424B3 1 orms4-424b3.htm ORM S-4 (424(B)(3) PROSPETUS orms4-424b3.htm
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-184392

PROXY STATEMENT/PROSPECTUS

Owens Mortgage Investment Fund,
a California Limited Partnership

2221 Olympic Boulevard
Walnut Creek, California 94595
February 14, 2013

Dear Owens Mortgage Investment Fund Limited Partner:

You are invited to attend a special meeting of the Limited Partners of Owens Mortgage Investment Fund, or OMIF, to be held at the Walnut Creek Marriott, 2355 N. Main Street, Walnut Creek, CA 94596 on the 3rd day of April, 2013 at 1:00p.m., local time.

I am pleased to report that after careful consideration the board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, has unanimously approved a plan to restructure our business operations to allow OMIF to qualify as a real estate investment trust, or a REIT, for U.S. federal income tax purposes.  We refer to the merger that will effect the restructuring, the related restructuring transactions and the election of REIT status as the REIT conversion. The REIT conversion is being undertaken in order to provide our Limited Partners with liquidity while maintaining the business operations and assets of OMIF.  Subject to compliance with applicable REIT rules and regulations, we intend to operate our business after the REIT conversion substantially as it is currently conducted, while leaving substantially intact the current management structure and operating policies and substantially replicating in Owens Realty Mortgage, Inc. your rights in OMIF. We do not expect a significant change in our business operations as a result of the REIT conversion.  The REIT conversion will not change our investment objectives.

The REIT conversion will include, among other things, the merger of OMIF with and into Owens Realty Mortgage, Inc., a recently formed Maryland corporation.  Shortly following closing of the merger, we intend to elect to be taxed as a REIT under the U.S. Internal Revenue Code.  In the merger, you will receive one share of common stock, par value $0.01 per share, of Owens Realty Mortgage, Inc., or Common Stock, for every 25 limited partner units of OMIF, or LP Units, that you own.  The units of OMIF representing the general partner interest of Owens Financial Group, Inc. will be treated as follows: (a) the 1,496,600 units representing the general partner  interest that was an expense of OMIF, or the Carried Interest, will be cancelled upon consummation of the merger; and (b) the approximate 1,378,256 units representing the general partner interest relating to cash contributions made by Owens Financial Group, Inc. to the capital of OMIF, or the GP Contribution Interest, will be converted into shares of Common Stock in the same manner LP Units are converted into shares of Common Stock.  The 1,000 shares of Common Stock owned by William C. Owens, the sole stockholder of Owens Realty Mortgage, Inc. prior to the REIT conversion, will be cancelled in exchange for $1,000 in the merger. Owens Realty Mortgage, Inc. will issue up to a total of 11,199,351 shares of Common Stock in connection with the REIT conversion. No fractional shares of Common Stock will be issued in connection with the merger and REIT conversion. Instead, cash adjustments will be paid in respect of any shares of Common Stock that would otherwise be issuable, and the amount of such cash adjustments shall be determined in good faith by the board of directors of Owens Realty Mortgage, Inc. We will apply to list the shares of Common Stock on the NYSE MKT LLC, or the NYSE MKT, or on a national securities exchange acceptable to Owens Realty Mortgage, Inc. Approval for listing of the shares on the NYSE MKT, or on a national securities exchange acceptable to Owens Realty Mortgage, Inc., is a condition to consummation of the merger and REIT conversion.

At the special meeting, you will be asked to consider and vote upon a proposal to adopt and approve the merger agreement and to approve the transactions contemplated thereby, which will implement the REIT conversion.
 
 
 

 

 
Your vote is very important. We cannot complete the merger unless Limited Partners holding at least a majority of the outstanding LP Units (excluding any LP Units held by Owens Financial Group, Inc.) vote to adopt and approve the merger agreement and to approve the transactions contemplated thereby.  After careful consideration, the board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, has unanimously approved the merger agreement and the transactions contemplated thereby and recommends that you vote “FOR” the adoption and approval of the merger agreement and the approval of the transactions contemplated thereby, which will implement the REIT conversion.

Whether or not you plan to attend the special meeting, please take the time to vote by completing and mailing the enclosed proxy card to us. If you do not vote, it will have the same effect as voting against the merger proposal.  Returning the proxy card does not deprive you of your right to attend the special meeting and to vote your LP Units in person.

This proxy statement/prospectus is a prospectus of Owens Realty Mortgage, Inc., as well as a proxy statement for OMIF and provides you with detailed information about the REIT conversion and the special meeting.  We urge you to read carefully this entire proxy statement/prospectus, including all of its annexes.  We especially encourage you to read the “Risk Factors” section beginning on page 19, including discussion of the following risks, among others, related to the REIT conversion:

 
Our management has no experience operating a REIT, and we cannot assure you that our management’s past experience will be sufficient to successfully manage our business as a REIT, including complying with complicated U.S. federal income tax rules and regulations.
     
 
If we fail to qualify as a REIT for U.S. federal income tax purposes, we will be taxed as a corporation and our liability for certain U.S. federal, state and local income taxes can be expected to increase significantly, which can be expected to result in a material decrease in cash available for distribution to our stockholders.
     
 
You will no longer have redemption rights after the REIT conversion.
     
 
If you sell the Common Stock you receive in the merger after the REIT conversion, the price you receive may be less than the amount you may be able to receive either through an exercise of your redemption rights or in connection with a liquidation of OMIF.

 
We appreciate your cooperation in considering and acting on the matters presented.
   
 
Sincerely,
 
 
   
 
William C. Owens
 
Chairman, President and Chief Executive Officer
 
Owens Financial Group, Inc., the sole general partner of Owens Mortgage Investment Fund,
 
a California Limited Partnership

 

 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the securities to be issued in the merger or passed upon the adequacy or accuracy of this proxy statement/prospectus.  Any representation to the contrary is a criminal offense.
 
This proxy statement/prospectus is dated February 14, 2013. This proxy statement/prospectus and accompanying form of proxy are being first mailed to Limited Partners of OMIF on or about February 14, 2013.

 
 

 



 
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
2221 Olympic Boulevard
Walnut Creek, California 94595

 
NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
To Be Held on April 3, 2013

Notice is hereby given that a special meeting of the Limited Partners of Owens Mortgage Investment Fund, a California Limited Partnership, or OMIF, will be held at the Walnut Creek Marriott, 2355 N. Main Street, Walnut Creek, CA 94596 on the 3rd day of April, 2013, at 1:00 p.m., local time, for the following purposes:
 
·  
 
To consider and vote upon a proposal to adopt and approve the agreement and plan of merger, dated January 23, 2013, by and between OMIF and Owens Realty Mortgage, Inc., a recently formed Maryland corporation, and to approve the transactions contemplated thereby, pursuant to which OMIF will be merged with and into Owens Realty Mortgage, Inc.  The merger agreement provides for Owens Realty Mortgage, Inc., as the surviving entity in the merger, to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes.  The merger agreement is included as Annex A to this proxy statement/prospectus; and
     
·      
 
To transact any other business that may properly come before the special meeting or any adjournments or postponements thereof.
     
If Limited Partners approve the merger agreement and the transactions contemplated thereby, which will implement the REIT conversion, OMIF and Owens Realty Mortgage, Inc. will not make any material changes to the merger agreement unless further Limited Partner approval is obtained.

OMIF reserves the right to cancel or defer the merger even if Limited Partners of OMIF vote to approve the merger agreement and the transactions contemplated thereby and the other conditions to the consummation of the merger are satisfied or waived, if the board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, determines that the merger is no longer in the best interests of OMIF and its Limited Partners. There is no time limit for OMIF to cancel or defer the merger.

Holders of record of the limited partner units of OMIF, or LP Units, at the close of business on January 28, 2013, the record date, are entitled to notice of, and to vote at, the special meeting and any adjournments or postponements thereof.

The merger cannot be completed unless Limited Partners holding at least a majority of the outstanding LP Units (excluding any LP Units held by Owens Financial Group, Inc.) vote to adopt and approve the merger agreement and to approve the transactions contemplated thereby. Even if you plan to attend the special meeting, we request that you sign and date the enclosed proxy card, and return it without delay in the enclosed postage-paid envelope, so that your LP Units will be represented at the special meeting.  If you do not vote, it will have the same effect as voting against the merger proposal.
 
   
 
By Order of the Board of Directors of
 
Owens Financial Group, Inc., as the sole general partner of Owens Mortgage Investment Fund,
 
a California Limited Partnership
 
 
 
William C. Owens
 
 Walnut Creek, California
 February 14, 2013
Chairman, President and Chief Executive Officer

 
 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus may contain statements that constitute forward-looking statements, and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Owens Mortgage Investment Fund, or OMIF, or Owens Realty Mortgage, Inc. to be materially different from future results, performance or achievements expressed or implied by these forward-looking statements.

In some cases you can identify forward-looking statements by terms such as “anticipate,” “project,” “may,” “intend,” “might,” “will,” “could,” “would,” “expect,” “believe,” “estimate,” “potential,” by the negative of these terms and by similar expressions. These forward-looking statements reflect OMIF’s and Owens Realty Mortgage, Inc.’s current views with respect to future events and are based on assumptions and subject to risks and uncertainties, many of which are beyond their ability to control or predict. You should not put undue reliance on any forward-looking statements. These forward-looking statements present OMIF’s and Owens Realty Mortgage, Inc.’s estimates and assumptions only as of the date of this proxy statement/prospectus.

 Important factors that could cause actual results to differ materially and adversely from those expressed or implied by the forward-looking statements include:

 
• 
general industry, economic and business conditions (which will, among other things, affect availability and cost of financing, interest rate fluctuations and operating expenses);
     
 
• 
adverse changes in the real estate markets;
     
 
• 
inflation and interest rate, market and monetary fluctuations;
     
 
• 
higher defaults on OMIF’s and Owens Realty Mortgage, Inc.’s loan portfolio than expected;
     
 
• 
Owens Realty Mortgage, Inc.’s ability to satisfy complex rules in order for it to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes;
     
 
The ability of certain of Owens Realty Mortgage, Inc.’s wholly-owned subsidiaries to qualify as taxable REIT subsidiaries for U.S. federal income tax purposes;
     
 
• 
Owens Realty Mortgage, Inc.’s ability and the ability of its subsidiaries to operate effectively within the limitations imposed by the U.S. federal income tax laws and regulations applicable to REITs;
     
 
• 
changes in U.S. federal income tax laws and regulations applicable to REITs;
     
 
• 
changes in the legal and regulatory environment in OMIF’s and Owens Realty Mortgage, Inc.’s  industry; and
     
 
• 
other risks inherent in the real estate business.
     
The above list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative but by no means exhaustive. Therefore, all forward-looking statements should be evaluated with the understanding of their inherent risk and uncertainty. Except for OMIF’s and Owens Realty Mortgage, Inc.’s ongoing obligations to disclose material information as required by U.S. federal securities laws, neither company intends to update you concerning any future revisions to any forward-looking statements to reflect events or circumstances occurring after the date of this proxy statement/prospectus.



