MORTGAGE LOANS, NET

Lending Activities

During the year ended December 31, 2017, the Company purchased two mezzanine loans from a related party (as described in Note 16) at a discount for $19.3 million, with a face value of $19.9 million. The loans are collateralized by a pledge of 100% of the equity interests in the entity owning the collateral for underlying assets of the respective loans. One loan had an original maturity date of September 9, 2016 with three one-year extensions. The borrower has exercised the first two extension options to extend the maturity date to September 9, 2018. The loan has an annual interest rate of 9.75% plus one-month LIBOR (11.23% at December 31, 2017). The second loan has a maturity date of October 9, 2019 with three one-year extensions, and bears an annual interest rate of 7.25% plus one-month LIBOR (8.73% at December 31, 2017). The respective discount for each loan is being amortized over the term of that loan using the effective interest method.

As further discussed in Note 5, effective September 29, 2017, the Company consolidated certain partnerships which had previously been accounted for as equity investments. As a result of the consolidation of such partnerships, one mortgage loan with a principal and interest balance of $0.4 million due from one of the partnerships has been eliminated in consolidation.

A roll-forward of loan activity for the years ended December 31, 2017 and 2016 follows (in thousands):



	Principal Outstanding				Interest Receivable			Valuation Allowance			Carrying Value
Balance at December 31, 2015	$	23,592			$	447		$	(12,892	)	$	11,147
Additions:
Accrued interest revenue	—				262			—			262
Reductions:				—
Principal and interest repayments	(7,843		)		(111		)	210			(7,744		)
Sale of mortgage loans	(3,148		)		(139		)	—			(3,287		)
Balance at December 31, 2016	12,601				459			(12,682		)	378
Additions:
Mortgage loan purchased	19,875				—			—			19,875
Accretion of mortgage income	258				—			—			258
Accrued interest revenue	—				686			—			686
Reductions:
Principal and interest repayments	—				(495		)	—			(495		)
Elimination of loan upon consolidation	(289		)		(120		)	—			(409		)
Mortgage loan discount	(625		)		—			—			(625		)
Balance at December 31, 2017	$	31,820			$	530		$	(12,682	)	$	19,668

As of December 31, 2017, the Company had four loans outstanding with an aggregate average principal and interest balance of $8.2 million. Two of these loans were performing loans with an average outstanding principal and accrued interest balance of $10.0 million, bearing a weighted average interest rate of 9.7% as of December 31, 2017. As of December 31, 2016, the Company had three loans with an aggregate average principal and interest balance of $4.4 million, one of which was performing with an outstanding principal and accrued interest balance of $0.4 million and bearing an interest rate of 11.0%. As of December 31, 2017 and December 31, 2016, the Company had two non-performing loans which have been fully reserved and have a zero carrying value. During the year ended December 31, 2017 and 2016 we recorded mortgage interest income of $0.9 million and $0.3 million, respectively. As of December 31, 2017 and 2016, the valuation allowance was $12.7 million and represented 39.2% and 97.1%, respectively, of the total outstanding loan principal and interest balances.

Geographic Diversification

Our mortgage loans consist of loans where the primary collateral is located in California, Missouri, New Mexico, and Texas. As of December 31, 2017 and 2016, the geographical concentration of our loan balances by state was as follows (dollar amounts in thousands):



	December 31, 2017										December 31, 2016
	Outstanding Principal and Interest		Valuation Allowance			Net Carrying Amount		Percent		#	Outstanding Principal and Interest		Valuation Allowance			Net Carrying Amount		Percent		#
California	$	12,682	$	(12,682	)	$	—	39.2	%	2	$	12,682	$	(12,682	)	$	—	97.1	%	2
Missouri	7,329		—			7,329		22.7	%	1	—		—			—		—	%	—
New Mexico	—		—			—		—	%	—	378		—			378		2.9	%	1
Texas	12,339		—			12,339		38.1	%	1	—		—			—		—	%	—
Total	$	32,350	$	(12,682	)	$	19,668	100.0	%	4	$	13,060	$	(12,682	)	$	378	100.0	%	3

Interest Rate Information

Our loan portfolio includes loans that carry variable and fixed interest rates. All variable interest rate loans are indexed to the Prime Rate or LIBOR. At December 31, 2017 and December 31, 2016, the Prime Rate was 4.50% and 3.75%, respectively. At December 31, 2017 and December 31, 2016, the one-month LIBOR was 1.56% and 0.77%, respectively.

At December 31, 2017, we had four loans with principal and interest balances totaling $32.4 million and interest rates ranging from 8.7% to 12.0%. Of this total, two loans with principal and interest balances totaling $12.7 million and a weighted average interest rate of 12.0% were non-performing loans and fully reserved, while two loans with principal and interest balances totaling $19.7 million and a weighted average interest rate of 9.7% were performing. Since a significant percentage of our loan principal balance is in default, the extent of mortgage income recognized on our loans is limited to only those loans that are performing.

At December 31, 2016, we had three loans with principal and interest balances totaling $13.1 million and interest rates ranging from 11.0% to 12.0%. Of this total, two loans with principal and interest balances totaling $12.7 million and a weighted average interest rate of 12.0% were non-performing loans and fully reserved, while one loan with principal and interest balances totaling $0.4 million and an interest rate of 11.0% was performing.

