety by reference to, and should be read in conjunction with, the Company’s Quarterly Report on Form 10-Q for the nine months ended September 30, 2017, the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, and the financial statements included in Item 9.01(a) of this Current Report on Form 8-K/A.

The accompanying Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 2017, reflects the financial position of the Company as if the transaction described in the Notes to the Unaudited Pro Forma Condensed Combined Financial Statements had been completed on September 30, 2017.

The accompanying Unaudited Pro Forma Condensed Combined Statements of Operations for the nine months ended September 30, 2017 and the twelve months ended December 31, 2016, present the results of operations of the Company as if the transaction described in the Notes to the Unaudited Pro Forma Condensed Combined Financial Statements had been completed on January 1, 2016.

These accompanying Unaudited Pro Forma Condensed Combined Financial Statements have been prepared to comply with Article 11 of Regulation S-X, as promulgated by the SEC and are presented for illustrative purposes only. They are subject to a number of estimates, assumptions, and other uncertainties, and do not purport to be indicative of the actual results of operations that would have occurred had the acquisition reflected therein in fact occurred on the dates specified, nor do such financial statements purport to be indicative of the results of operations that may be achieved in the future. In addition, the Unaudited Pro Forma Condensed Combined Financial Statements include pro forma allocations of the purchase price of the properties discussed in the accompanying notes based upon preliminary estimates of the fair value of the assets acquired and liabilities assumed in connection with the acquisitions and are subject to change. See "Forward Looking Statements" in this Current Report on Form 8-K/A and the description of other risks, uncertainties and factors that could cause actual results to differ materially from those projected that are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and as may be updated from time to time in other reports filed by the Company with the SEC, including Forms 8-K and 10-Q.

The historical consolidated financial information of IMH and the historical financial information of MacArthur Place, presented herein, have been adjusted in the Unaudited Pro Forma Condensed Combined Balance Sheet and Unaudited Pro Forma Condensed Combined Statements of Operations to eliminate assets not acquired and liabilities not assumed and their related impacts on the results of operations, and to give effect to pro forma events that are (1) directly attributable to the acquisition of the MacArthur Hotel, (2) factually supportable and (3) expected to have a continuing impact on the combined results. The Unaudited Pro Forma Condensed Combined Balance Sheet and Unaudited Pro Forma Condensed Combined Statements of Operations should be read in conjunction with the accompanying notes thereto.

IMH FINANCIAL CORPORATION

Unaudited Pro Forma Condensed Combined Balance Sheet

As of September 30, 2017

(dollars in thousands)

	Historical		Historical
	IMH Financial		MacArthur		Pro Forma				Pro Forma
	Corporation		Place		Adjustments				Combined
	(1)		(2)		(3) and (4)
Assets
Cash and Cash Equivalents	$	34,089	$	3,299	$	(35,486	)	4a	$	16,825
					18,914			4b
					(700		)	4c
					(3,291		)	3
Funds Held by Lender and Restricted Cash	308		—		—				308
Mortgage Loans, Net	7,203		—		—				7,203
Real Estate Held for Sale	15,252		—		—				15,252
Operating Properties	—		5,953		(5,953		)	4d	19,630
					19,630			4e
Other Real Estate Owned	35,860		—		—				35,860
Other Receivables	340		172		—				512
Other Assets	4,279		351		(105		)	3	4,525
Goodwill and Intangible Assets	—		—		16,370			4f	16,370
Property and Equipment, Net	533		—		—				533
Assets of Discontinued Operations	592		—		—				592
Total Assets	$	98,456	$	9,775	$	9,380			$	117,611
Liabilities
Accounts Payable and Accrued Expenses	$	4,078	$	532	$	(295	)	3	$	4,315
Accrued Property Taxes	238		42		(42		)	3	238
Dividends Payable	539		—		—				539
Accrued Interest Payable	431		19		(19		)	3	431
Customer Deposits and Funds Held for Others	368		1,039		(335		)	3	1,072
Notes Payable, Net of Discount	14,787		5,072		18,914			4b	33,701
					(5,072		)	3
Notes Payable and Special Assessment Obligations, Held for Sale	2,920		—		—				2,920
Liabilities of Discontinued Operations	493		—		—				493
Total Liabilities	23,854		6,704		13,151				43,709
Redeemable Convertible Preferred Stock, $.01 par value; 100,000,000 shares authorized; 8,200,000 shares outstanding; liquidation preference of $39,570	34,160								34,160
Commitments, contingencies and subsequent events
Stockholders' Equity