 
 

 



TABLE OF CONTENTS

           
   
Page
 
       
QUESTIONS AND ANSWERS ABOUT THE REIT CONVERSION AND MERGER
 
 1
   
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
 
9
   
 
The Companies
 
9
   
 
The REIT Conversion
 
9
   
 
Ownership Structure After the Merger
 
10
   
 
Conflicts of Interest
 
11
   
 
Date, Time, Place and Purpose of the Special Meeting
 
12
   
 
Limited Partners Entitled to Vote
 
12
   
 
Recommendation of General Partner
 
12
   
 
Votes Required
 
12
   
 
Interests of Owens Financial Group, Inc. and Its Directors and Executive Officers, and the Directors and Executive Officers of Owens Realty Mortgage, Inc. in the REIT Conversion
 
12
   
 
LP Units Owned by Directors and Executive Officers of Owens Financial Group, Inc. and Owens Realty Mortgage, Inc.
 
13
   
 
Conditions to the Merger
 
13
   
 
Regulatory Approvals
 
14
   
 
Restrictions on the Right to Sell Owens Realty Mortgage, Inc. Common Stock
 
14
   
 
Material United States Federal Income Tax Consequences
 
14
   
 
Qualification of Owens Realty Mortgage, Inc. as a REIT
 
14
   
 
Share Purchase Program
 
15
   
SELECTED FINANCIAL DATA
 
16
   
 
Selected Financial Data
 
16
   
 
Comparative Historical and Pro Forma Per Share Data
 
17
   
RISK FACTORS
 
 19
   
 
Risks and Effects of the Merger and the REIT Conversion
 
19
   
 
Risks Related to Our Business
 
21
   
 
United States Federal Income Tax Risks Relating to Our REIT Qualification
 
31
   
 
Risks of Ownership of Our Common Stock
 
33
   
 
Risks Related to Our Organization and Structure
 
34
   
VOTING AND PROXIES
 
37
   
 
Date, Time and Place of the Special Meeting
 
37
   
 
Purpose of the Special Meeting
 
37
   
 
Recommendation of Owens Financial Group, Inc., the General Partner
 
37
   
 
Record Date and Unit Information
 
37
   
 
Quorum; Vote Required
 
38
   
 
LP Units Owned by Directors and Executive Officers of Owens Financial Group, Inc. and Owens Realty Mortgage, Inc.
 
38
   
 
Voting Procedures
 
38
   
 
Solicitation of Proxies and Expenses
 
39
   
 
Stockholder Proposals
 
39
   
MERGER PROPOSAL
 
40
   
 
Background of the REIT Conversion
 
40
   
 
Our Reasons for the REIT Conversion
 
42
   
 
Organizational Actions
 
43
   
TERMS OF THE MERGER
 
45
   
 
Structure and Completion of the Merger
 
45
   
 
Other Effects of the Merger
 
45
   
 
Conditions to the Merger
 
46
   


 
i

 

 
Termination of the Merger Agreement
 
47
   
 
Interests of Owens Financial Group, Inc. and Its Directors and Executive Officers, and the Directors and Executive Officers of Owens Realty Mortgage, Inc. in the REIT Conversion
 
47
   
 
Regulatory Approvals
 
47
   
 
Absence of Dissenters’ Rights
 
48
   
 
Restrictions on Sales of Owens Realty Mortgage, Inc. Common Stock Issued in the Merger
 
48
   
 
Accounting Treatment of the Merger
 
48
   
OTHER RESTRUCTURING TRANSACTIONS; FORMATION OF TAXABLE REIT SUBSIDIARIES
 
49
   
EXECUTIVE COMPENSATION
 
50
   
MANAGEMENT AGREEMENT
 
52
   
 
General Duties
 
52
   
 
Obligations of Owens Financial Group, Inc.
 
55
   
 
Other Activities of Owens Financial Group, Inc.
 
56
   
 
Compensation
 
56
   
 
Reimbursement of Expenses
 
57
   
 
Term and Termination
 
58
   
 
Termination for Cause
 
58
   
 
Limitation of Liability and Indemnification
 
59
   
 
Amendment
 
59
   
MARKET PRICE INFORMATION AND DISTRIBUTION POLICY
 
60
   
BUSINESS
 
61
   
 
General
 
61
   
 
Investment in Real Estate Loans
 
61
   
 
Types of Mortgage Loans
 
62
   
 
Prepayment Penalties and Exit Fees
 
63
   
 
Balloon Payment
 
63
   
 
Repayment of Loans on Sales of Properties
 
64
   
 
Variable Rate Loans
 
64
   
 
Debt Coverage Standard for Mortgage Loans
 
64
   
 
Loan Limit Amount
 
64
   
 
Loans to Affiliates
 
65
   
 
Purchase of Loans from Affiliates
 
65
   
 
Competition
 
65
   
 
Regulation
 
65
   
 
Employees
 
66
   
 
Real Estate Properties
 
66
   
 
Legal Proceedings
 
74
   
HOW WE PROTECT OUR RIGHTS AS A LENDER
 
75
   
 
Overview of Mortgages
 
75
   
 
Parties to a Deed of Trust
 
75
   
 
Foreclosure
 
75
   
 
Environmental Risks
 
76
   
 
Second Mortgage; Rights of Senior Mortgages
 
77
   
 
Bankruptcy Laws
 
78
   
 
Enforceability of Certain Provisions
 
78
   
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
 
81
   
 
Distribution Policy
 
81
   
 
Investment Policies
 
81
   
 
Financing Policies
 
84
   
 
Interested Director and Officer Transactions
 
84
   
 
Policies with Respect to Other Activities
 
85
   
 
Reporting Policies
 
85
   
CONFLICTS OF INTEREST
 
86
   


 
ii

 

MANAGEMENT
 
88
 
 
Directors and Executive Officers
 
88
 
 
Board Composition of Owens Realty Mortgage, Inc.
 
90
 
 
Board Committees of Owens Realty Mortgage, Inc.
 
91
 
 
Director Compensation for Owens Realty Mortgage, Inc.
 
93
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
94
 
 
Critical Accounting Policies
 
94
 
 
Results of Operations
 
95
 
 
Loan Portfolio
 
101
 
 
Real Estate Properties Held for Sale and Investment
 
103
 
 
Cash, Cash Equivalents, Restricted Cash and Certificates of Deposit
 
107
 
 
Interest and Other Receivables
 
107
 
 
Other Assets
 
107
 
 
Due to General Partner
 
108
 
 
Accrued Distributions Payable
 
108
 
 
Accounts Payable and Accrued Liabilities
 
108
 
 
Deferred Gains
 
108
 
 
Noncontrolling Interests
 
108
 
 
Asset Quality
 
109
 
 
Liquidity and Capital Resources
 
110
 
 
Contingency Reserves
 
114
 
RELATED PARTY TRANSACTIONS
 
115
 
PRO FORMA FINANCIAL INFORMATION
 
119
 
OWENS REALTY MORTGAGE, INC. BALANCE SHEET
 
125
 
DESCRIPTION OF OWENS REALTY MORTGAGE, INC. STOCK
 
126
 
 
General
 
126
 
 
Shares of Common Stock
 
126
 
 
Power to Reclassify Unissued Shares of Our Stock
 
127
 
 
Power to Increase or Decrease Authorized Shares of Stock and Issue Additional Shares of Common and Preferred Stock
 
127
 
 
Restrictions on Ownership and Transfer
 
127
 
 
Transfer Agent and Registrar
 
130
 
CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS
 
131
 
 
Our Board of Directors
 
131
 
 
Removal of Directors
 
131
 
 
Business Combinations
 
131
 
 
Control Share Acquisitions
 
132
 
 
Subtitle 8
 
133
 
 
Meetings of Stockholders
 
133
 
 
Amendments to Our Charter and Bylaws
 
133
 
 
Dissolution of Owens Realty Mortgage, Inc.
 
133
 
 
Advance Notice of Director Nominations and New Business
 
134
 
 
Effects of Certain Provisions of Maryland Law and of Our Charter and Bylaws
 
134
 
 
Indemnification and Limitation of Liability of Directors and Officers
 
134
 
 
REIT Qualification
 
135
 
COMPARISON OF RIGHTS OF LIMITED PARTNERS OF OMIF AND STOCKHOLDERS OF OWENS REALTY MORTGAGE, INC.
 
136
 
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
 
152
 
 
Introduction
 
152
 
 
United States Federal Income Tax Consequences of the Merger
 
153
 
 
United States Federal Income Taxation of Owens Realty Mortgage, Inc. Following the Merger
 
153
 
 
United States Federal Income Taxation of Stockholders
 
162
 
 
Taxation of Tax-Exempt Stockholders
 
164
 


 
iii

 

 
Information Reporting and Backup Withholding Tax Applicable to Stockholders
 
164
   
 
Taxation of Non-U.S. Stockholders
 
165
   
 
Possible Legislative or Other Actions Affecting Tax Considerations
 
165
   
 
Other Tax Consequences for Owens Realty Mortgage, Inc. and Its Stockholders
 
165
   
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
 
 167
   
LEGAL MATTERS
 
170
   
EXPERTS
 
170
   
WHERE YOU CAN FIND MORE INFORMATION
 
170
   
OTHER MATTERS
 
170
   
INDEX TO FINANCIAL STATEMENTS
       

 
ANNEXES
     
Annex A
 
Agreement and Plan of Merger
Annex B
 
Charter of Owens Realty Mortgage, Inc.
Annex C
 
Bylaws of Owens Realty Mortgage, Inc.
Annex D
 
Form of Management Agreement
Annex E
 
Opinion of ValuCorp International, Inc.
 


 
iv

 

 
 

 
QUESTIONS AND ANSWERS ABOUT THE REIT CONVERSION AND MERGER
 
       What follows are questions that you, as a Limited Partner of Owens Mortgage Investment Fund, a California Limited Partnership, or OMIF, may have regarding the REIT conversion (as defined below), the merger and the special meeting, and the answers to those questions. You are urged to carefully read this proxy statement/prospectus and the other documents referred to in this proxy statement/prospectus in their entirety because the information in this section may not provide all of the information that might be important to you with respect to the REIT conversion and the merger or the special meeting. Additional important information is contained in the annexes to this proxy statement/prospectus.
 
     The information contained in this proxy statement/prospectus, unless otherwise indicated, assumes the REIT conversion and all the transactions related to the REIT conversion, including the merger, will occur. When used in this proxy statement/prospectus, unless otherwise specifically stated or the context otherwise requires, the terms  “we,” “our” and “us” refer to OMIF with respect to the period prior to the merger, and Owens Realty Mortgage, Inc. with respect to the period after the merger.
     
Q:
 
What is proposed?
     
A:
 
The board of directors of Owens Financial Group, Inc. as the sole general partner of Owens Mortgage Investment Fund, a California Limited Partnership, or OMIF, has approved a plan to restructure OMIF’s business operations to enable it to elect to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes. We refer to the merger that will effect the restructuring, the related restructuring transactions and the election of REIT status as the REIT conversion. Following the REIT conversion, subject to compliance with applicable REIT rules and regulations, we intend to continue our real estate lending business consistent with past practices. We do not expect a significant change in our business operations as a result of the REIT conversion. The REIT conversion will not change our investment objectives. We currently do not plan to raise additional capital through equity financings, except through a distribution reinvestment plan we intend to adopt.
     
Q:
 
Why are we proposing the REIT conversion?
     
