SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are disclosed in our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2012. During the nine months ended September 30, 2013, there were no material changes in our significant accounting policies, except as described below.

Reclassifications

Certain 2012 amounts have been reclassified to conform to the 2013 financial statement presentation. During the period ended September 30, 2013, the Company completed a conversion to a new accounting system which provides more detailed reporting and greater visibility for the Company and its various subsidiaries. As a result of this conversion, we identified various changes in the classifications of certain previously reported income statement amounts and segment information. While these changes had no material impact on the Company's consolidated financial statements as a whole, there were some significant reclassifications which are described as follows:

•

During the period ended September 30, 2012 and prior, we had not segregated income derived from our Hospitality and Entertainment operations due to the immateriality of such balances in relation to overall revenue. Such amounts were included in Investment and Other Income in those periods. We began classifying such amounts separately in our Form 10-K for the year ended December 31, 2012. As such, we have reclassified Hospitality and Entertainment Income amounts for the three and nine months ended September 30, 2012 in the accompanying condensed consolidated statement of operations to conform to our current presentation.


•	We have created a line item entitled Operating Property Expenses (exclusive of Taxes, Interest and Depreciation) and reclassified appropriate amounts primarily from Other Operating Expenses for Real Estate Owned to capture those expenses directly attributable to operating properties, thereby segregating incidental costs of ownership of non-operating REO properties.

•

During the year ended December 31, 2012 and prior, we reported various costs related to Default and Enforcement Related Expenses as a separate line item. Due to the nature of such costs and the overlapping relationship between these and other professional fees, we elected to reclassify the applicable components of Default and Enforcement Related Expenses between Professional Fees and General and Administrative Expenses in our 2013 presentation. As such, we have reclassified such amounts for the three and nine months ended September 30, 2012 in the accompanying condensed consolidated statement of operations to conform to our current presentation.

The effect of these reclassifications is presented in the table below.

Restatement of Previously Issued Condensed Consolidated Statement of Cash Flows

Restricted Cash

During the year ended December 31, 2012, the Company identified a misstatement with respect to the manner in which it presented cash and cash equivalents and restricted cash in its consolidated balance sheet as of December 31, 2011 and September 30, 2012. As previously reported, in connection with the $50.0 million loan with NW Capital secured in June 2011, we entered into a cash management agreement with the lender under which the amount of discretionary funds available to us is limited to the following 90 days of budgeted operating cash, which is funded on a monthly basis, subject to NWR approval and release. The balance of all remaining cash (including the balance of loan proceeds and any and all proceeds received from revenues, loan payments, asset sales or other cash generating events) is collected and maintained in a trust account as collateral under the loan for the benefit of NW Capital (the Collateral Account). While the funds are not restricted for a specified purpose and are expected to be used to fund on-going operations, capital purchases and investments, the availability of such funds is restricted as to withdrawal and subject to NW approval and control. Accordingly, we are required to separately disclose on the face of the consolidated balance sheets the amount of cash in the Collateral Account as restricted cash. Specifically, we recorded an adjustment to reclassify $1.6 million and $20.2 million from cash to restricted cash as of September 30, 2012 and December 31, 2011, respectively.

Interest on Property Taxes

During the period ended September 30, 2012 and prior, interest expense on delinquent property taxes was reported as a component of Property Taxes for Real Estate Owned rather than as a component of Interest Expense. We corrected this misstatement and began properly classifying such amounts as a component of Interest Expense in our Form 10-K for the year ended December 31, 2012. As such, we have restated such amounts for the three and nine months ended September 30, 2012 in the accompanying condensed consolidated statement of operations to conform to our current presentation.

Segment Information

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

Assessment of Restatements

These corrections had no impact on consolidated stockholders’ equity as of December 31, 2011 or September 30, 2012 or on revenue, expenses, net loss or basic and diluted loss per share for the periods then ended. The Company has assessed these misstatements in financial statement presentation and has determined that, on both a qualitative and quantitative basis, the adjustments are immaterial, both individually and in the aggregate, to the consolidated financial statements, and thus the Company did not and will not amend any of its prior quarterly and annual reports on Form 10-Q and 10-K, and it has adjusted its presentation on a prospective basis. In order to provide consistency in the Company's financial reporting, the September 30, 2012 condensed consolidated statement of cash flows presented herein has been restated to appropriately reflect the corrections described above. In addition, the segment information presented in Note 10 three and nine months ended September 30, 2012 has been restated to reflect the classification of expenses in the proper segments. The following table summarizes the effect of these corrections and reclassifications on the previously filed condensed consolidated statement of cash flows for the nine months ended September 30, 2012, which was restated for comparative purposes only (in thousands):



