INVESTMENTS IN JOINT VENTURES AND PARTNERSHIPS

Park City, Utah Lakeside Investment

During 2015, the Company, through a consolidated subsidiary, Lakeside DV Holdings, LLC (“LDV Holdings”), entered into a joint venture with a third party developer, Park City Development, LLC (“PCD”) for the purpose of acquiring, holding and developing certain real property located in Park City, Utah (“Lakeside JV”). The intent of Lakeside JV was to sell townhome, single family residential and hotel lots. Under the Lakeside JV limited liability company agreement, the Company agreed to contribute up to $4.2 million for a 90% interest and PCD agreed to contribute up to $0.5 million for a 10% interest. Equity balances in Lakeside JV were subject to a 12% preferred return, compounded quarterly. PCD’s principal provided a limited performance guaranty to the Company in the case of certain defaults by PCD.

In January 2017, the Company purchased PCD’s 10% interest in Lakeside JV for $0.7 million and terminated PCD as manager. Upon purchase of PCD’s interest, Lakeside JV became a consolidated entity of the Company in the first quarter of 2017. The Company’s investment in Lakeside JV was previously accounted for under the equity method. No gain or loss was recorded for this transaction as the consideration paid plus the reported amounts of previously held interests approximated the fair value of Lakeside JV. As of December 31, 2017, the Company had made all required contributions to Lakeside JV.

Upon formation of Lakeside JV, the Company syndicated $1.7 million of its $4.2 million investment to several investors (“Syndicates”) by selling preferred equity interests in LDV Holdings. The syndicated investment was made up of $1.4 million from various related parties and $0.3 million from an unrelated party. Of the $1.4 million invested by related parties, $1.1 million was invested by one of the Company’s directors and preferred shareholders (see Note 16), $0.2 million was invested by two members of the Company’s board of directors, and $0.1 million was invested by a partner from one of the Company’s outside law firms. The Company has no obligation to return the initial investment to the Syndicates.

LDV Holdings’ cash flows are to be distributed first to its members in proportion to the preferred equity investment, including the preferred return, then to the extent of additional capital contributions made by its members. Thereafter, cash flows are to be distributed to members at varying rates as certain return hurdles are achieved. Other than a 2% management fee to be paid to the Company, cash flows distributions from LDV Holdings to the Syndicates are to effectively mirror the distributions to LDV Holdings from Lakeside JV. The investment by the Syndicates in LDV Holdings is included in non-controlling interests, a component of shareholders’ equity in the accompanying consolidated balance sheets.

During 2017, certain of Syndicates executed promissory notes in favor of a subsidiary of the Company totaling $0.7 million. The notes receivable have an annual interest rate of 8% and mature at the earliest to occur of 1) the date on which the sale of the Lakeside JV property occurs, or 2) September 17, 2019. The promissory notes are secured by the investors’ respective interest and allocated proceeds of LDV Holdings. Under applicable accounting guidance, the notes receivable have been netted against the non-controlling interest balance in the accompanying consolidated balance sheet.

In the Company’s estimation, the fair value of the unimproved real estate holdings of Lakeside JV exceeded our investment basis as of December 31, 2017 and 2016. The Company’s maximum exposure to loss in the Lakeside JV as of December 31, 2017 was $2.7 million. The risk of loss on the balance of the investment is borne by the Syndicates.

During the year ended December 31, 2016, Lakeside JV recorded a loss of $0.2 million which is reflected in the loss on the equity method investment in the accompanying consolidated statements of operations, of which $0.1 million was allocable to the Syndicates and is reflected in income attributable to noncontrolling interest income allocation in the accompanying consolidated statements of operations.

Equity Interests Acquired through Guarantor Recoveries

In 2015, the Company acquired certain real estate assets and equity interests in a number of limited liability companies and limited partnerships with various real estate holdings and related assets in satisfaction of an outstanding receivable from a court-appointed receiver advanced in connection with certain enforcement and collection efforts against the guarantor of a former borrower. Prior to September 29, 2017, certain of these entities were consolidated in the our consolidated financial statements while others were accounted for under the equity method of accounting, depending on the extent of the Company’s financial interest in and level of control over each such entity.