A:
 
We are proposing the REIT conversion primarily to provide liquidity for Limited Partners.  We will apply to list the shares of common stock, par value $0.01 per share, of Owens Realty Mortgage, Inc., or the Common Stock, on the NYSE MKT LLC, or the NYSE MKT, or on a national securities exchange acceptable to Owens Realty Mortgage, Inc.  Approval for listing of the shares on the NYSE MKT, or on a national securities exchange acceptable to Owens Realty Mortgage, Inc., is a condition to consummation of the merger and REIT conversion.
     
Q:
 
What is a REIT?
     
A:
 
A REIT is a corporation or other entity that derives most of its income from real estate loans and real property and whose assets predominantly consist of such loans and property. The corporation must make a special election for U.S. federal income tax purposes to be treated as a REIT. Subject to a number of significant exceptions, a corporation that qualifies as a REIT generally is not subject to U.S. federal corporate income taxes on income and gain that it distributes to its stockholders, thereby reducing its corporate-level taxes.
     
Q:
 
What will happen in the REIT conversion?
     
A:
 
The REIT conversion, if approved, will involve several restructuring transactions:
     
   
The Merger
     
   
The principal restructuring transaction is the merger of OMIF with and into Owens Realty Mortgage, Inc., a recently formed Maryland corporation.  Owens Realty Mortgage, Inc. will be the surviving entity in the merger and will succeed to and continue the business of OMIF. As a consequence of the merger and the REIT conversion:



 
1

 
 

 
     
   
• every 25 limited partner units of OMIF, or LP Units, will be converted into one share of Common Stock.   The units of OMIF representing the general partner interest of Owens Financial Group, Inc. will be treated as follows: (a) the 1,496,600 units representing the general partner  interest that is an expense of OMIF, or the Carried Interest, will be cancelled upon consummation of the merger; and (b) the approximate 1,378,256  units representing the general partner interest relating to cash contributions made by Owens Financial Group, Inc. to the capital of OMIF, or the GP Contribution Interest, will be converted into shares of Common Stock in the same manner LP Units are converted into shares of Common Stock. The 1,000 shares of Common Stock owned by William C. Owens, the sole stockholder of Owens Realty Mortgage, Inc. prior to the REIT conversion, will be cancelled in exchange for $1,000 in the merger. No fractional shares of Common Stock will be issued in connection with the merger and REIT conversion. Instead, cash adjustments will be paid in respect of any shares of Common Stock that would otherwise be issuable, and the amount of such cash adjustments shall be determined in good faith by the board of directors of Owens Realty Mortgage, Inc.;
     
   
•  the shares of Common Stock will trade on the NYSE MKT or on a national securities exchange acceptable to Owens Realty Mortgage, Inc., as approval for listing of the shares is a condition to consummation of the merger and REIT conversion;
     
   
• Owens Realty Mortgage, Inc. will succeed to and continue to operate, directly or indirectly, all of the existing business of OMIF;
     
   
• your rights as stockholders of Owens Realty Mortgage, Inc. will be governed by Maryland law and the charter and bylaws of Owens Realty Mortgage, Inc.; and
     
   
• Owens Financial Group, Inc. will continue to manage our day-to-day business operations, subject to the oversight of the board of directors of Owens Realty Mortgage, Inc., pursuant to the terms and conditions of a management agreement, or the Management Agreement.
     
   
We have attached a copy of the merger agreement as Annex A to this proxy statement/prospectus. We have also attached copies of the charter and the bylaws of Owens Realty Mortgage, Inc., and the form of Management Agreement as Annex B, Annex C and Annex D, respectively, to this proxy statement/prospectus. If Limited Partners approve the merger agreement and the transactions contemplated thereby, which will implement the REIT conversion, we will not make any material changes to the merger agreement unless further Limited Partner approval is obtained.  We urge you to read each of these documents carefully. While our management structure will be substantially similar to that of OMIF, there are certain minimal differences.  See “Comparison of Rights of Limited Partners of OMIF and Stockholders of Owens Realty Mortgage, Inc.
     
   
Other Important Restructuring Transactions
     
   
In connection with the REIT conversion, OMIF intends to transfer, directly or indirectly, various properties to one or more wholly-owned corporate subsidiaries of Owens Realty Mortgage, Inc. The transferred assets will consist primarily of real property previously foreclosed upon by OMIF that may be sold to third parties in the near future. Properties held for investment will not be transferred to corporate subsidiaries. The composition and value of any assets to be transferred can only be determined at the time of the REIT conversion.  When we transfer certain properties to wholly-owned corporate subsidiaries, these wholly-owned subsidiaries will elect to be treated as “taxable REIT subsidiaries” effective upon the REIT conversion. Income from these wholly-owned taxable REIT subsidiaries will be either distributed to Owens Realty Mortgage, Inc., where it will contribute to income available for distribution to stockholders or be reinvested into Owens Realty Mortgage, Inc.’s business, or be retained by the taxable REIT subsidiaries and used to fund their operations. In lieu of placing properties in taxable REIT subsidiaries, we may also sell foreclosed properties prior to the REIT conversion, which could result in a lower amount realized by us than if such properties were sold at a later date.
 
A taxable REIT subsidiary is a corporation in which a REIT owns stock and which joins the REIT in filing a taxable REIT subsidiary election on Internal Revenue Service, or IRS, Form 8875. A taxable REIT subsidiary also includes any corporation in which a taxable REIT subsidiary owns securities representing more than 35% of the voting power or more than 35% of the value of such corporation’s outstanding securities. A taxable REIT subsidiary generally can conduct activities that generate gross income that would not be qualifying income for purposes of the gross income tests



 
2

 
 
 
    applicable to REITs and generally can hold assets that would not be qualifying assets for purposes of the quarterly asset tests applicable to REITs. As the name implies, taxable REIT subsidiaries are subject to corporate income tax on the income they recognize and, unlike a REIT, they are not allowed a deduction for dividends they pay on their stock.
     
Q:
 
What alternatives were considered to a REIT conversion?
     
A:
 
As alternatives to a REIT conversion, we considered maintaining the current operating structure as well as a liquidation of OMIF. As discussed herein, we concluded that maintaining the current structure was not in the best interests of Limited Partners as it provides only limited liquidity and reduces the availability of funds for investment in real estate loans.
 
We also evaluated liquidation as an alternative. We engaged an independent valuation firm, ValuCorp International, Inc., or ValuCorp, to prepare an analysis of the value of an LP Unit in a liquidation scenario as of June 30, 2012. In the opinion of ValuCorp, the maximum value obtainable under a liquidation scenario would be $0.49964 per LP Unit and the actual value could be substantially lower under certain circumstances. Owens Financial Group, Inc., the sole general partner of OMIF, based on its experience in commercial real estate lending, also believes that any liquidation of OMIF would result in a substantial loss of unit value. Therefore, we have decided not to pursue liquidation.
 
A copy of ValuCorp’s opinion is attached as Annex E to this proxy statement/prospectus. The full text of the ValuCorp report has been filed with the Securities and Exchange Commission, or the SEC, as an exhibit to the registration statement of which this proxy statement/prospectus is a part.
     
Q:
 
Will our business operations change after the REIT conversion?
     
A:
 
Subject to compliance with applicable REIT rules and regulations, we plan to operate our business after the REIT conversion substantially as it is currently conducted. We do not expect any material change in our business operations as a result of the REIT conversion. Our investment policies, as set forth in the Seventh Amended and Restated Limited Partnership Agreement for OMIF, or the Partnership Agreement, are not expected to change substantially and following the REIT conversion may not be changed without the approval of the holders of a majority of the outstanding shares of stock of Owens Realty Mortgage, Inc. Subject to compliance with applicable REIT rules and regulations, we expect to continue to follow our current loan underwriting guidelines and substantially all of our existing investment policies. We currently do not plan to raise additional capital through equity financings, except through a distribution reinvestment plan we intend to adopt. Owens Financial Group, Inc. will continue to serve as our manager after the REIT conversion. Unlike before, however, Owens Financial Group, Inc. will manage our business subject to the oversight of the board of directors of Owens Realty Mortgage, Inc. and pursuant to the terms and conditions of a Management Agreement, the form of which is attached as Annex D to this proxy statement/prospectus.
     
Q:
 
What are the material terms of the Management Agreement to be entered into with Owens Financial Group, Inc.?
     
A:
 
General.  Owens Financial Group, Inc. will implement our business strategies on a day-to-day basis subject to the oversight of the board of directors of Owens Realty Mortgage, Inc. There are no material differences between Owens Realty Mortgage, Inc.’s investment and operating policies and the fees payable to Owens Financial Group, Inc. under the Management Agreement, and the management provisions currently set forth in the Partnership Agreement. See “Management Agreement.”
     
   
Compensation.  Owens Financial Group, Inc. will be compensated based on the various services it provides according to the Management Agreement and charter of Owens Realty Mortgage, Inc.  The compensation structure under the Management Agreement and the charter is substantially the same as currently set forth in the Partnership Agreement. The fees payable by us to Owens Financial Group, Inc. may not be changed without the approval of the holders of a majority of the outstanding shares of stock of Owens Realty Mortgage, Inc. (subject to certain limited exceptions set


 
3

 
 

 
    forth in the Management Agreement and charter of Owens Financial Group, Inc.). Owens Financial Group, Inc. earned a total of approximately $1,425,000 for the nine months ended September 30, 2012 and approximately $2,577,000 and $2,457,000 for each of the fiscal years ended December 31, 2011 and 2010, respectively, for managing OMIF. In addition, Owens Financial Group, Inc. earned a total of approximately $60,000, $955,000 and $227,000 in fees from borrowers for the nine months ended September 30, 2012 and the fiscal years ended December 31, 2011 and 2010, respectively. The total amount earned by Owens Financial Group, Inc. that is paid by borrowers represents fees on loans originated or extended for OMIF (including loan fees, late payment charges and miscellaneous loan fees). Owens Financial Group, Inc. currently does not manage funds other than OMIF, although it may engage in such activities in the future.
     
   
Term; Termination. The Management Agreement will continue in force for the duration of the existence of Owens Realty Mortgage, Inc. (which is currently December 31, 2034), unless earlier terminated in accordance with the Management Agreement. The Management Agreement will be terminated upon the affirmative vote of the holders of a majority of the outstanding shares of Common Stock. This provision is similar to the current Partnership Agreement, which permits Limited Partners holding a majority of outstanding LP Units (excluding  LP Units held by Owens Financial Group, Inc.) to terminate Owens Financial Group, Inc. as a general partner. In addition, Owens Realty Mortgage, Inc. may terminate the Management Agreement for cause effective upon 30 days’ prior written notice, and Owens Financial Group, Inc. may terminate the Management Agreement for cause effective upon 60 days’ prior written notice. Owens Financial Group, Inc. may also terminate the Management Agreement upon an amendment to Owens Realty Mortgage, Inc.’s charter that modifies the compensation to which Owens Financial Group, Inc. is entitled. The Management Agreement does not contain any termination penalty or payment provisions.
     
Q:
 
Will the REIT conversion result in additional benefits to Owens Financial Group, Inc.?
     
A:
 
Yes. If the REIT conversion is consummated, OMIF’s total capital will not continue to be reduced to satisfy redemption requests or be returned in its entirety to members in the event of liquidation. Instead, the capital may be used to invest in new loans from which Owens Financial Group, Inc. can continue to earn fees.
 
