NOTE 4 – LOANS

Loans generally are funded at a fixed interest rate with a loan term of up to five years. Loans acquired are generally done so within the first six months of origination, and purchased at the current par value, which approximates fair value. As of March 31, 2018, 87 of the company’s 93 loans (representing 98% of the aggregate principal of the company’s loan portfolio) have a loan term of five years or less from loan inception. The remaining loans have terms longer than five years. Substantially all loans are written without a prepayment penalty provision. As of March 31, 2018, 69 loans outstanding (representing 67% of the aggregate principal balance of the company’s loan portfolio) provide for monthly payments of principal and interest, typically calculated on a 30-year amortization, with the remaining principal balance due at maturity. The remaining loans provide for monthly payments of interest only, with the principal balance due at maturity.

Secured loans unpaid principal balance (principal)

Secured loan transactions are summarized in the following table for the three months ended March 31, 2018.

	2018
Principal, January 1	$	54,768,689
Loans funded		9,946,500
Loans acquired from affiliates		5,889,819
Principal payments received		(12,739,617	)
Principal, March 31	$	57,865,391

During the three months ended March 31, 2018, the company renewed 4 loans, at then market terms, with an aggregate principal balance of $1,324,473, which are not included in the activity shown above.

Loan characteristics

Secured loans had the characteristics presented in the following table.

	March 31,			December 31,
	2018			2017
Number of secured loans		93			93
Secured loans – principal	$	57,865,391		$	54,768,689
Secured loans – lowest interest rate (fixed)		6.9	%		6.9	%
Secured loans – highest interest rate (fixed)		10.5	%		10.5	%

Average secured loan – principal	$	622,209		$	588,911
Average principal as percent of total principal		1.1	%		1.1	%
Average principal as percent of members’ capital		0.9	%		0.9	%
Average principal as percent of total assets		0.9	%		0.9	%

Largest secured loan – principal	$	3,200,000		$	3,239,124
Largest principal as percent of total principal		5.5	%		5.9	%
Largest principal as percent of members’ capital		4.7	%		5.0	%
Largest principal as percent of total assets		4.7	%		5.1	%

Smallest secured loan – principal	$	94,425		$	52,562
Smallest principal as percent of total principal		0.2	%		0.1	%
Smallest principal as percent of members’ capital		0.1	%		0.1	%
Smallest principal as percent of total assets		0.1	%		0.1	%

Number of California counties where security is located		17			16
Largest percentage of principal in one California county		18.8	%		22.6	%

Number of secured loans with filed notice of default		1			1
Secured loans in foreclosure – principal	$	139,162		$	139,643

Number of secured loans with an interest reserve		—			—
Interest reserves	$	—		$	—

As of March 31, 2018, the company’s largest loan with principal of $3,200,000 represents 5.5% of outstanding secured loans and 4.7% of company assets. The loan is secured by a retail-office property located in Los Angeles County, bears an interest rate of 8.75% and matures on November 1, 2018. As of March 31, 2018, the company had 1 loan with a notice of default filed.

In compliance with California laws and regulations, all borrower receipts are deposited into a bank trust account maintained by RMC and subsequently disbursed to the company after an appropriate holding period. At March 31, 2018, the trust account held a balance relating to the company’s loan portfolio of $50,209, consisting of both interest and principal payments from borrowers, all of which was disbursed by April 13, 2018.

Lien position

Secured loans had the lien positions presented in the following table.

	March 31, 2018								December 31, 2017
	Loans		Principal			Percent			Loans		Principal			Percent
First trust deeds		56	$	35,087,060			61	%		60	$	37,032,195			68	%
Second trust deeds		37		22,778,331			39			33		17,736,494			32
Total secured loans		93		57,865,391			100	%		93		54,768,689			100	%
Liens due other lenders at loan closing				37,901,684								31,545,806
Total debt			$	95,767,075							$	86,314,495

Appraised property value at loan closing			$	197,444,000							$	181,018,000

Percent of total debt to appraised values (LTV) at loan closing⁽¹⁾				53.7	%							53.5	%

(1)

Based on appraised values and liens due other lenders at loan closing. The weighted-average loan-to-value (LTV) computation above does not take into account subsequent increases or decreases in property values following the loan closing nor does it include decreases or increases of the amount owing on senior liens to other lenders.