Effective September 29, 2017, the Company consolidated the accounts of various corporate entities, the full ownership of which was initially granted to the Company under a previous judgment award against a guarantor under certain legacy mortgage loans. The value of the corporate entities was not recorded as a recovery at the time of award since the ownership of those entities remained under the control of a court-appointed receiver from the date the judgment was awarded. The assets of the corporate entities consist primarily of general and limited partnership interests in, and various receivables from (and liabilities to), several of the previously consolidated and unconsolidated entities, as well amounts for other entities pertaining to the guarantor that were administratively dissolved by court order in a receivership wind-up motion. As a result, the Company began to consolidate into its financial statements the accounts of various unconsolidated variable interest entities, whose assets are comprised of real estate holdings, rights to develop water and receivables from other related entities, and liabilities which consisted primarily of various amounts payable to related entities.

The consolidation of the aforementioned entities occurred as a result of the termination of a court-appointed receivership over the corporate entities which maintained the general partner interests and thereby controlled the activities of such entities through that date. During the year ended December 31, 2017, the receiver assigned and delivered to the Company the stock certificates of the corporate entities, including the underlying interest in partnerships. As a result, as of that date, the Company received full possession, custody and control of its awarded interests in the corporate entities and related interest in partnerships. The Company’s ownership interests in the consolidated entities range from 3.8% to 100.0% and were determined to be variable interest entities. The Company determined the partnerships are deemed to be variable interest entities and that through its general and limited partnership interests, the Company is the primary beneficiary of such entities because 1) it has the power to direct the activities of the entities that most significantly impact the economic performance of such entities, and 2) with the financial assistance provided to such entities, the Company has the risk of absorbing losses or rights to receive benefits that could be potentially significant to the entities; as such, they should be consolidated. Intercompany receivables and liabilities have been eliminated in consolidation in the accompanying consolidated financial statements.

In April 2017, the court-appointed receiver over the general partner of one of the partnerships made a capital call of all partners to fund various operating and capital requirements. While the Company met its obligation under this request, none of the remaining partners did so, at which point the Company funded those portions as well totaling $1.1 million to the partnership. As a result of the other partners’ failure to make the required contributions, the general partner declared a default by such limited partners under the terms of the partnership agreement and assigned those limited partner interests to the Company’s limited partner subsidiary. Upon transfer of the general partner interest to the Company at termination of the receivership on September 29, 2017, the Company gained full authority to act on behalf of the partnership. Accordingly, we recorded the effects of the ownership of those additional limited partner interests upon consolidation.

Financial data presented for previous periods have not been restated to reflect the consolidation of the entities. The assets and liabilities of the newly consolidated entities were recorded at their preliminary estimated fair values. As a result of the assignment of the corporate entity and related general partner interests and recording of assets and liabilities at fair value for the affected entities, and after elimination of intercompany balances, the Company recorded the elimination of the investment in unconsolidated entities of $4.0 million, and recorded a decrease in mortgage loans of $0.4 million, a decrease in other receivables of $2.4 million, an increase in other real estate owned of $17.8 million, an increase in other assets of $1.1 million, an increase in liabilities of $0.2 million, and non-controlling interests of $6.5 million at consolidation. In addition, the Company recorded net recovery income of $6.1 million at consolidation.

In 2016, a subsidiary of the Company entered into a series of promissory notes and related agreements with five of the partnerships to advance a total of up to $0.7 million for the purposes of funding various operating costs and well infrastructure development costs in connection with a damaged well affecting the partnerships. The partnership notes are secured by the assets of the respective partnerships, bear interest rates ranging from the JP Morgan Chase Prime rate plus 2.0% (6.50% at December 31, 2017) to 8.0% and mature no later than July 31, 2018. During the year ended December 31, 2017, the notes were amended to increase the maximum loan amount to $1.0 million per entity, or $5.0 million in total, and to cross-collateralize the notes. During the year ended December 31, 2017, a total of $1.5 million was advanced to the five partnerships under the terms of the note agreements. The outstanding principal and interest of such notes totaled $2.0 million as of December 31, 2017. As a result of the consolidation of the related entities, the notes receivable and notes payable and related interest amounts have been eliminated in consolidation.