Owens Financial Group, Inc. will continue to face the same conflicts of interest in its role as manager of Owens Realty Mortgage, Inc. as currently exist in connection with its management of OMIF. See “Conflicts of Interest.”
     
Q:
 
Will I continue to have redemption rights after the REIT conversion?
     
A:
 
No. Under the Partnership Agreement, you currently have the right to withdraw as a member and require OMIF to redeem your LP Units upon withdrawal, subject to certain conditions and limitations, including a maximum limit of $100,000 by any Limited Partner during any calendar quarter. In addition, in no event shall the sum of all withdrawals permitted under the Partnership Agreement, together with certain permitted transfers and distributions of net proceeds under the Partnership Agreement, exceed 10% of the aggregate capital accounts of all outstanding LP Units in any calendar year, except upon a vote of the Limited Partners to dissolve OMIF. The redemption demands have exceeded this limit. Consequently, many Limited Partners who would like to attain liquidity for their LP Units have been unable to do so within the timeframe they desire. As of September 30, 2012, Limited Partners holding approximately 108,200,000 LP Units, representing approximately 38% of all outstanding LP Units and units represented by the Carried Interest and GP Contribution Interest, had requested withdrawals. These requests to redeem LP Units total approximately $102,192,000 (tax basis) and represent approximately 38% of OMIF’s total tax basis capital.
 
You will not have any redemption rights as a stockholder of Owens Realty Mortgage, Inc. after the REIT conversion. Upon completion of the REIT conversion, Limited Partners in effect will surrender any outstanding redemption requests.  However, the shares of Common Stock to be issued in the merger will trade on the NYSE MKT, or on a national securities exchange acceptable to Owens Realty Mortgage, Inc., as approval for listing of the shares is a condition to consummation of the merger and REIT conversion.
     
Q:
 
How will my rights as an equity holder change after the REIT conversion?
     


 
4

 

A:
 
Your current rights as a Limited Partner of OMIF are governed primarily by the Partnership Agreement. If the merger proposal is approved by Limited Partners of OMIF and the merger is consummated, you will become a stockholder of Owens Realty Mortgage, Inc., and your rights as a stockholder of Owens Realty Mortgage, Inc., will be governed by the Maryland General Corporation Law, or the MGCL, and the charter and bylaws of Owens Realty Mortgage, Inc.
 
The REIT conversion has been structured to preserve in all material respects your rights in OMIF by replicating them in Owens Realty Mortgage, Inc. In that regard, your rights to vote on certain matters as a stockholder of Owens Realty Mortgage, Inc., will be substantially similar to your voting rights as a Limited Partner of OMIF.  However, some important differences exist between your rights as a Limited Partner of OMIF and your rights as a stockholder of Owens Realty Mortgage, Inc.
 
You will not have redemption rights after the REIT conversion. Another difference is that the charter of Owens Realty Mortgage, Inc. prohibits ownership, directly or by the attribution provisions of the U.S. federal tax laws, by any person of more than a specified percentage of the outstanding shares of Owens Realty Mortgage, Inc.’s stock. This ownership limitation is being implemented primarily to satisfy certain requirements under the Internal Revenue Code of 1986, as amended, or the Code, that are applicable to REITs in general and to otherwise address concerns relating to stock ownership. A chart comparing your rights as a stockholder of Owens Realty Mortgage, Inc., and a Limited Partner of OMIF is set forth under “Comparison of Rights of Limited Partners of OMIF and Stockholders of Owens Realty Mortgage, Inc.”
 
Copies of the charter and the bylaws of Owens Realty Mortgage, Inc. are attached as Annex B and Annex C, respectively, to this proxy statement/prospectus.
     
Q:
 
What will I receive in connection with the merger?
     
A:
 
At the time of the completion of the merger, you will receive one share of Common Stock for every 25 LP Units that you hold. The units of OMIF representing the general partner interest of Owens Financial Group, Inc. will be treated as follows: (a) the 1,496,600 units representing the Carried Interest will be cancelled upon consummation of the merger; and (b) the approximate 1,378,256 units representing the GP Contribution Interest will be converted into shares of Common Stock in the same manner LP Units are converted into shares of Common Stock. The 1,000 shares of Common Stock owned by William C. Owens, the sole stockholder of Owens Realty Mortgage, Inc. prior to the REIT conversion, will be cancelled in exchange for $1,000 in the merger. We will apply to list the shares of Common Stock on the NYSE MKT or on a national securities exchange acceptable to Owens Realty Mortgage, Inc. Approval for listing of the shares of Common Stock on the NYSE MKT, or on a national securities exchange acceptable to Owens Realty Mortgage, Inc., is a condition to consummation of the merger and REIT conversion.
     
Q:
 
Will I receive fractional shares of the Common Stock in connection with the merger?
     
A:
 
No fractional shares of Common Stock will be issued in connection with the merger and REIT conversion. Instead, cash adjustments will be paid in respect of any shares of Common Stock that would otherwise be issuable, and the amount of such cash adjustments shall be determined in good faith by the board of directors of Owens Realty Mortgage, Inc. As promptly as practicable after the determination of the amount of cash, if any, to be paid to Limited Partners of OMIF, Owens Realty Mortgage, Inc. will forward payments to such Limited Partners.
     
Q:
 
Will Owens Realty Mortgage, Inc. make distributions in the future?
     
A:
 
We currently intend to distribute substantially all REIT taxable income and net capital gain on a monthly basis to the extent practicable, consistent with OMIF’s current policy to distribute all of its net income available for distribution. “Net income available for distribution” means profits and losses reduced by amounts set aside for the restoration or creation of reserves and increased by the reduction or elimination of reserves at the discretion of Owens Financial Group, Inc. Although we generally do not plan to make distributions in excess of our REIT taxable income and any net capital gain, we may do so from time to time. As a REIT, Owens Realty Mortgage, Inc. generally will be required to distribute annually at least 90% of its REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gain). REIT taxable income


 
5

 
 

 
    generally is the net income of a REIT determined for U.S. federal income tax purposes subject to specified adjustments, including a deduction for dividends paid and excluding net capital gain. A distribution of REIT taxable income or net capital gain generally will be a taxable distribution to you and will not represent a return of capital for U.S. federal income tax purposes. If we make distributions in excess of our REIT taxable income and any net capital gain, the excess portion of these distributions generally would represent a non-taxable return of capital for such purposes up to your tax basis in your Owens Realty Mortgage, Inc. stock and then generally capital gain. The portion of any distribution treated as a return of capital for U.S. federal income tax purposes would reduce your tax basis in your Owens Realty Mortgage, Inc. stock by a corresponding amount. If the REIT conversion is completed, we plan to continue to make distributions. The actual amount and timing of the distributions will be as authorized by the board of directors of, and declared by, Owens Realty Mortgage, Inc., and will depend on, among other factors, our financial condition and earnings. In order to maintain our status as a REIT, we may be required to make distributions in excess of available cash. In this situation, we expect we may need to borrow funds or raise capital by selling assets to meet our distribution requirements.
 
 
If you dispose of your shares of Common Stock before the close of business on the record date for a distribution payment, you will not receive that distribution payment.
     
Q:
 
Are there risks I should consider in deciding whether to vote for the merger proposal?
     
A:
 
Yes, in evaluating the merger proposal, you should consider carefully the following factors:
     
   
• You will lose your redemption rights in connection with the REIT conversion.  The Partnership Agreement provides that in no event shall the sum of all withdrawals permitted under the Partnership Agreement, together with certain permitted transfers and distributions of net proceeds under the Partnership Agreement, exceed 10% of the aggregate capital accounts of all outstanding LP Units in any calendar year, except upon a vote of the Limited Partners to dissolve OMIF. The redemption demands have exceeded this limit. Consequently, many Limited Partners who would like to attain liquidity for their LP Units have been unable to do so within the timeframe they desire. As of September 30, 2012, Limited Partners holding approximately 108,200,000 LP Units, representing approximately 38% of all outstanding LP Units and units represented by the Carried Interest and GP Contribution Interest, had requested withdrawals. These requests to redeem LP Units total approximately $102,192,000 (tax basis) and represent approximately 38% of OMIF’s total tax basis capital. There may be significant initial downward pressure on the market price of the Common Stock after the REIT conversion because of these redemption requests and, as a result, you may receive less upon a sale of the Common Stock than what you may be able to receive either by exercising your redemption rights or in connection with a liquidation of OMIF.
     
   
• Based upon its intended qualification as a non-publicly traded partnership, the U.S. federal income tax rules governing OMIF are less complex compared to such rules governing REITs. Because we have never operated as a REIT and our management has no experience managing a REIT and complying with the complicated REIT qualification requirements, we may not be able to successfully manage our business as a REIT. Moreover, assuming OMIF is not treated as a publicly traded partnership, it is not subject to U.S. federal income taxes. In contrast, Owens Realty Mortgage, Inc. will be subject to U.S. federal income taxation if it fails to qualify as a REIT and, even if it qualifies as a REIT, a portion of its income may be subject to U.S. federal income taxation.   See “Material United States Federal Income Tax Consequences.”
     
   
• Owens Financial Group, Inc. will continue to face the same conflicts of interest in managing the affairs of Owens Realty Mortgage, Inc. as currently exist in connection with its management of OMIF. For example, Owens Financial Group, Inc. will face conflicts of interest arising from our fee structure as its compensation will be based on the volume and size of loans selected for us. Owens Financial Group, Inc. will also face conflicts of interest concerning the allocation of its time between our activities and its other activities, including managing other funds with objectives and policies similar to ours. See “Conflicts of Interest.”
     
   
• Owens Realty Mortgage, Inc. will be dissolved on December 31, 2034 unless the charter of Owens Realty Mortgage, Inc. is amended. As we move closer to the dissolution date, we expect to stop making new loans and we expect that our stock price will approach our book value per share. We cannot assure you that the market price of our Common Stock will not fluctuate or decline significantly in the future.



 
6

 
 

 
     
     
   
• We will incur certain increased costs as a result of being a listed company.
     
   
• You should also consider the specific factors discussed in the “Risk Factors” section beginning on page 19.
     
Q:
 
What do I need to do now?
     
A:
 
You should carefully read and consider the information contained in this proxy statement/prospectus, including its annexes. You should then complete and sign the proxy card and return it in the enclosed postage-paid envelope as soon as possible so that your LP Units can be voted at the special meeting. If you do not include instructions on how to vote your properly signed proxy, your LP Units will be voted “FOR” the adoption and approval of the merger agreement and the approval of the transactions contemplated thereby.
     
Q:
 
May I vote in person?
     
A:
 
Yes. You may attend the special meeting and vote your LP Units in person whether or not you have already authorized a proxy to vote your LP Units.
     
Q:
 
May I change my vote after I have mailed my signed proxy card?
     
A:
 
Yes. You may change your vote at any time before your proxy is voted at the special meeting. You can do this in one of three ways. First, you can send a written notice stating that you would like to revoke your proxy to our general partner, Owens Financial Group, Inc., at 2221 Olympic Boulevard, Walnut Creek, California 94595. Second, you can complete and return a new proxy card, dated as of a later date. Third, you can attend the special meeting and vote in person. Your attendance alone at the special meeting will not revoke your proxy.
     
Q:
 
What vote is required to approve the merger proposal?
     