Property type

Secured loans summarized by property type are presented in the following table.

	March 31, 2018							December 31, 2017
	Loans		Principal		Percent			Loans		Principal		Percent
Single family⁽²⁾		65	$	37,929,509		66	%		67	$	37,615,216		69	%
Multi-family		8		5,337,203		9			5		2,164,861		4
Commercial		20		14,598,679		25			21		14,988,612		27
Total secured loan balance		93	$	57,865,391		100	%		93		54,768,689		100	%

(2)

Single family property type as of March 31, 2018 consists of 11 loans with principal of $6,506,239 that are owner occupied and 54 loans with principal of $31,423,270 that are non-owner occupied. At December 31, 2017, single family property consisted of 10 loans with principal of $6,309,036 that are owner occupied and 57 loans with principal of $31,306,180 that are non-owner occupied.

Distribution of loans within California

The distribution of secured loans outstanding by California counties is presented in the following table as of March 31, 2018, and December 31, 2017.

	March 31, 2018					December 31, 2017
	Principal		Percent			Principal		Percent
San Francisco Bay Area⁽³⁾
Alameda	$	8,993,618		15.5	%	$	9,869,036		18.0	%
San Mateo		8,554,723		14.8			7,800,549		14.2
San Francisco		7,755,285		13.4			8,338,720		15.1
Santa Clara		7,111,703		12.3			5,461,084		10.0
Sonoma		1,285,000		2.2			—		—
Contra Costa		1,064,345		1.8			1,511,195		2.8
Solano		—		—			109,443		0.2
		34,764,674		60.0			33,090,027		60.3

Other Northern California
Sacramento		850,000		1.5			850,000		1.6
Placer		641,571		1.1			642,913		1.2
Yolo		169,915		0.3			174,758		0.3
San Joaquin		156,696		0.3			157,039		0.3
		1,818,182		3.2			1,824,710		3.4

Northern California Total		36,582,856		63.2			34,914,737		63.7

Los Angeles & Coastal
Los Angeles		10,871,240		18.8			12,357,456		22.6
Orange		4,594,372		7.9			1,487,747		2.7
San Diego		2,004,547		3.5			2,192,746		4.0
Santa Barbara		994,774		1.7			996,768		1.8
Ventura		349,291		0.6			350,000		0.6
		18,814,224		32.5			17,384,717		31.7

Other Southern California
San Bernardino		2,110,000		3.7			2,110,000		3.9
Riverside		358,311		0.6			359,235		0.7
		2,468,311		4.3			2,469,235		4.6

Southern California Total		21,282,535		36.8			19,853,952		36.3
Total Secured Loans	$	57,865,391		100.0	%	$	54,768,689		100.0	%

(3)	Includes Silicon Valley

Scheduled maturities

Secured loans are scheduled to mature as presented in the following table as of March 31, 2018.

	Loans		Principal		Percent
2018⁽⁴⁾		13	$	15,156,189		26	%
2019		37		25,167,665		43
2020		18		8,254,558		14
2021		9		4,244,110		7
2022		11		3,469,122		6
Thereafter		4		1,434,585		3
Total future maturities		92		57,726,229		99
Matured as of March 31, 2018		1		139,162		1
Total secured loan balance		93	$	57,865,391		100	%

(4)	Loans maturing in 2018 from April 1 to December 31.

One loan with a principal balance of $139,162 was past maturity as of March 31, 2018. The loan was 334 days delinquent and designated as impaired and in non-accrual status at March 31, 2018.

Loans may be repaid or refinanced before, at or after the contractual maturity date. On matured loans, the company may continue to accept payments while pursuing collection of amounts owed from borrowers. Therefore, the above tabulation for scheduled maturities is not a forecast of future cash receipts.