The Company’s consolidated financial statements include the assets, liabilities and results of operations of VIEs for which the Company is deemed to be the primary beneficiary. The other equity holders’ interests are reflected in net income (loss) attributable to noncontrolling interests in the accompanying consolidated statements of operations and noncontrolling interest in the accompanying consolidated balance sheets. For certain of the consolidated entities, the Company previously recorded only its proportionate interest in related assets and liabilities at that time such interests were initially awarded, rather than recording the gross assets and liabilities and non-controlling interest portion. For the applicable entities, it was determined that the Company should have recorded additional other REO assets and a corresponding non-controlling interest in the amount of $3.2 million since these entities were consolidated. We have recorded out of period adjustments to reflect the proper amount of assets, liabilities and non-controlling interests as of December 31, 2017. The Company concluded that these out of period adjustments were not material to any of the prior period consolidated balance sheets and they had no impact on prior period consolidated statements of operations and cash flows.

L’Auberge de Sonoma Hotel Fund

As described in Note 9, in October 2017, the Company, through various subsidiaries, acquired MacArthur Place for a purchase price of $36.0 million. The acquisition of MacArthur Place was funded using $19.4 million in loan proceeds from MidFirst Bank (see Note 7 for description of loan terms) and the balance was contributed by the Company through the Hotel Fund. In November 2017, the Company commenced an offering of up to $25.0 million of preferred interests in the Hotel Fund. The net proceeds of this offering will be used to (i) redeem the Company’s initial contributions to the Hotel Fund and (ii) fund certain renovations to MacArthur Place.

Purchasers of the preferred interests (the “Preferred Members”) are entitled to a preferred distribution, payable monthly, accruing at a rate of 7.0% per annum on invested capital, cumulative and non-compounding (the “Preferred Distribution”). Prior to the sale or other disposition of the Property, if the Fund has insufficient operating cash flow to pay the Preferred Distribution in a given month, the Company will provide the funds necessary to pay the Preferred Distribution for such month. Such payment by the Company will be treated as an additional capital contribution and the Company’s capital account will be increased by such amount. Moreover, we, as sponsor have agreed to fund, in the form of common capital contributions, up to 6.0% of gross proceeds as selling commissions and up to 1.0% of gross proceeds as nonaccountable expense reimbursements to broker-dealers based on the capital raised by them for the Hotel Fund. These portions of our common equity in the Hotel Fund are subordinate to the distribution of capital to Preferred Investors in the event of a capital transaction. Additionally, upon the refinance or sale of all or a portion of MacArthur Place, Preferred Members may be entitled to receive certain additional preferred distributions (the “Additional Preferred Distribution”) that will result in an overall return of up to12.0% on the Preferred Interests. Upon a capital transaction, the Fund will distribute 10.0% of any cash available after the payment of the Additional Preferred Distribution to the Preferred Members pro rata in proportion to the Preferred Interests owned. Any amounts in excess of this shall be retained by the Company. The Fund intends to pursue a liquidity event, with a focus on the sale of all or substantially all of the Fund’s assets, approximately four to six years following commencement of the Offering.

As of December 31, 2017, the Hotel Fund sold preferred interests in the aggregate amount of $0.7 million, which is included in noncontrolling interests in the accompanying consolidated balance sheet. The Hotel Fund did not make any distributions during the year ended December 31, 2017. Based on the structure of the Hotel Fund, our ability to direct the activities that that most significantly impact the economic performance of the Hotel Fund, and the risk of absorbing losses or rights to receive benefits that could be potentially significant to the Hotel Fund, the Company is deemed to be the primary beneficiary of the Hotel Fund, and accordingly we have consolidated and expect to continue to consolidate the Hotel Fund in our consolidated financial statements.

The following table summarizes the carrying amounts of the above referenced entities’ assets and liabilities included in the Company’s consolidated balance sheets at December 31, 2017 and December 31, 2016 (in thousands, net of intercompany eliminations):



	December 31, 2017			December 31, 2016
Total assets	$	59,320		$	19,456
Total liabilities	29,260			6,269
Net income (loss)	(2,773		)	(422		)

The Company’s maximum exposure to loss consists of its combined equity in those entities which totaled $28.7 million as of December 31, 2017.

Summarized Financial Information of Unconsolidated Entities (unaudited)

As of December 31, 2017, we no longer hold investments that are recorded on the equity method as a result of the aforementioned consolidation.

Prior to consolidation, during the years ended December 31, 2017 and 2016, the equity loss recorded on our equity method investments in the accompanying consolidated statements of operations was $0.2 million and $0.2 million, respectively.