NOTE 3 – MANAGER AND OTHER RELATED PARTIES

RMC’s allocated one percent (1%) of the profits and losses was $11,425 and $8,168 for the three months ended March 31, 2018 and 2017, respectively. The manager, at its sole discretion, provided financial support that improved net income and the return to investors in both 2018 and 2017. Total support provided, as detailed below, was approximately $628,000 and $401,000 for the three months ended March 31, 2018 and 2017, respectively.

At times, to enhance the company’s earnings, RMC has taken several actions, including:

•

charging less than the maximum allowable fees;

•

not requesting reimbursement of qualifying expenses; and/or,

•

paying company expenses, such as professional fees, that could have been obligations of the company.

Such fee waivers and cost actions were not made for the purpose of providing the company with sufficient funds to satisfy withdrawal requests, nor to meet any required level of distributions, as the company has no such required level of distributions. RMC does not use any specific criteria in determining the exact amount of fees to be waived and/or costs to be absorbed. Any decision to waive fees and/or to absorb costs, and the amount (if any) to be waived or absorbed, is made by RMC in its sole discretion.

Going forward, this support will be reduced and RMC expects support will ultimately cease. Beginning in April 2018, the manager will no longer pay for company expenses, and intends, by the fourth quarter of 2018, to begin reducing fee waivers and commence collecting reimbursable expenses, so that by July 2019 the company will be paying RMC the fees it is entitled to under the operating agreement and reimbursing RMC for expenses attributable to the company.

Fees waived and costs reimbursements for the three months ended March 31, 2018 are presented in the following table.

				Operating Expenses
	Loan Admin Fees			Mortgage Servicing Fees		Asset Management Fee			Cost Reimbursements			Professional Services			Other			Total

Chargeable/reimbursable	$	158,363		$	35,184	$	127,844		$	184,149		$	147,837		$	14,332		$	667,709
RMC Support
Waived		(158,363	)		—		(127,844	)		(184,149	)		—			—			(470,356	)
Cost Absorbed by RMC		—			—		—			—			(143,152	)		(14,247	)		(157,399	)
Total RMC Support		(158,363	)		—		(127,844	)		(184,149	)		(143,152	)		(14,247	)		(627,755	)

Net charged	$	—		$	35,184	$	—		$	—		$	4,685		$	85		$	39,954

Fees waived and costs reimbursements for the three months ended March 31, 2017 are presented in the following table.

				Operating Expenses
	Loan Admin Fees			Mortgage Servicing Fees		Asset Management Fee			Cost Reimbursements			Professional Services			Other			Total

Chargeable/reimbursable	$	86,077		$	24,310	$	86,434		$	97,605		$	119,739		$	11,808		$	425,973
RMC Support
Waived		(86,077	)		—		(86,434	)		(97,605	)		—			—			(270,116	)
Cost Absorbed by RMC		—			—		—			—			(119,739	)		(10,769	)		(130,508	)
Total RMC Support		(86,077	)		—		(86,434	)		(97,605	)		(119,739	)		(10,769	)		(400,624	)

Net charged	$	—		$	24,310	$	—		$	—		$	—		$	1,039		$	25,349

•

Loan administrative fees

RMC is entitled to receive a loan administrative fee in an amount up to one percent (1%) of the principal amount of each new loan originated or acquired on the company’s behalf by RMC for services rendered in connection with the selection and underwriting of potential loans. Such fees are payable by the company upon the closing or acquisition of each loan. Beginning in August 2015, RMC, at its sole discretion, began waiving loan administrative fees.

•

Mortgage servicing fees

RMC earns mortgage servicing fees from the company of up to one-quarter of one percent (0.25%) annually of the unpaid principal balance of the loan portfolio or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. RMC is entitled to receive these fees regardless of whether specific mortgage payments are collected. The mortgage servicing fees are accrued monthly on all loans. Remittance to RMC is made monthly unless the loan has been assigned a specific loss reserve, at which point remittance is deferred until the specific loss reserve is no longer required, or the property has been acquired by the company. An increase or decrease in this fee within the limits set by the operating agreement directly impacts the yield to the members.

•

Asset management fees

RMC is entitled to receive a monthly asset management fee for managing the company’s portfolio and operations in an amount up to three-quarters of one percent (0.75%) annually of the portion of the capital originally committed to investment in mortgages, not including leverage, and including up to two percent (2%) of working capital reserves. This amount will be recomputed annually after the second full year of operations by subtracting from the then fair value of the company’s loans plus working capital reserves, an amount equal to the outstanding debt.

RMC, at its sole discretion, may elect to accept less than the maximum amount of the asset management fee. An increase or decrease in this fee within the limits set by the operating agreement directly impacts the yield to the members. RMC intends to begin reducing these fee waivers by the fourth quarter of 2018.

•

Costs through RMC

RMC, per the operating agreement, may request reimbursement by the company for operations expense incurred on behalf of the company, including without limitation, accounting and audit fees, legal fees and expenses, postage and preparation of reports to members and out-of-pocket general and administration expenses. Certain costs (e.g. postage) can be allocated specifically to the company. Other costs are allocated on a pro-rata basis (e.g. by the company’s percentage of total capital of all mortgage funds managed by RMC). Payroll and consulting fees are broken out first based on activity, and then allocated to the company on a pro-rata basis based on percentage of capital to the total capital of all mortgage funds.