A:
 
The adoption and approval of the merger agreement and the approval of the transactions contemplated thereby require the affirmative vote of Limited Partners holding at least a majority of the outstanding LP Units (excluding any LP Units held by Owens Financial Group, Inc.) as of the close of business on the record date. If you do not vote, it will have the same effect as voting against the merger proposal. As of the close of business on the record date, the affirmative vote of Limited Partners holding at least 138,782,045 LP Units will be required to approve the merger proposal.
     
Q:
 
When do we expect to complete the merger?
     
A:
 
We are working toward completing the merger as quickly as possible. We currently expect to complete the merger as soon as practicable after the requisite approval is obtained at the special meeting and the closing conditions are satisfied or waived.
 
However, OMIF reserves the right to cancel or defer the merger even if Limited Partners vote to approve the merger proposal and the other conditions to the consummation of the merger are satisfied or waived if the board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, determines that the merger is no longer in the best interests of OMIF and the Limited Partners. There is no time limit for OMIF to cancel or defer the merger.
     
Q:
 
Am I entitled to dissenters’ rights?
     
A:
 
You are not entitled to dissenters’ or appraisal rights in connection with the merger and REIT conversion. See “Terms of the Merger – Absence of Dissenters’ Rights.”
     
Q:
 
Where will my new Common Stock be traded?
     
A:
 
Owens Realty Mortgage, Inc. will apply to have its shares of Common Stock listed on the NYSE MKT or on a national securities exchange acceptable to Owens Realty Mortgage, Inc. If the shares of Common Stock are not approved for listing on the NYSE MKT or on a national securities

 
7

 
 
 
 
    exchange acceptable to Owens Realty Mortgage, Inc., we will not complete the merger.
     
Q:
 
Who is paying for the expenses incurred in connection with the REIT conversion?
     
A:
 
OMIF will pay for all expenses incurred in connection with the REIT conversion.
     
Q:
 
Who can help answer my questions?
     
A:
 
If you have any questions about the merger or the REIT conversion, or if you need additional copies of this proxy statement/prospectus, you should contact our proxy solicitor at:
     
     
 
Georgeson Inc.
199 Water Street, 26th Floor
New York, NY  10038
Toll Free Number:  866-821-0284
 

 
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SUMMARY OF THE PROXY STATEMENT/PROSPECTUS

This summary highlights selected information from this proxy statement/prospectus and may not contain all of the information that is important to you. You should carefully read this entire proxy statement/prospectus and the other documents to which this proxy statement/prospectus refers in order to fully understand the REIT conversion and the merger. In particular, you should read the annexes attached to this proxy statement/prospectus, including the merger agreement attached as Annex A and the form of Management Agreement attached as Annex D. You also should read the charter and the bylaws of Owens Realty Mortgage, Inc., which are attached as Annex B and Annex C, respectively, because they, along with the MGCL, will govern your rights as a stockholder of Owens Realty Mortgage, Inc. following the merger.

The information contained in this proxy statement/prospectus, unless otherwise indicated, assumes the REIT conversion and all the transactions related to the REIT conversion, including the merger, will occur. When used in this proxy statement/prospectus, unless otherwise specifically stated or the context otherwise requires, the terms “we,” “our” and “us” refer to OMIF with respect to the period before the merger and the REIT conversion, and Owens Realty Mortgage, Inc. with respect to the period after the REIT conversion.

The Companies

OMIF is a California Limited Partnership that invests in first, second, third, wraparound, participating and construction mortgage and deed of trust loans and loans on leasehold interest mortgages and deeds of trust. Our sole general partner is Owens Financial Group, Inc., which arranges, services and maintains the loan portfolio for OMIF. OMIF’s mortgage and deed of trust loans are secured by mortgages and deeds of trusts on unimproved, improved, income-producing and non-income-producing real property, such as condominium projects, apartment complexes, shopping centers, office buildings, and other commercial or industrial properties.  No single loan may exceed 10% of total OMIF assets as of the date the loan is made.  In addition, as of September 30, 2012, OMIF held title to 32 real estate properties that were acquired through foreclosure, including 17 within majority- or wholly-owned limited liability companies. As of September 30, 2012, the total carrying amount of these properties was approximately $136,889,000.  Twenty-one of the properties were being held for long-term investment and the remaining eleven properties were being marketed for sale. OMIF also has a 50% ownership interest (accounted for under the equity method) in a limited liability company that owns property located in Santa Clara, California.

Owens Realty Mortgage, Inc. is a Maryland corporation recently formed for the sole purpose of converting OMIF into a REIT. Upon the consummation of the merger, Owens Realty Mortgage, Inc. will succeed to and continue the business of OMIF and will make an election to be taxed as a REIT for U.S. federal income tax purposes. Owens Realty Mortgage, Inc. has conducted no business to date other than that incident to facilitating the REIT conversion.

The principal executive offices of both OMIF and Owens Realty Mortgage, Inc. are located at 2221 Olympic Boulevard, Walnut Creek, California 94595. The telephone number at that location is (925) 935-3840. Owens Financial Group, Inc. maintains a website at http://www.owensfinancial.com/, which contains information concerning OMIF under the tab labeled “OMIF Investors.”  Information contained in the website does not constitute part of this proxy statement/prospectus.

The REIT Conversion

The board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, has approved a plan, pending the approval of the Limited Partners of OMIF, to restructure our business operations so that Owens Realty Mortgage, Inc., as the successor to the assets, liabilities and business operations of OMIF following the merger, may qualify as a REIT for U.S. federal income tax purposes. We refer to the merger, the related restructuring transactions and the election of REIT status by Owens Realty Mortgage, Inc. in this proxy statement/prospectus as the REIT conversion. The REIT conversion is designed to enable Owens Realty Mortgage, Inc., as the business successor of OMIF, to reposition its assets, liabilities and business operations in a manner that will make it eligible to elect to be treated as a REIT for U.S. federal income tax purposes. We have received an opinion from counsel that Owens Realty Mortgage, Inc.’s organization and proposed method of operation will enable Owens Realty Mortgage, Inc. to meet the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes for the taxable year 2013 and thereafter. It is a condition to closing that we 
 
 
9

 
 
receive from counsel at the closing of the merger an opinion that Owens Realty Mortgage, Inc.’s organization and proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes for the taxable year 2013 and thereafter. If Owens Realty Mortgage, Inc. qualifies as a REIT, it will become subject to certain significant requirements as further discussed in “Other Restructuring Transactions; Formation of Taxable REIT Subsidiaries” and “Material United States Federal Income Tax Consequences — United States Federal Income Taxation of Owens Realty Mortgage, Inc. Following the Merger. Following the merger, Owens Realty Mortgage, Inc. generally will not be subject to corporate-level U.S. federal income tax on that portion of its REIT taxable income and net capital gain that is distributed to its stockholders. Owens Realty Mortgage, Inc. intends to distribute on a monthly basis substantially all of its income and gain to its stockholders. Subject to the referenced exceptions, this treatment generally would eliminate the U.S. federal “double taxation” on earnings (at the corporate and stockholder levels) that generally results from investments in corporations.

We are distributing this proxy statement/prospectus to holders of LP Units in connection with the solicitation of proxies by the board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, for Limited Partners to consider and vote upon a proposal to adopt and approve the merger agreement and to approve the transactions contemplated thereby, which will initiate the REIT conversion and the related restructuring transactions. A copy of the merger agreement is attached as Annex A to this proxy statement/prospectus. If Limited Partners approve the merger agreement, we will not make any material changes to it unless further Limited Partner approval is obtained.

OMIF reserves the right to cancel or defer the merger even if Limited Partners of OMIF vote to approve the merger agreement and the transactions contemplated thereby and the other conditions to the consummation of the merger are satisfied or waived if the board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, determines that the merger is no longer in the best interests of OMIF and its Limited Partners. There is no time limit for OMIF to cancel or defer the merger.

We estimate that one-time transaction costs incurred in connection with the REIT conversion will be approximately $1,200,000. We will pay for all costs incurred in connection with the REIT conversion, whether or not the conversion is approved and consummated.

Ownership Structure After the Merger

The following chart shows the ownership structure of Owens Realty Mortgage, Inc. immediately following the merger. The following chart also shows the ownership structure of Owens Financial Group, Inc., and affiliated entities immediately following the merger. Except to reflect (a) Owens Realty Mortgage, Inc. as the successor entity to OMIF in the merger and (b) the dissolution of Owens Securities Corp. Broker-Dealer (which was 100% owned by Owens Financial Group, Inc.), the ownership structure of Owens Financial Group, Inc. immediately after the merger will be identical to the ownership structure immediately prior to the merger.



 
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** Includes 13,736 shares of Common Stock held by Investors Yield, Inc. (a California Trust Company), a wholly owned subsidiary of Owens Financial Group, Inc.
++ Percentage ownerships are based on 11,198,120 shares of Common Stock outstanding (based on LP Units and units representing the GP Contribution Interest outstanding as of December 31, 2012)

Conflicts of Interest (page 86)

We will continue to depend substantially on Owens Financial Group, Inc. to manage our operations after the REIT conversion. The Management Agreement governing our relationship with Owens Financial Group, Inc. was negotiated by related parties and may not reflect terms as favorable as those subject to arm’s-length bargaining. Owens Financial Group, Inc. will face the same conflicts of interest in managing the affairs of Owens Realty Mortgage, Inc. as currently exist in connection with its management of OMIF, including:

 
• 
Owens Financial Group, Inc. will receive substantial fees from borrowers for obtaining, processing, making and brokering, and managing real estate loans, as well as for other services. Many of these fees are paid on an up-front basis. Owens Financial Group, Inc.’s compensation is based on the volume and size of the real estate loans selected for us, regardless of their performance, which could create an incentive to make or extend riskier loans. Our interests may diverge from those of Owens Financial Group, Inc. and William C. Owens, who directly owns 56.0976% of Owens Financial Group, Inc., in deciding whether we should invest in a particular loan. Owens Financial Group, Inc. will receive an immediate benefit through the payment of fees from borrowers irrespective of the risk we may bear in connection with our ability to collect on such loans.
     
 
• 
Owens Financial Group, Inc. will receive fees from borrowers that would otherwise increase our returns. Because Owens Financial Group, Inc. receives all of these fees, our interests will diverge from those of Owens Financial Group, Inc. when Owens Financial Group, Inc. determines whether we should charge higher interest rates or Owens Financial Group, Inc. should receive higher fees from borrowers.
     
 
 
 
11

 
 
 
 Owens Financial Group, Inc. must allocate its time between our activities and its other activities. Additional funds may be formed or managed by Owens Financial Group, Inc. in the future. Owens Financial Group, Inc. has discretion in determining which loans are appropriate for us and which are appropriate for another company that it may manage. Moreover, Owens Financial Group, Inc. has no obligation to provide us with any particular opportunities or even a pro rata share of opportunities afforded to other companies it may manage.
     
 

Date, Time, Place and Purpose of the Special Meeting (page 37)

The special meeting will be held at the Walnut Creek Marriott, 2355 N. Main Street, Walnut Creek, CA 94596 on April 3, 2013 at 1:00 p.m., local time, to consider and vote upon the merger proposal described in the notice of special meeting of Limited Partners of OMIF.

Limited Partners Entitled to Vote (page 37)

The board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, has fixed the close of business on January 28, 2013as the record date for the determination of Limited Partners entitled to receive notice of, and to vote at, the special meeting. As of the close of business on the record date, there were approximately 277,564,089 LP Units of OMIF outstanding and entitled to vote and approximately 2,463 holders of record entitled to vote.