	Historical			Historical
	IMH Financial			MacArthur		Pro Forma				Pro Forma
	Corporation			Place		Adjustments				Combined
	(1)			(2)		(3) and (4)
Common stock, $.01 par value; 200,000,000 shares authorized; 18,079,522 shares issued and 16,253,426 shares outstanding at September 30, 2017	181									181
Less: Treasury stock at cost, 1,829,096 shares at September 30, 2017	(6,170		)							(6,170		)
Paid-in Capital	715,881									715,881
Accumulated Deficit	(675,595		)			(700		)	4c	(676,295		)
Total IMH Financial Corporation Stockholders' Equity	34,297			—		(700		)		33,597
Noncontrolling Interests	6,145			3,071		(3,071		)		6,145
Total Equity	40,442			3,071		(3,771		)		39,742
Total Liabilities and Stockholders' Equity	$	98,456		$	9,775	$	9,380			$	117,611

See accompanying notes to unaudited pro forma condensed combined financial statements.

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Pro Forma Condensed Combined Balance Sheet Adjustments, Reclassifications and Eliminations

The unaudited pro forma condensed combined balance sheet gives effect to the acquisition of the MacArthur Hotel, through various subsidiaries of the Company, as if it had occurred on September 30, 2017. No effect is given to the pro forma adjustments for the operating results of the MacArthur Hotel that are reflected in the unaudited pro forma condensed combined statements of operations.

Certain amounts in the historical balance sheet of MacArthur Place have been reclassified to conform to IMH’s presentation. In addition, certain balances have been eliminated to reflect the MacArthur Place assets that were not acquired and liabilities that were not assumed. Below is an explanation of the notes in the unaudited pro forma condensed combined balance sheet:

1) Represents the historical consolidated balance sheet of the Company.

2) Represents the historical balance sheet of MacArthur Place, as reclassified to conform to our financial statement presentation. These reclassification adjustments did not result in any changes to total assets or total liabilities at September 30, 2017.

3) Reflects the elimination of assets and liabilities of MacArthur Place that we did not acquire or assume, which primarily includes cash, certain prepaids and other assets, mortgage loan obligations and certain other liabilities.

4) The unaudited pro forma condensed combined balance sheet adjustments represent the impact of the Company’s acquisition of the MacArthur Hotel, and assume the acquisition had been completed on September 30, 2017. Also, in accordance with ASC 805, the Company has preliminarily estimated and allocated the value of its investment in the MacArthur Hotel to land and improvements, building and improvements, property and equipment, and various other assets acquired and liabilities assumed, with the balance allocated to goodwill and intangibles on the relative fair value basis. While the acquisition has been completed, the purchase price allocation and adjustments described above are estimates and are subject to risks and uncertainties that could cause actual results to differ from the assumptions used in this unaudited pro forma condensed combined financial information, including the amount of goodwill and intangible assets. In addition, the acquisition is subject to a post-closing true-up period which is still under negotiation with the seller that could impact the ultimate amount of receivables and liabilities, and further impact the amount of goodwill recorded.

a. The following table summarizes the pro forma estimate of the fair values of assets acquired and liabilities to be assumed as if the acquisition of the MacArthur Hotel had occurred on September 30, 2017 (in thousands):

Property and identifiable intangible assets acquired:
Land and improvements	$	4,920
Building and improvements	13,650
Property and equipment, net	1,060
	19,630
Goodwill and intangible assets	16,370
Purchase price	36,000
Other assets acquired and liabilities assumed:
Cash	8
Receivables, Inventory and other assets	418
Accounts payable and accrued expenses	(137		)
Customer deposit and gift cards	(704		)
Net liabilities assumed	(415		)
Adjusted purchase price	$	35,585

In a business combination, the initial allocation of the purchase price is considered preliminary and therefore subject to change until the end of the measurement period (up to one year from the acquisition date). Because the measurement period for the acquisition of the MacArthur Hotel is still open, IMH expects that certain fair value estimates will change once all information necessary to make a final fair value assessment has been received. Any measurement period adjustments determined to be material will be applied retrospectively to the period of acquisition in IMH’s consolidated financial statements and, depending on the nature of the adjustments, other periods subsequent to the period of acquisition could also be affected.