Restatements	September 30, 2012 Balances
	As Previously Reported			Adjustment			As Restated
Statement of Cash Flow Items
Decrease in Restricted Cash	$	—		$	1,575		$	1,575
Net Decrease in Cash Equivalents	(1,543		)	1,575			32
Cash and Cash Equivalents, Beginning of Period	21,322			(20,154		)	1,168
Cash and Cash Equivalents, End of Period	$	19,779		$	(18,579	)	$	1,200



	Three Months Ended September 30, 2012							Nine Months Ended September 30, 2012
	As Previously Reported		Adjustment			As Restated		As Previously Reported	Adjustment		As Restated
Statement of Operations
Property Taxes for Real Estate Owned	$	792	$	(175	)	$	617	2,011	(523	)	1,488
Interest Expense	3,480		175			3,655		10,327	523		10,850



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

Operating Liabilities
Mortgage and REO - Legacy Portfolio and Other Operations	$	5,405	$	3,132		$	8,537
Commercial Real Estate Leasing Operations	323		246			569
Hospitality and Entertainment Operations	2,171		(1,178		)	993
Corporate and Other	8,530		(2,201		)	6,329



	Three Months Ended September 30, 2012												Nine Months Ended September 30, 2012
	As Previously Reported			Restatement Adjustment			Reclassification Adjustment			As Restated			As Previously Reported			Restatement Adjustment			Reclassification Adjustment			As Restated
Segment Information - Income Statement Items
Expenses
Mortgage and REO - Legacy Portfolio and Other Operations - Operating Expenses	$	3,138		$	(2,410	)	$	657		$	1,385		$	7,211		$	(4,745	)	$	715		$	3,181
Mortgage and REO - Legacy Portfolio and Other Operations - Interest Expense	—			—			382			382			—			—			1,230			1,230
Mortgage and REO - Legacy Portfolio and Other Operations - Credit Loss Provision (Recoveries)	—			—			(1,028		)	(1,028		)	—			—			(1,913		)	(1,913		)
Commercial Real Estate Leasing Operations - Operating Expenses	385			270			1			656			1,081			1,021			(1		)	2,101
Commercial Real Estate Leasing Operations - Interest Expense	—			—			—			—			—			—			1			1
Commercial Real Estate Leasing Operations - Credit Loss Provision (Recoveries)	—			—			(2		)	(2		)	—			—			(1		)	(1		)
Hospitality and Entertainment Operations - Operating Expenses	831			10			(31		)	810			2,078			32			(77		)	2,033
Hospitality and Entertainment Operations - Interest Expense	—			—			21			21			—			—			46			46
Corporate and Other - Operating Expenses	4,886			2,130			(3,252		)	3,764			15,483			3,710			(9,558		)	9,635
Corporate and Other - Interest Expense	—			—			3,252			3,252			—			—			9,573			9,573
Corporate and Other - Credit Loss Provision (Recoveries)	—			—			—			—			—			—			(15		)	(15		)

Net Income (Loss)
Mortgage and REO - Legacy Portfolio and Other Operations	$	(2,688	)	$	2,410		$	(208	)	$	(486	)	$	(6,175	)	$	4,745		$	(179	)	$	(1,609	)
Commercial Real Estate Leasing Operations	(22		)	(272		)	7			(287		)	89			(1,021		)	9			(923		)
Hospitality and Entertainment Operations	(511		)	(10		)	10			(511		)	(769		)	(31		)	30			(770		)
Corporate and Other	(4,963		)	(2,130		)	195			(6,898		)	(15,370		)	(3,711		)	158			(18,923		)