Recommendation of General Partner (page 37)

The board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, believes that the REIT conversion is advisable for OMIF and its Limited Partners and unanimously recommends that you vote “FOR” the adoption and approval of the merger agreement and the approval of the transactions contemplated thereby.

Votes Required

The adoption and approval of the merger agreement and the approval of the transactions contemplated thereby, which will implement the REIT conversion, requires the affirmative vote of Limited Partners holding at least a majority of the outstanding LP Units (excluding LP Units held by Owens Financial Group, Inc.) as of the close of business on the record date. If you do not vote, it will have the same effect as a vote against approval of the REIT conversion. As of the close of business on the record date, the affirmative vote of least 138,782,045  LP Units will be required.

In the event that the merger is not approved by Limited Partners of OMIF at the special meeting, OMIF will continue to operate as a California Limited Partnership and the REIT conversion will not be completed at this time.

OMIF reserves the right to cancel or defer the merger even if Limited Partners of OMIF vote to approve the merger agreement and the transactions contemplated thereby and the other conditions to the consummation of the merger are satisfied or waived, if the board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, determines that the merger is no longer in the best interests of OMIF and its Limited Partners. There is no time limit for OMIF to cancel or defer the merger.

Interests of Owens Financial Group, Inc. and Its Directors and Executive Officers, and the Directors and Executive Officers of Owens Realty Mortgage, Inc. in the REIT Conversion

If the REIT conversion is consummated, OMIF’s total capital will not continue to be reduced to satisfy redemption requests. Instead, the capital may be used to invest in new loans from which Owens Financial Group, Inc. can continue to earn fees. William C. Owens, the Chairman, President and Chief Executive Officer of Owens Financial Group, Inc. and  the Chief Executive Officer, President and director of Owens Realty Mortgage, Inc., owns 56.0976% of the capital stock of Owens Financial Group, Inc. and will benefit from any increase in the profitability of Owens Financial Group, Inc. Bryan H. Draper, a director and the Secretary and Chief Financial Officer of Owens Financial Group, Inc. and the Secretary, Chief Financial Officer, and Treasurer of Owens Realty Mortgage, Inc., William E. Dutra, a director and Senior Vice President of Owens Financial Group, Inc., and Andrew J. Navone, a director and a
 
 
12

 
 
Senior Vice President of Owens Financial Group, Inc., each own 14.6341% of the capital stock of Owens Financial Group, Inc. and each will benefit from any increase in the profitability of Owens Financial Group, Inc. Except for the foregoing and except for the Management Agreement and the potential conflicts of interest that may arise with Owens Financial Group, Inc. managing our affairs, we are not aware of any interests of Owens Financial Group, Inc. or its directors and executive officers, or the directors and officers of Owens Realty Mortgage, Inc. in the merger that are different from, or in addition to, the interests of other Limited Partners of OMIF.

LP Units Owned by Directors and Executive Officers of Owens Financial Group, Inc. and Owens Realty Mortgage, Inc. (page 38)

As of the record date, the directors and executive officers of Owens Financial Group, Inc., the sole general partner of OMIF, and of Owens Realty Mortgage, Inc., as a group, beneficially owned and were entitled to vote approximately1, 416,879 LP Units, representing approximately 0.51% of the LP Units entitled to vote with respect to the merger proposal. Additionally, approximately 1,041,433 LP Units are held directly and indirectly by Owens Financial Group, Inc., in which William C. Owens owns a 56.0976% interest, and of which each of Bryan H. Draper, William E. Dutra, and Andrew J. Navone owns a 14.6341% interest; however, Owens Financial Group, Inc. is not entitled to vote its LP Units with respect to the merger proposal. No director or executive officer of Owens Financial Group, Inc. or Owens Realty Mortgage, Inc. has entered into any voting agreements with respect to his votes on the merger proposal. However, we expect that the directors and executive officers of Owens Financial Group, Inc. and Owens Realty Mortgage, Inc. will vote all of their LP Units “FOR” the merger proposal which will effect the REIT conversion.

Conditions to the Merger (page 46)

OMIF and Owens Realty Mortgage, Inc. will complete the merger only if the conditions specified in the merger agreement are either satisfied or waived. The closing conditions include the following:
 
 
• 
The merger agreement and the merger must be approved by Limited Partners holding a majority of the outstanding LP Units (excluding LP Units held by Owens Financial Group, Inc.).
     
 
The merger must be approved by the holders of a majority of the outstanding shares of Common Stock.
     
 
• 
Owens Realty Mortgage, Inc.’s registration statement registering the shares of its Common Stock to be issued in the merger, of which this proxy statement/prospectus forms a part, must be effective, no stop order suspending its effectiveness may be in effect, and no proceeding for suspending its effectiveness may be pending or threatened by the SEC.
     
 
The Common Stock must have been approved for listing on the NYSE MKT or on a national securities exchange acceptable to Owens Realty Mortgage, Inc.
     
 
• 
OMIF must receive from counsel a legal opinion generally to the effect that (a) the merger qualifies as a transaction described in Section 351 of the Code and (b) Owens Realty Mortgage, Inc.’s organization and proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT for the taxable year 2013and thereafter.
     
 
Owens Financial Group, Inc., acting on behalf of OMIF, shall have determined, in its sole discretion, that no legislation or proposed legislation with a reasonable possibility of being enacted would have the effect of impairing the ability of Owens Realty Mortgage, Inc. to qualify as a REIT.
     
 
No statute, rule, regulation, executive order, decree, injunction or other order may have been enacted, entered, promulgated or enforced by any court or governmental authority that has the effect of prohibiting the consummation of the merger.
     
 
• 
All necessary state and local governmental and third-party consents must have been received. Owens Financial Group, Inc., acting on behalf of OMIF, may waive this closing condition. 


 
13

 
 
Regulatory Approvals (page 47)

We are not aware of any U.S. federal, state or local regulatory requirements that must be complied with or approvals that must be obtained prior to the consummation of the merger, other than:

 
• 
compliance with applicable U.S. federal and state taxation and securities laws; and
     
 
• 
the filing and acceptance for record of articles of merger and a certificate of merger with and by the State Department of Assessments and Taxation of Maryland, or the SDAT, and the California Secretary of State as required by the MGCL and the California Corporations Code, respectively.

Restrictions on the Right to Sell Owens Realty Mortgage, Inc. Common Stock

Subject to the restrictions on ownership and transfer in Owens Realty Mortgage, Inc.’s charter, all shares of Common Stock to be received by Limited Partners of OMIF in connection with the merger will be freely transferable, unless a holder is considered an “affiliate” of either OMIF or Owens Realty Mortgage, Inc. under the Securities Act of 1933, or the Securities Act. Generally speaking, affiliates of Owens Realty Mortgage, Inc. would consist of its directors, officers and holders of 5% or more of Common Stock and any other persons controlling Owens Financial Group, Inc.

Material United States Federal Income Tax Consequences (page 152)

It is intended that the merger will qualify as a transaction described in Section 351 of the Code. Assuming the merger so qualifies, you generally will not recognize any gain or loss for U.S. federal income tax purposes as a result of the merger. Counsel has opined to us that the merger will qualify as a transaction described in Section 351 of the Code. It is a condition to closing that we receive from our counsel at the closing of the merger a substantially similar opinion that the merger qualifies as a transaction described in Section 351 of the Code.

Tax matters are complicated, and the tax consequences of the merger to you will depend on the facts of your particular circumstances, including whether you are a “U.S. person” for U.S. federal income tax purposes. In addition, you may be subject to state, local or foreign tax laws that are not discussed in this proxy statement/prospectus. Accordingly, we strongly urge you to consult your own tax advisor for a full understanding of the tax consequences to you of the merger.

Qualification of Owens Realty Mortgage, Inc. as a REIT

Owens Realty Mortgage, Inc. expects to qualify as a REIT for U.S. federal income tax purposes effective for its taxable year ending 2013.  Our counsel has opined to us that Owens Realty Mortgage, Inc.’s organization and proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes for the taxable year ending 2013 and thereafter. It is a condition to closing that we receive from our counsel at the closing of the merger a substantially similar opinion that Owens Realty Mortgage, Inc.’s organization and proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes for the taxable year ending 2013and thereafter. If it so qualifies, Owens Realty Mortgage, Inc. will be permitted to deduct distributions made to its stockholders, allowing its income and gain represented by such distributions to avoid taxation at the entity level and to be taxed generally only at the stockholder level. Owens Realty Mortgage, Inc. intends to distribute substantially all of its income and gain. As a REIT, however, Owens Realty Mortgage, Inc. will be subject to separate, corporate-level tax, including potential 100% penalty taxes under various circumstances, as well as certain state and local taxes. In addition, Owens Realty Mortgage, Inc. intends to own one or more taxable REIT subsidiaries that will be subject to full corporate income tax. Furthermore, Owens Realty Mortgage, Inc.’s ability to qualify as a REIT will depend upon its continuing satisfaction following the REIT conversion of various requirements, such as those related to the diversity of its stock ownership, the nature of its assets, the sources of its income and the distributions to its stockholders, including a requirement that Owens Realty Mortgage, Inc. distribute to its stockholders at least 90% of its REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gain). Although Owens Realty Mortgage, Inc., generally does not intend to make distributions in excess
 
 
14

 
 
of its REIT taxable income and any net capital gain, it may do so from time to time. If Owens Realty Mortgage, Inc. fails to qualify as a REIT, it will be subject to U.S. federal income tax at regular corporate rates.

Share Purchase Program
 
Following the REIT conversion, Owens Realty Mortgage, Inc. currently expects to establish a share purchase program to allow Owens Realty Mortgage, Inc. to acquire its shares of Common Stock in the public markets. The purchase program has been broadly discussed with NYSE MKT representatives and Owens Realty Mortgage, Inc. has indicated its willingness to establish such a program. The purchase program is expected to be subject to certain terms, conditions and applicable law, including any laws or regulations which Owens Realty Mortgage, Inc. must comply with to maintain its REIT status. Notably, the purchase program is only expected to be in effect in the event the average closing price of a share of Common Stock is less than $12.50 over a two consecutive trading-day period.

The purchase program is expected to be designed to provide temporary price support for our Common Stock; accordingly, the purchase program is expected to terminate at such time as the average closing price of a share of Common Stock is at least $12.50 over a ten consecutive trading-day period. Additionally, the program is also expected to terminate upon the earlier of the following events: (i) at such time as the total number of shares purchased under the program exceeds 5% of the total shares of Common Stock outstanding immediately upon the effectiveness of the REIT conversion; and (ii) at such time as total purchases made under the program exceed a cost to the Company of $7,000,000.  We cannot guarantee that funds set aside for the purchase program will be sufficient to accommodate the purchase of all available shares of Common Stock during the program’s term.



 
15

 


SELECTED FINANCIAL DATA

Selected Financial Data

The following tables present a summary of OMIF’s historical consolidated audited financial data as of the dates and for the years ended December 31, 2011, 2010, 2009, 2008 and 2007. The tables also present a summary of OMIF’s historical consolidated unaudited financial data as of and for the nine months ended September  30, 2012 and 2011.