b. Reflects the proceeds received from the financing obtained in connection with the acquisition from MidFirst Bank (“MidFirst”) in the amount of $32.3 million, of which approximately $19.4 million was utilized for the purchase of the MacArthur Hotel, net of deferred financing costs of $0.4 million. The loan requires interest-only payments during the initial three-year term and bears floating interest equal to the 30-day LIBOR rate plus 3.75%, subject to possible downward adjustment if certain additional conditions are met.

c. To record the estimated amount of direct costs and fees payable in connection with the closing of the acquisition, including legal fees, consulting fees, due diligence and other payments specified Agreement.

d. To eliminate the historical cost basis of the MacArthur Hotel property, plant and equipment at the date of acquisition.

e. To record the addition of the MacArthur Hotel operating property consisting of land and improvements, building and improvements, and property and equipment to its estimated fair value derived from preliminary valuation information obtained. The ultimate fair value of such assets may materially differ from this estimate.

f. To record the estimated fair value of identifiable intangible assets and goodwill derived from preliminary valuation information obtained. The ultimate fair value of such assets may materially differ from this estimate.

IMH FINANCIAL CORPORATION

Unaudited Pro Forma Condensed Combined Statement of Operations

Year Ended December 31, 2016

(In thousands, except share data)

	Historical			Historical						Pro Forma
	IMH Financial			MacArthur		Pro Forma				IMH Financial
	Corporation			Place		Adjustments				Corporation
	(1)			(2)		(3)
Revenue:
Operating Property Revenue	$	4,700		$	9,513	$	—			$	14,213
Investment and Other Income	399			—		—				399
Mortgage Loan Income, Net	340			—		—				340
Total Revenue	5,439			9,513		—				14,952
Operating Expenses:
Operating Property Direct Expenses (Exclusive of Interest and Depreciation)	3,892			8,179		—				12,071
Expenses for Non-Operating Real Estate Owned	376			—		—				376
Professional Fees	4,364			—		—				4,364
General and Administrative Expenses	7,646			—		—				7,646
Interest Expense	5,305			246		(246		)	3a	6,462
						1,157			3b
Depreciation and Amortization Expense	759			559		(559		)	3a	2,360
						1,601			3c
Total Operating Expenses	22,342			8,984		1,953				33,279
Provision (Recovery) of Credit Losses, Impairment Charges, Gain on Disposal, and Equity Loss from Unconsolidated Entities
Gain on Disposal of Assets, Net	(10,997		)	—		—				(10,997		)
Provision of Credit Losses, Net	231			—		—				231
Impairment of Real Estate Owned	—			—		—				—
Equity Loss from Unconsolidated Entities	236			—		—				236
Total Provision (Recovery) of Credit Losses, Impairment Charges, Loss (Gain) on Disposal and Equity Loss from Unconsolidated Entities	(10,530		)	—		—				(10,530		)
Total Costs and Expenses	11,812			8,984		1,953				22,749
Income (Loss) before Income Taxes	(6,373		)	529		(1,953		)		(7,797		)
Provision for Income Taxes	—			—		—				—
Net Income (Loss)	(6,373		)	529		(1,953		)		(7,797		)
Net Income Attributable to Noncontrolling Interests	117			—		—				117
Cash Dividend on Redeemable Convertible Preferred Stock	(2,146		)	—		—				(2,146		)
Deemed Dividend on Redeemable Convertible Preferred Stock	(2,505		)	—		—				(2,505		)
Net Income (Loss) Attributable to Common Shareholders	$	(10,907	)	$	529	$	(1,953	)		$	(12,331	)
Loss per common share
Basic and Diluted	$	(0.69	)						3d	$	(0.77	)
Basic and Diluted Weighted Average Common Shares Outstanding	15,916,325									$	15,916,325

See accompanying notes to unaudited pro forma condensed combined financial statements.

IMH FINANCIAL CORPORATION

Unaudited Pro Forma Condensed Combined Statement of Operations

Nine Months Ended September 30, 2017

(In thousands, except share data)