Delinquency

Secured loans summarized by payment delinquency are presented in the following table as of March 31, 2018 and December 31, 2017.

	March 31, 2018				December 31, 2017
	Loans		Amount		Loans		Amount
Past Due
30-89 days		4	$	1,324,345		3	$	1,259,100
90-179 days		—		—		—		—
180 or more days		1		139,162		1		139,643
Total past due		5		1,463,507		4		1,398,743
Current		88		56,401,884		89		53,369,946
Total secured loan balance		93	$	57,865,391		93	$	54,768,689

Loans in non-accrual status

	March 31, 2018		December 31, 2017
Number of loans	$	1	$	1
Principal investment		139,162		139,643
Advances		4,369		969
Accrued Interest		8,874		11,025
Total recorded investment	$	152,405	$	151,637
Foregone interest	$	7,535	$	4,306

At March 31, 2018, and December 31, 2017, no loans were 90 or more days past due as to principal or interest and not in non-accrual status.

Impaired loans/allowance for loan losses

	March 31, 2018		December 31, 2017
Principal	$	139,162	$	139,643
Recorded investment⁽⁵⁾		152,405		151,637
Impaired loans without allowance		152,405		151,637
Impaired loans with allowance		—		—
Allowance for loan losses, impaired loans		—		—

Number of loans		1		1

(5)Recorded investment is the sum of the principal, advances, and interest accrued for financial reporting purposes.

One loan was designated as impaired at March 31, 2018 and at December 31, 2017. No allowance for loan losses has been recorded as all loans were deemed to have protective equity (i.e., low loan-to-value ratio) such that collection is reasonably assured for all amounts owing.

Impaired loans had average balances and interest income recognized and received in cash as presented in the following tables as of and for the three months ended March 31, 2018 and the year ended December 31, 2017.

	March 31, 2018		December 31, 2017
Average recorded investment	$	152,021	$	536,934
Interest income recognized		—		8,602
Interest income received in cash		3,224		4,342

Modifications and troubled debt restructurings

No loan payment modifications were made during three months ended March 31, 2018, and December 31, 2017, and no modifications were in effect at March 31, 2018 and December 31, 2017.

Commitments/loan disbursements/construction and rehabilitation loans

As of March 31, 2018, the company had no construction loans outstanding. The company may make construction loans that are not fully disbursed at loan inception. Construction loans are determined by the manager to be those loans made to borrowers for the construction of entirely new structures or dwellings, whether residential, commercial or multi-family properties. The company will approve and fund the construction loan up to a maximum loan balance. Disbursements will be made periodically as phases of the construction are completed or at such other times as the loan documents may require. Undisbursed construction funds will be held in escrow pending disbursement. Upon project completion, construction loans are reclassified as permanent loans. Funding of construction loans is limited to 10% of the loan portfolio.

At March 31, 2018, the company had no rehabilitation loans outstanding. The company may also make rehabilitation loans. A rehabilitation loan will be approved up to a maximum principal balance and, at loan inception, will be either fully or partially disbursed. If fully disbursed, a rehabilitation escrow account is established and advanced periodically as phases of the rehabilitation are completed or at such other times as the loan documents may require. If not fully disbursed, the rehabilitation loan will be funded from available cash balances and future cash receipts. The company does not maintain a separate cash reserve to fund undisbursed rehabilitation loan obligations. Rehabilitation loan proceeds are generally used to acquire and remodel single family homes for future sale or rental. Upon project completion, rehabilitation loans are reclassified as permanent loans. Funding of rehabilitation loans is limited to 15% of the loan portfolio.

Fair Value

The company does not record its loans at fair value on a recurring basis. The recorded amount of the performing loan (i.e., the loan balance) is deemed to approximate fair value as is the loan balance of loans designated impaired for which a specific reserve has not been recorded (i.e., the loan is well collateralized such that collection of the amount owed is assured, including forgone interest if any). Loans designated impaired (i.e., that are collateral dependent) are measured at fair value on a non-recurring basis. No assets or liabilities were measured at fair value on a non-recurring basis at and for the periods ended March 31, 2018 or December 31, 2017.