The selected consolidated statement of operations data presented below for the fiscal years ended December 31, 2011 and 2010 and the selected consolidated balance sheets data as of December 31, 2011 and 2010 have been derived from OMIF’s audited financial statements and related notes thereto included with this proxy statement/prospectus. The selected statement of operations data presented below for the fiscal years ended December 31, 2009, 2008 and 2007 and the selected balance sheet data as of September 30, 2011 and December 31, 2009, 2008 and 2007 have been derived from OMIF’s financial statements and related notes thereto, which are not included with this proxy statement/prospectus. The selected consolidated statement of operations data presented below for the nine months ended September 30, 2012 and 2011 and the selected consolidated balance sheet data as of September 30, 2012 have been derived from OMIF’s unaudited financial statements and related notes thereto included with this proxy statement/prospectus. Management believes that the unaudited financial statements include all adjustments necessary to present fairly the information included in those statements and that the adjustments made consist only of normal recurring adjustments.

You should read the information below along with all other financial information and analysis presented in this proxy statement/prospectus, including the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included with this proxy statement/prospectus. Historical results are not necessarily indicative of future results.
 
   
UNAUDITED
                             
   
September 30,
   
September 30,
   
December 31,
   
December 31,
   
December 31,
   
December 31,
   
December 31,
   
2012
   
2011
   
2011
   
2010
   
2009
   
2008
   
2007
Balance Sheet Data:
 
                                       
Loans secured by trust deeds (net of allowance)
$
40,215,214
 
$
70,389,823
 
$
44,879,979
 
$
121,596,980
 
$
183,390,822
 
$
248,508,567
 
$
272,333,481
 
Cash, cash equivalents, restricted cash and certificates of deposits
 
 
22,271,528
   
 
13,274,661
   
18,195,176
   
7,379,003
   
10,232,013
   
6,029,724
   
10,159,033
 
Interest and other receivables
 
2,057,419
   
2,100,516
   
1,455,846
   
4,493,614
   
4,644,320
   
3,643,774
   
5,412,821
 
Real estate held for sale
 
 
68,709,511
   
 
30,154,636
   
13,970,673
   
15,132,847
   
10,852,274
   
11,413,760
   
10,572,237
 
Real estate held for investment
 
 
68,179,936
   
 
115,584,121
   
131,620,987
   
81,933,352
   
69,036,262
   
47,014,812
   
42,338,070
 
Other assets
 
2,311,560
   
1,278,957
   
1,328,586 
   
1,036,146 
   
560,259
   
432,898
   
405,222
 
Total assets
 
$
 
206,132,156
 
 
$
 
235,287,761
 
 
$
213,871,061
 
 
$
234,101,888 
 
 
$
281,484,473
 
 
$
319,831,220
 
 
$
341,531,109
 
Total liabilities
 
 
14,652,535
   
 
15,770,735
   
15,305,274
   
14,984,057
   
37,599,212
   
46,559,166
   
42,678,970
 
Total OMIF partners’ capital
 
183,420,458
   
202,440,036
   
181,045,959
   
219,101,364
   
243,850,605
   
273,203,409
   
298,852,139
 
Noncontrolling interests
 
8,059,163
   
17,076,990
   
17,519,828
   
16,467
   
34,656
   
68,645
   
 
Total partners’ capital (1)
 
 
191,479,621
   
 
219,517,026
   
198,565,787
   
219,117,831
   
243,885,261
   
273,272,054
   
298,852,139
 
Total liabilities and partners’ capital
$
 
206,132,156
 
$
 
235,287,761
 
$
213,871,061
 
$
234,101,888 
 
$
281,484,473 
 
$
319,831,220
 
$
341,531,109
 
(1)  Total partners’ capital includes minority interest of $108,509 as of December 31, 2007.
 

 
16

 

 
   
UNAUDITED
                               
   
9 Months Ended
   
9 Months Ended
   
12 Months Ended
   
12 Months Ended
   
12 Months Ended
   
12 Months Ended
   
12 Months Ended
 
   
September 30,
   
September 30,
   
December 31,
   
December 31,
   
December 31,
   
December 31,
   
December 31,
 
   
2012
   
2011
   
2011
   
2010
   
2009
   
2008
   
2007
 
Statement of
Operations Data:
                                         
Total Revenues
$
 
14,888,569
 
$
 
14,107,268
 
$
18,120,744
 
$
16,541,704
 
$
20,939,784
 
$
31,058,755
 
$
32,809,785
 
Total expenses
 
 
14,130,680
   
 
20,095,559
   
41,735,797
   
39,373,365
   
41,065,553
   
28,881,695
   
11,217,179
 
Net income (loss)
 
 
757,889
   
 
(5,988,291
 
(23,615,053
)
 
(22,831,661
 
(20,125,769
 
2,177,060
   
21,592,606
 
Net income attributable to noncontrolling interests
 
 
(515,289
)  
 
(681,244
 
(1,129,202
)
 
(5,859
 
(10,336
 
(13,896
 
0
 
Net income (loss) attributable to OMIF
 
 
242,600
   
 
(6,669,535
 
(24,744,255
)
 
(22,837,520
 
(20,136,105
 
2,163,164
   
21,592,606
 
Partners’ income distributions
 
 
627,868
   
 
1,404,091
   
1,723,449
   
1,911,721
   
4,204,379
   
7,032,513
   
6,976,329
 
Partners’ capital distributions and withdrawals
 
 
   
 
8,587,702
   
11,587,701
   
   
5,112,360
   
29,489,573
   
18,546,530
 


Comparative Historical and Pro Forma Per Share Data

The following tables set forth selected historical per unit data for OMIF and selected unaudited pro forma per share data after giving effect to the REIT conversion. This information should be read in conjunction with all other financial information and analysis presented in this proxy statement/prospectus, including the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included with this proxy statement/prospectus. The pro forma per share amounts have been computed using the assumptions described in the section entitled “Pro Forma Financial Information.”  The unaudited pro forma financial data are presented for informational purposes only. The unaudited pro forma financial data are not necessarily indicative of the financial position or operating results that would have occurred had the REIT conversion been completed as of the dates indicated, nor are they necessarily indicative of future financial position or operating results.

Historical Data Per Unit of OMIF

The historical book value per unit data presented below are computed by dividing the total OMIF book basis capital of $183,420,458 and $181,045,959 as of September 30, 2012 and December 31, 2011, respectively, by the number of units outstanding as of those dates of 281,480,380.

   
As of or for the  9 Months Ended
September 30,  
2012
   
As of or for the Year Ended
December 31,
2011
Net income (loss) allocated to limited partners per weighted average limited partner unit
 
$
                   0.001
  $
    (0.09
)
Book value per unit
 
$
0.65
  $
                                   0.64
 
Income and capital distributions per unit
 
$
                   0.002
 
                                   0.05
 

Net income (loss) allocated to Limited Partners per weighted average LP Unit is computed by dividing the net income allocated to Limited Partners of $240,087 for the nine months ended September 30, 2012 and net loss of $24,469,847 for the year ended December 31, 2011 by the weighted average LP Units outstanding of 278,606,000 for the nine months ended September 30, 2012 and 285,083,000 for the year ended December 31, 2011. Income and capital distributions per unit is calculated by dividing the total actual income distributions and capital distributions to partners of OMIF for the periods indicated by the number of units outstanding as of those dates of 281,480,380.


 
17

 
Unaudited Pro Forma Per Share Data of Owens Realty Mortgage, Inc.

The pro forma book value per share data is computed by dividing the total Owens Realty Mortgage, Inc. pro forma book basis equity of $183,420,458 as of September 30, 2012 by the number of shares of Common Stock outstanding of 11,198,131 (assuming the conversion occurred on January 1, 2011 based on units outstanding as of September 30, 2012 and assuming that 1,496,600 of Owens Financial Group, Inc.’s units represented by its Carried Interest are not converted to shares of Common Stock).

   
As of or for the  9 Months
Ended September 30,
 2012
     
As of or for the Year Ended
December 31,
2011
Net income (loss) from continuing operations per share: Basic
 
$
                   0.02
   
(2.21
)
Book value per share
 
$
                    16.38
   
                      N/A
 
Income and capital distributions per share
 
$
                   0.06
   
                      1.19
 

Net income (loss) from continuing operations per share (basic) is computed by dividing the pro forma net income attributable to Owens Realty Mortgage, Inc. of $242,600 for the nine months ended September 30, 2012 and net loss of $24,744,255 for the year ended December 31, 2011 by the pro forma weighted average common shares outstanding of 11,198,131 for the nine months ended September 30, 2012 and for the year ended December 31, 2011. Income and capital distributions per share is calculated by dividing the total actual income distributions and capital distributions to OMIF partners for the periods indicated by the number of shares of Common Stock outstanding of 11,198,131 (assuming the conversion occurred on January 1, 2011 based on units outstanding as of September 30, 2012 and assuming that 1,496,600 of Owens Financial Group, Inc.’s units represented by its Carried Interest are not converted to shares of Common Stock).

 
18

 

RISK FACTORS

     In considering whether to approve the merger agreement and the REIT conversion, you should consider carefully the risks described below. These factors should be considered in conjunction with the other information included elsewhere in this proxy statement/prospectus.

Risks and Effects of the Merger and the REIT Conversion

Our management has no experience operating a REIT, and we cannot assure you that our management’s past experience will be sufficient to successfully manage our business as a REIT. If we fail to comply with REIT requirements, we would incur U.S. federal income taxes at the corporate level, which would reduce our distributions to you.

We have never operated as a REIT, and our management has no experience in complying with the income, asset and other limitations imposed by the REIT provisions of the Code. These provisions are complex, and the failure to comply with these provisions in a timely manner could prevent us from qualifying as a REIT or could force us to pay unexpected taxes and penalties. In such event, our net income would be reduced and we would have less funds available for distribution to you.

If we fail to qualify as a REIT, we would be subject to U.S. federal income tax at regular corporate rates. Also, unless the IRS granted us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first fail to qualify. If we fail to qualify as a REIT, we would have to pay significant income taxes and therefore would have less money available for investments or for distributions to our stockholders. This would likely have a significant adverse effect on the value of our securities. In addition, we would no longer be required to make distributions to our stockholders to maintain preferential U.S. federal income taxation as a REIT.

You will lose your redemption rights in connection with the REIT conversion.

You currently have the right to withdraw as a Limited Partner of OMIF and require OMIF to redeem your LP Units, subject to certain conditions and limitations, including a maximum limit of $100,000 by any Limited Partner during any calendar quarter. In addition, in no event shall the sum of all withdrawals permitted under the Partnership Agreement, together with certain permitted transfers and distributions of net proceeds under the Partnership Agreement, exceed 10% of the aggregate capital accounts of all outstanding LP Units in any calendar year, except upon a vote of the Limited Partners to dissolve OMIF. Currently, redemption demands have exceeded this limit. As of September 30, 2012, Limited Partners holding approximately 108,200,000 LP Units, representing approximately 38% of all outstanding LP Units and units represented by the Carried Interest and GP Contribution Interest, had requested withdrawals. These requests to redeem LP Units total approximately $102,192,000 (tax basis) and represent approximately 38% of OMIF’s total tax basis capital. The merger was structured to provide liquidity to Limited Partners by listing the shares of Common Stock on the NYSE MKT or on a national securities exchange acceptable to Owens Realty Mortgage, Inc. You will not have any redemption rights as a stockholder of Owens Realty Mortgage, Inc. after the REIT conversion. Upon completion of the REIT conversion, Limited Partners in effect will surrender any outstanding redemption requests.