	Historical			Historical						Pro Forma
	IMH Financial			MacArthur		Pro Forma				IMH Financial
	Corporation			Place		Adjustments				Corporation
	(1)			(2)		(3)
Revenue:
Operating Property Revenue	$	1,682		$	7,108	$	—			$	8,790
Management Fees, Investment and Other Income	808			—		—				808
Mortgage Loan Income, Net	402			—		—				402
Total Revenue	2,892			7,108		—				10,000
Operating Expenses:
Operating Property Direct Expenses (Exclusive of Interest and Depreciation)	1,544			6,194		—				7,738
Expenses for Non-Operating Real Estate Owned	485			—		—				485
Professional Fees	3,181			—		—				3,181
General and Administrative Expenses	6,154			—		—				6,154
Interest Expense	1,323			180		(180		)	3a	2,284
						961			3b
Depreciation and Amortization Expense	139			395		(395		)	3a	1,340
						1,201			3c
Total Operating Expenses	12,826			6,769		1,587				21,182
Provision (Recovery) of Credit Losses, Impairment Charges, Loss (Gain) on Disposal, and Equity Loss from Unconsolidated Entities
Loss (Gain) on Disposal of Assets, Net	(2,036		)	—		—				(2,036		)
Recovery of Investment and Credit Losses, Net	(6,408		)	—		—				(6,408		)
Impairment of Real Estate Owned	344			—		—				344
Equity Loss from Unconsolidated Entities	239			—		—				239
Total Provision (Recovery) of Credit Losses, Impairment Charges, Loss (Gain) on Disposal and Equity Loss from Unconsolidated Entities	(7,861		)	—		—				(7,861		)
Total Costs and Expenses	4,965			6,769		1,587				13,321
Income (Loss) before Income Taxes	(2,073		)	339		(1,587		)		(3,321		)
Provision for Income Taxes	—			—		—				—
Income (Loss) from Continuing Operations	(2,073		)	339		(1,587		)		(3,321		)
Net Income Attributable to Noncontrolling Interests	490			—		—				490
Cash Dividend on Redeemable Convertible Preferred Stock	(1,600		)	—		—				(1,600		)
Deemed Dividend on Redeemable Convertible Preferred Stock	(2,016		)	—		—				(2,016		)
Net Income (Loss) Attributable to Common Shareholders	$	(5,199	)	$	339	$	(1,587	)		$	(6,447	)
Loss per common share
Basic and Diluted	$	(0.32	)						3d	$	(0.40	)
Basic and Diluted Weighted Average Common Shares Outstanding	16,166,285									16,166,285

See accompanying notes to unaudited pro forma condensed combined financial statements.

IMH FINANCIAL CORPORATION

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Pro forma Condensed Combined Statement of Operations Adjustments, Reclassifications and Eliminations

The unaudited pro forma condensed combined statement of operations gives effect to the acquisition of the MacArthur Hotel, through various subsidiaries of the Company, as if it had occurred on January 1, 2016. Certain amounts in the historical statement of operations of the MacArthur Hotel have been reclassified to conform to IMH’s presentation and to eliminate revenues and expenses to the extent they relate to assets that were not acquired or liabilities that were not assumed. The details of these adjustments, reclassifications and eliminations in the unaudited pro forma condensed combined statement of operations are as follows:

1) Represents the historical consolidated statement of operations of the Company, except that the Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 2016 includes only the results of operations from continuing operations of the Company for the period presented. In accordance with Article 11 of Regulation S-X of the Securities and Exchange Commission, revenues and expenses related to property operations classified as discontinued operations have been excluded.

2) Represents the historical statement of operations of the MacArthur Place, as reclassified to conform to our financial statement presentation. These reclassification adjustments did not result in any changes to net income for the year ended December 31, 2016 or the nine month period ended September 30, 2017.

3) Pro Forma adjustments include:

a. To eliminate the MacArthur Hotel's historical interest expense and depreciation and amortization.

b. To record estimated interest expense resulting from the loan obtained in connection with the acquisition. The loan requires interest-only payments during the initial three-year term and bears floating interest equal to the 30-day LIBOR rate plus 3.75%, subject to possible downward adjustment if certain additional conditions are met. For pro forma presentation purposes, we have presented interest expenses for each of the periods presented based on the current interest rate. A one-eighth percent change in interest rate would impact interest expense by less than $30,000 for each period presented.

c. To record estimated depreciation and amortization expense resulting from the preliminary fair value of property acquired based on estimated useful lives ranging from three to 15 years. Amortization expense includes an estimate of the amortization of intangible assets acquired in the acquisition based on a preliminary valuation. The ultimate amortization may differ from from this estimate.

d. Pro forma net loss per common share was $0.77 compared to actual loss per common share of $0.69 for the year ended December 31, 2016. Pro forma net loss per common share was $0.40 compared to actual loss per common share of $0.32 for the nine month period ended September 30, 2017.