RMC, at its sole discretion, has elected to request less than the maximum amount of reimbursement for operating expenses. An increase or decrease in this reimbursement, within the limits set by the operating agreement, directly impacts the yield to the members. RMC intends to initiate collecting qualifying expenses by the fourth quarter of 2018.

•

Professional Services

Professional services consist primarily of legal, regulatory (including SEC/FINRA compliance) and audit and tax compliance expenses.

RMC, at its sole discretion, elected to reimburse the company for professional services (primarily audit and tax expense). An increase or decrease in reimbursements by RMC directly impacts the yield to the members. Beginning in April 2018, RMC will no longer provide reimbursements to the company for professional services.

Commissions and fees are paid by the borrowers to RMC.

•

Brokerage commissions, loan originations

For fees in connection with the review, selection, evaluation, negotiation and extension of loans, RMC may collect a loan brokerage commission that is expected to range from approximately 1.5% to 5% of the principal amount of each loan made during the year. Total loan brokerage commissions are limited to an amount not to exceed 4% of the total company assets per year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the company.

•

Other fees

RMC receives fees for processing, notary, document preparation, credit investigation, reconveyance and other mortgage related fees. The amounts received are customary for comparable services in the geographical area where the property securing the loan is located, payable solely by the borrower and not by the company.

In the ordinary course of business, performing loans may be assigned, in-part or in-full, between the affiliated mortgage funds at par. During the three months ended March 31, 2018, Redwood Mortgage Investors VIII, LP, an affiliated mortgage fund, assigned to the company two performing loans in-full at par value of approximately $5,890,000. The company paid cash for the loans and the affiliated mortgage fund has no continuing obligation or involvement on the loans assigned to the company. There were no loans assigned during the three months ended March 31, 2017.

Formation loan

Formation loan transactions are presented in the following table.

	For the three months ended			Since Inception
Balance, beginning of period	$	3,777,088		$	—
Formation loan advances to RMC		357,794			5,017,741
Payments received from RMC		—			(854,077	)
Early withdrawal penalties applied		(1,051	)		(29,833	)
Balance, March 31, 2018	$	4,133,831		$	4,133,831
Subscription proceeds since inception				$	71,490,002
Formation loan advance rate					7	%

The future minimum payments on the formation loan as of March 31, 2018 are presented in the following table.

2018	$	377,709
2019		377,709
2020		377,709
2021		377,709
2022		377,709
Thereafter		2,245,286
Total	$	4,133,831

RMC is required to make annual payments on the formation loan of one tenth of the principal balance outstanding at December 31 of the prior year. The formation loan is forgiven if the manager is removed and RMC is no longer receiving payments for services rendered.

Reimbursement and allocation of organization and offering expenses

The manager is reimbursed for, or the company may pay directly, organization and offering expenses (or O&O expenses) incurred in connection with the organization of the company or offering of the units including, without limitation, attorneys’ fees, accounting fees, printing costs and other selling expenses (other than sales commissions) in a total amount not exceeding 4.5% of the original purchase price of all units (other than DRIP units) sold in all offerings (hereafter, the “maximum O&O expenses”), and the manager pays any O&O expenses in excess of the maximum O&O expenses. For each calendar quarter or portion thereof after December 31, 2015, that a member holds units (other than DRIP units) and for a maximum of forty (40) such quarters, a portion of the O&O expenses borne by the company is allocated to and debited from that member’s capital account in an annual amount equal to 0.45% of the member’s original purchase price for those units, in equal quarterly installments of 0.1125% each commencing with the later of the first calendar quarter of 2016 or the first full calendar quarter after a member’s purchase of units, and continuing through the quarter in which such units are redeemed. If at any time the aggregate O&O expenses actually paid or reimbursed by the company since inception are less than the maximum O&O expenses, the company shall first reimburse the manager for any O&O expenses previously borne by it so long as it does not result in the company bearing more than the maximum O&O expenses, and any savings thereafter remaining shall be equitably allocated among (and serve to reduce any subsequent such cost allocations to) those members who have not yet received forty (40) quarterly allocations of O&O expenses, as determined in the good faith judgment of the manager. Any O&O expenses with respect to a member’s units that remain unallocated upon redemption of such units shall be reimbursed to the company by the manager.

Organization and offering expenses (O & O expenses) are summarized in the following table.

	2018			Since Inception
Balance, January 1	$	2,335,325		$	—
O&O expenses reimbursed to RMC		143,694			3,038,308
Early withdrawal penalties applied ⁽¹⁾		(696	)		(19,211	)
O&O expenses allocated⁽²⁾		(70,208	)		(452,365	)
O&O expenses reimbursed by RMC ⁽³⁾		(12,193	)		(170,810	)
Balance, March 31 ⁽⁴⁾	$	2,395,922		$	2,395,922

(1)

Early withdrawal penalties collected are applied to the next installment of principal due under the formation loan and to reduce the amount owed to RMC for O&O expenses. The amounts credited will be determined by the ratio between the amount of the formation loan and the amount of offering costs incurred by the company.

(2)

Beginning in 2016, O&O expenses reimbursed to RMC by RMI IX are allocated to members’ capital accounts over 40 quarters

(3)

RMC reimburses the company for any unallocated O&O expenses on units redeemed.

(4)

Proceeds from investors admitted to RMI IX were $67,106,564 through March 31, 2018. O&O expenses incurred by RMC and remaining to be reimbursed to RMC by RMI IX were $3,210,028.