	Three Months Ended September 30, 2012					Nine Months Ended September 30, 2012
	As Previously Reported	Restatement Adjustment		Reclassification Adjustment	As Restated	As Previously Reported	Restatement Adjustment		Reclassification Adjustment	As Restated
Reclassifications - Statement of Operations
Hospitality and Entertainment Income	—	320		—	320	—	1,308		—	1,308
Investment and Other Income	442	(320	)	—	122	1,609	(1,308	)	—	301
Operating Property Expenses (exclusive of Taxes, Interest and Depreciation)	—	915		—	915	—	2,417		—	2,417
Other Operating Expenses for Real Estate Owned	1,742	(936	)	—	806	3,839	(2,466	)	—	1,373
Professional Fees	1,636	165		—	1,801	3,430	446		—	3,876
Default and Enforcement Related Expenses	243	(243	)	—	—	821	(821	)	—	—
General and Administrative Expenses	1,406	99		—	1,505	4,403	442		—	4,845

Derivative Financial Instruments

Our derivative investment receivable reflects the estimated fair value of an exit fee receivable by us in connection with a preferred equity investment transaction in a joint venture completed during the nine months ended September 30, 2013, as described in note 5. This derivative does not qualify as a hedge. Accordingly, we recognize future gains and losses on this derivative investment receivable for accounting purposes in investment and other income in the condensed consolidated statement of operations. Under the terms of the joint venture agreement, the exit fee receivable is to be equal to the greater of 4% of our original investment or 1.5% of the fair market value of the portfolio assets of the joint venture at the two year preferred equity redemption date. The initial fair value of the derivative exit fee receivable was derived by taking the present value using an annual discount rate of approximately 12% of the estimated exit fee which was determined by applying capitalization rates ranging from 5.0% to 7.2% to the forecasted stabilized net operating income of each of the operating properties of the joint venture. As of September 30, 2013 we applied a similar methodology to estimate the fair market value of the portfolio assets and recorded no gain or loss for the period ended September 30, 2013.

Use of Estimates

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

Restricted Cash

At September 30, 2013 and December 31, 2012, restricted cash and cash equivalents totaled $4.7 million and $14.9 million, respectively. Restricted cash includes cash items that are legally or contractually restricted as to usage or withdrawal, which include amounts relating to: a) to the Collateral Account which is required under the terms of NW Capital loan and related agreements, and is subject to NW Capital approval and release. While the funds in the Collateral Account are not restricted for a specified purpose and are expected to be used to fund on-going operations, capital purchases and investments, the availability of such funds is restricted as to withdrawal and subject to NW approval and release; b) as described in Note 7, under the terms of our loan agreement with Canpartners Realty Holding Company IV LLC (Canpartners), we are required to maintain a minimum $5.0 million balance of cash and cash equivalents at all times during the term of the loan, which may include balances in the Collateral Account, as well as other reserve accounts required under the Canpartners' loan agreement; and c) amounts maintained in escrow accounts for contractually specified purposes.

Recently Adopted Accounting Standards

Changes to accounting principles generally accepted in the United States of America (U.S. GAAP) are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASUs) to the FASB's Accounting Standards Codification.

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

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

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

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

In June 2013, the FASB issued ASU 2013-08, Financial Services - Investment Companies: Amendments to the Scope, Measurement, and Disclosure Requirements ("ASU 2013-08"). In general, the amendments of this ASU: (i) revise the definition of an investment company; (ii) require an investment company to measure non-controlling ownership interests in other investment companies at fair value rather than using the equity method of accounting; and (iii) require information to be disclosed concerning the status of the entity and any financial support provided, or contractually required to be provided, by the investment company to its investees. ASU 2013-08 is effective for interim and annual periods that begin after December 15, 2013 and early application is prohibited. As the FASB has decided to retain the current U.S. GAAP scope exception from investment company accounting and financial reporting for real estate investment trusts, the adoption of this ASU will not have a material impact on the Company's consolidated financial statements.

In July 2013, the FASB issued ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the FASB Emerging Issues Task Force) (“ASU 2013-10”). The amendments of this ASU apply to all entities that elect to apply hedge accounting of the benchmark interest rate under Derivatives and Hedging (FASB Accounting Standards Codification Topic 815). ASU 2013-10 permits the Federal Funds Effective Rate (also referred to as the Overnight Index Swap Rate, or OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes in addition to the interest rates on direct Treasury obligations of the U.S. government and London Interbank Offered Rate. ASU 2013-10 was effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. Adoption of ASU 2103-10 is not expected to have a material impact on the Company's consolidated financial statements.

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