Changes in the Portfolio Profile — Scheduled Maturities

The outstanding principal and interest balances of mortgage investments, net of the valuation allowance, as of December 31, 2017 and 2016, have scheduled maturity dates within the next several quarters as follows (dollar amounts in thousands):



December 31, 2017							December 31, 2016
Quarter	Outstanding Balance			Percent		#	Quarter	Outstanding Balance			Percent		#
Matured	$	12,682		39.2	%	2	Matured	$	12,682		97.1	%	2
Q3 2018	7,329			22.7	%	1	Q3 2018	—			—	%	—
Q4 2019	12,339			38.1	%	1	Q4 2019	—			—	%	—
2020 and thereafter	—			—	%	—	Thereafter	378			2.9	%	1
Total principal and interest	32,350			100.0	%	4		13,060			100.0	%	3
Less: valuation allowance	(12,682		)					(12,682		)
Net carrying value	$	19,668						$	378

From time to time, we may modify certain terms of a loan or extend a loan’s maturity date in an effort to preserve our collateral. Accordingly, repayment dates of the loans may vary from their currently scheduled maturity date. If the maturity date of a loan is not extended, we classify and report the loan as matured. We did not modify any loans during the years ended December 31, 2017 or 2016.

We do not expect payoffs to materialize for nonperforming loans past their maturity dates. We may find it necessary to foreclose, modify, extend, make protective advances or sell such loans in order to protect our collateral, maximize our return or generate additional liquidity.

There were no mortgage loan payoffs during the year ended December 31, 2017. During the year ended December 31, 2016, we collected mortgage loan payoffs totaling $7.6 million. This amount represented the negotiated payoffs of two of our performing loans at a collective discount of $0.2 million. The discounted payoffs on these loans did not represent troubled debt restructuring because the loans were fully performing and the Company initiated the discounted payoffs in order to generate liquidity. We recorded an adjustment as of December 31, 2015 to provide for this discount.

Summary of Existing Loans in Default

At December 31, 2017 and 2016, two of our remaining legacy loans with outstanding principal and interest balances totaling $12.7 million were in default and past their respective scheduled maturity dates and are fully reserved. There were no other changes to loans in default during the year ended December 31, 2017.

We are evaluating the best course of action with respect to the loans in default which could lead to foreclosure or other disposition, but we have not completed foreclosure on any such loans during the year ended or subsequent to December 31, 2017. The timing of foreclosure on the remaining loans is dependent on several factors, including applicable states statutes, potential bankruptcy filings by the borrowers, the nature and extent of other liens secured by the underlying real estate.

Concentration by Category based on Collateral Development Status

We have historically classified loans into categories for purposes of identifying and managing loan concentrations. The following table summarizes, as of December 31, 2017 and 2016, respectively, loan principal and interest balances by concentration category (dollars in thousands):



	December 31, 2017						December 31, 2016
	Amount			%		#	Amount			%		#
Pre-entitled land:
Processing entitlements	$	—		—	%	—	$	378		2.9	%	1
	—			—	%	—	378			2.9	%	1
Entitled land:
Held for investment	12,682			39.2	%	2	12,682			97.1	%	2
	12,682			39.2	%	2	12,682			97.1	%	2
Construction & Existing structures
Exiting structure - held for investment	19,668			60.8	%	2	—			—	%	—
	19,668			60.8	%	2	—			—	%	—
Total	32,350			100.0	%	4	13,060			100.0	%	3
Less: valuation allowance	(12,682		)				(12,682		)
Net carrying value	$	19,668					$	378

Unless loans are modified and additional loan amounts are advanced to allow a borrower’s project to progress to the next phase of the project’s development, the classifications of our loans generally do not change during the loan term. Thus, in the absence of funding new loans, we do not expect material changes between loan categories with the exception of changes resulting from foreclosures or loan sales.

We also classify loans into categories based on the underlying collateral’s projected end-use for purposes of identifying and managing loan concentration and associated risks. As of December 31, 2017 and 2016, respectively, outstanding principal and interest loan balances by expected end-use of the underlying collateral, were as follows (dollars in thousands):



	December 31, 2017						December 31, 2016
	Amount			%		#	Amount			%		#
Residential	$	12,682		39.2	%	2	$	12,682		97.1	%	2
Mixed Use	—			—	%	—	378			2.9	%	1
Commercial	19,668			60.8	%	2	—			—	%	—
Total	32,350			100.0	%	4	13,060			100.0	%	3
Less: valuation allowance	$	(12,682	)				$	(12,682	)
Net carrying value	$	19,668					$	378

Borrower and Borrower Group Concentrations

Our investment policy generally provides that aggregate loans outstanding to a borrower or affiliated borrowers should not exceed 20% of the total of the Company’s investment portfolio. Following the origination of a loan, however, the aggregate loans outstanding to a borrower or affiliated borrowers may exceed those thresholds as a result of foreclosures, limited lending activities, and changes in the size and composition of our overall portfolio.

As of December 31, 2017, we had four outstanding loans, of which there were two performing loans whose aggregate principal and interest carrying value totaled $19.7 million, representing 100% of our total loan portfolio net carrying value. As of December 31, 2016, we had three outstanding loans. One loan, the only performing loan, had an outstanding principal and interest carrying value, net of allowance, of $0.4 million, which represented 100% of our total loan portfolio net carrying value. Due to the limited size of our mortgage portfolio, during the year ended December 31, 2017, two individual loans with aggregate principal balances totaling $19.5 million collectively accounted for 96.9% of total mortgage income for the year. Similarly, during the year ended December 31, 2016, three individual loans with average aggregate principal balances totaling $3.5 million accounted for 99.2% of total mortgage loan income for the year.

Loan Sales and Payoffs

We did not sell any mortgage loans during the year ended December 31, 2017. During the year ended December 31, 2016, the Company sold one loan with a carrying value of $3.1 million for a net loss of $0.1 million. During the year ended December 31, 2017, we did not collect any mortgage principal payments. During the year ended December 31, 2016, we collected mortgage loan payoffs totaling $7.6 million.