•

Secured loans, performing (i.e. not designated as impaired) (Level 2) - Each loan is reviewed quarterly for its delinquency, LTV adjusted for the most recent valuation of the underlying collateral, remaining term to maturity, borrower’s payment history and other factors. Also considered is the limited resale market for the loans. Most companies or individuals making similar loans as the company intend to hold the loans until maturity as the average contractual term of the loans (and the historical experience of the time the loan is outstanding due to pre-payments) is shorter than conventional mortgages. As there are no prepayment penalties to be collected, loan buyers may be hesitant to risk paying above par. Due to these factors, sales of the loans are infrequent, because an active market does not exist. The recorded amount of the performing loans (i.e. the loan balance) is deemed to approximate the fair value, although the intrinsic value of the loans would reflect a premium due to the interest to be received.

•

Secured loans, designated impaired (Level 2) - Secured loans designated impaired are deemed collateral dependent, and the fair value of the loan is the lesser of the fair value of the collateral or the enforceable amount owing under the note. The fair value of the collateral is determined by exercise of judgment based on management’s experience informed by appraisals (by licensed appraisers), brokers’ opinion of values and publicly available information on in-market transactions (Level 2 inputs).

The following methods and assumptions are used to determine the fair value of the collateral securing a loan.

Single family – Management’s preferred method for determining the fair market value of its single-family residential assets is the sale comparison method. Management primarily obtains sale comps via its subscription to the RealQuest service, but also uses free online services such as Zillow.com and other available resources to supplement this data. Sale comps are reviewed for similarity to the subject property, examining features such as proximity to subject, number of bedrooms and bathrooms, square footage, sale date, condition and year built.

If applicable sale comps are not available or deemed unreliable, management will seek additional information in the form of brokers’ opinions of value or appraisals.

Multi-family residential – Management’s preferred method for determining the aggregate retail value of its multifamily units is the sale comparison method. Sale comps are reviewed for similarity to the subject property, examining features such as proximity to subject, rental income, number of units, composition of units by the number of bedrooms and bathrooms, square footage, condition, amenities and year built.

Management’s secondary method for valuing its multifamily assets as income-producing rental operations is the direct capitalization method. In order to determine market cap rates for properties of the same class and location as the subject, management refers to published data from reliable third-party sources such as the CBRE Cap Rate Survey. Management applies the appropriate cap rate to the subject’s most recent available annual net operating income to determine the property’s value as an income-producing project. When adequate sale comps are not available or reliable net operating income information is not available or the project is under development or is under-performing to market, management will seek additional information and analysis to determine the cost to improve and the intrinsic fair value and/or management will seek additional information in the form of brokers’ opinion of value or appraisals.

Commercial buildings – Where commercial rental income information is available, management’s preferred method for determining the fair value of its commercial real estate assets is the direct capitalization method. In order to determine market cap rates for properties of the same class and location as the subject, management refers to reputable third-party sources such as the CBRE Cap Rate Survey. Management then applies the appropriate cap rate to the subject’s most recent available annual net operating income to determine the property’s value as an income-producing commercial rental project. When adequate sale comps are not available or reliable net operating income information is not available or the project is under development or is under-performing to market, management will seek additional information and analysis to determine the cost to improve and the intrinsic fair value and/or management will seek additional information in the form of brokers’ opinion of value or appraisals.

Management supplements the direct capitalization method with additional information in the form of a sale comparison analysis (where adequate sale comps are available), brokers’ opinion of value, or appraisal.

Commercial land – Commercial land has many variations/uses, thus requiring management to employ a variety of methods depending upon the unique characteristics of the subject land. Management may rely on information in the form of a sale comparison analysis (where adequate sale comps are available), brokers’ opinion of value, or appraisal.