Sales of our Common Stock after the REIT conversion could have an adverse effect on our stock price.

Sales of a substantial number of shares of our Common Stock after the REIT conversion, or the perception that such sales could occur, could adversely affect the market price for our Common Stock. Subject to the restrictions on ownership and transfer in Owens Realty Mortgage, Inc.’s charter, all of the shares issued in the merger, other than any shares issued to an “affiliate” under the Securities Act, will be freely tradable without restriction or further registration under the Securities Act. In addition, none of our shares outstanding upon completion of the merger will be subject to lock-up agreements. We cannot predict the effect that future sales of our Common Stock will have on the market price of our Common Stock.

As of September 30, 2012, Limited Partners holding approximately 108,200,000 LP Units, representing approximately 38% of all outstanding LP Units and units represented by the Carried Interest and GP Contribution Interest, had requested withdrawals. These requests to redeem LP Units total approximately $102,192,000 (tax basis) and represent approximately 38% of OMIF’s total tax basis capital. Given these redemption requests, there may be significant initial downward pressure on the market price of our Common Stock after the REIT conversion. As a result, if you sell the Common Stock you
 
 
19

 
 
receive in the merger, the price you receive may be less than the amount you may be able to receive either through an exercise of your redemption rights or in connection with a liquidation of OMIF.

We cannot assure you that we will have access to funds to meet our distribution and tax obligations.

In order to qualify as a REIT, we will be required each year to distribute to our stockholders at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding any net capital gain). Furthermore, we will be subject to corporate-level U.S. federal income taxation on our undistributed income and gain. We intend to make distributions to our stockholders of substantially all of our income and gain so as to comply with the 90% distribution requirement and limit corporate-level U.S. federal income taxation of Owens Realty Mortgage, Inc. Although we generally do not intend to make distributions in excess of our REIT taxable income and any net capital gain, we may do so from time to time. A distribution of REIT taxable income or net capital gain generally will be a taxable distribution to you and not represent a return of capital for U.S. federal income tax purposes. If we make distributions in excess of our REIT taxable income and any net capital gain, the excess portion of these distributions generally would represent a non-taxable return of capital for such purposes up to your tax basis in your Owens Realty Mortgage, Inc. stock and then generally capital gain. The portion of any distribution treated as a return of capital for U.S. federal income tax purposes would reduce your tax basis in your Owens Realty Mortgage, Inc. stock by a corresponding amount. Differences in timing between taxable income and cash available for distribution could require us to borrow funds or raise capital by selling assets to enable us to meet these distribution requirements. We also could be required to pay taxes and liabilities in the event we were to fail to qualify as a REIT. Our inability to retain earnings (resulting from these distribution requirements) generally may require us to refinance debt that matures with additional debt or equity. There can be no assurance that any of these sources of funds, if available at all, would be available to meet our distribution and tax obligations.

We may incur increased costs as a result of being a listed company.

Approval for the listing of our Common Stock on the NYSE MKT or on a national securities exchange acceptable to Owens Realty Mortgage, Inc. is a condition to consummation of the merger and REIT conversion. As a listed company, we may incur additional legal, accounting and other expenses that we did not incur as a non-listed company. We also anticipate that we will incur costs associated with corporate governance requirements, as well as new accounting pronouncements and new rules implemented by the SEC, NYSE MKT, or any other applicable national securities exchange. Any expenses required to comply with evolving standards may result in increased general and administrative expenses and a diversion of management time and attention from our business. In addition, these laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially greater costs to obtain the same or similar coverage. The effect of these events could also make it more difficult for us to attract qualified persons to serve on our board of directors or board committees. We are currently evaluating and monitoring developments with respect to these laws and regulations and cannot predict or estimate the amount or timing of additional costs we may incur in responding to their requirements.

Under the Management Agreement, termination of our manager for cause requires that we provide 30 days’ prior written notice to our manager.

Termination of the Management Agreement with Owens Financial Group, Inc. for cause, including in the event that Owens Financial Group, Inc. engages in fraud or embezzlement, misappropriates funds or intentionally breaches the Management Agreement, requires us to provide 30 days’ prior written notice to Owens Financial Group, Inc.  Accordingly, if Owens Financial Group, Inc. engages in any of the foregoing activities (or any other activities resulting in a for cause termination),  our inability to terminate the Management Agreement for at least 30 days may result in inefficiencies and uncertainties that could ultimately have a material adverse effect on our business, financial condition and results of operations.


 
20

 
 
Risks Related to Our Business

We will rely on Owens Financial Group, Inc. to manage our day-to-day operations and select our loans for investment.

Our ability to achieve our investment objectives and to make distributions to you depends upon Owens Financial Group, Inc.’s performance in obtaining, processing, making and brokering loans for us to invest in and determining the financing arrangements for borrowers. You will have no opportunity to evaluate the financial information or creditworthiness of borrowers, the terms of mortgages, the real property that is our collateral or other economic or financial data concerning our loans.  We are obligated to pay Owens Financial Group, Inc. an annual management fee up to 2.75% of the average unpaid balance of our outstanding mortgage loans at the end of each month.  Owens Financial Group, Inc. has no fiduciary obligations to Owens Realty Mortgage, Inc. or its stockholders, is not required to devote its employees full time to our business and may devote time to business interests competitive with our business.

We do not have a policy that expressly prohibits our directors, officers, security holders or affiliates from engaging for their own account in business activities of the types conducted by us.
 
       We do not have a policy that expressly prohibits our directors, officers, security holders or affiliates from engaging for their own account in business activities of the types conducted by us. However, our code of business conduct and ethics contains a conflicts of interest policy that, unless waived in accordance with the code, prohibits our directors and executive officers, as well as personnel of Owens Financial Group, Inc. who provide services to us, from engaging in any transaction that involves an actual conflict of interest with us. In addition, our Management Agreement with Owens Financial Group, Inc. does not prevent our manager and its affiliates from engaging in additional management or investment opportunities, some of which could compete with us.
 
Owens Financial Group, Inc.’s liability is limited under the Management Agreement, and we have agreed to indemnify Owens Financial Group, Inc. against certain liabilities. As a result, we could experience poor performance or losses for which Owens Financial Group, Inc. would not be liable.
 
     Pursuant to the Management Agreement, Owens Financial Group, Inc. does not assume any responsibility other than to render the services called for thereunder and is not responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Under the terms of the Management Agreement, none of Owens Financial Group, Inc., its officers, stockholders, directors, employees or advisors, among others, will be liable to us or any subsidiary of ours, to our board of directors, or to our or any subsidiary’s stockholders, members or partners for any acts or omissions made pursuant to the Management Agreement, except for acts or omissions constituting bad faith, willful misconduct, gross negligence or reckless disregard of Owens Financial Group, Inc.’s duties under the Management Agreement, as determined by a final court order. In addition, we have agreed to indemnify, to the fullest extent permitted by law, Owens Financial Group, Inc., its officers, stockholders, directors, employees and advisors, among others, from all losses (including attorneys’ fees) arising from any acts or omissions of such person made in good faith in the performance of Owens Financial Group, Inc.’s duties under the Management Agreement and not constituting bad faith, willful misconduct, gross negligence or reckless disregard of such duties.

Owens Financial Group, Inc.’s lack of experience with certain real estate markets could impact its ability to make prudent investments on our behalf.

     While we invest in real estate loans throughout the United States, the majority of our loans are in the Western United States.  Real estate markets vary greatly from location to location, and the rights of secured real estate lenders vary from state to state.  Owens Financial Group, Inc. may originate loans in markets where they have limited experience.  In those circumstances, Owens Financial Group, Inc. intends to rely on independent real estate advisors and local legal counsel to assist them in making prudent investment decisions.  You will not have an opportunity to evaluate the qualifications of such advisors, and no assurance can be given that they will render prudent advice to Owens Financial Group, Inc.


 
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Our success depends on key personnel of Owens Financial Group, Inc., the loss of whom could adversely affect our operating results, and Owens Financial Group, Inc.’s ability to attract and retain qualified personnel.

Our success depends in part upon the continued contributions of certain key personnel of Owens Financial Group, Inc., including William C. Owens (Chief Executive Officer and President), Bryan H. Draper (Chief Financial Officer), Melina A. Platt (Controller), Andrew J. Navone (Senior Vice President) and William E. Dutra (Senior Vice President), some of whom would be difficult to replace because of their extensive experience in the field, extensive market contacts and familiarity with our business. If any of these key employees were to cease employment with us, our operating results could suffer. None of these individuals is subject to an employment, non-competition or confidentiality agreement with us or Owens Financial Group, Inc., and we do not maintain “key man” life insurance policies on any of them. Our future success also depends in large part upon Owens Financial Group, Inc.’s ability to hire and retain additional highly skilled managerial, operational and marketing personnel. Owens Financial Group, Inc. may require additional operations and marketing people who are experienced in obtaining, processing, making and brokering loans and who also have contacts in the relevant markets. If Owens Financial Group, Inc. were unable to attract and retain key personnel, the ability of Owens Financial Group, Inc. to make prudent investment decisions on our behalf may be impaired.

Loan delinquencies and foreclosures may contribute to reductions in our net income and your distributions.

As of September 30, 2012, mortgage loans of OMIF of approximately $51,646,000 were impaired. In addition, OMIF’s investment in loans that were past maturity (delinquent in principal) but current in monthly payments was approximately $690,000 as of September 30, 2012 (combined total of delinquent loans of $52,336,000 compared to $53,817,000 as of December 31, 2011). Of the impaired loans and past maturity loans as of September 30, 2012, approximately $30,225,000 were in the process of foreclosure and $4,493,000 involved borrowers in bankruptcy.

It is highly likely that we will continue to experience reduced net income or further losses in the future, thus negatively impacting future distributions. Owens Financial Group, Inc. expects that, as non-delinquent loans are paid off by borrowers, interest income received by us will be reduced. In addition, we will likely foreclose on more delinquent loans, thereby obtaining ownership of more real estate that may result in larger operating losses. Management will attempt to sell many of these properties but may need to sell them for losses or wait until market values recover in the future.

Defaults on our real estate loans will decrease our revenues and your distributions.

We are in the business of investing in real estate loans, and, as such, we are subject to risk of defaults by borrowers. Our performance will be directly impacted by any defaults on the loans in our portfolio. As a non-conventional lender willing to invest in loans to borrowers who may not meet the credit standards of conventional lenders, the rate of default on our loans could be higher than those generally experienced in the real estate lending industry. Any sustained period of increased defaults could adversely affect our business, financial condition, liquidity and the results of our operations, and ultimately your distributions. We seek to mitigate the risk by estimating the value of the underlying collateral and insisting on low loan-to-value ratios. However, we cannot assure you that these efforts will fully protect us against losses on defaulted loans. Any subsequent decline in real estate values on defaulted loans could result in less security than anticipated at the time the loan was originally made, which may result in our not recovering the full amount of the loan. Any failure of a borrower to repay loans or interest on loans will reduce our revenues and your distributions and the value of your interest in our company. Our appraisals are generally dated within 12 months of the date of loan origination and may not reflect a decrease in the value of the real estate due to events subsequent to the date of the appraisals.

As of September 30, 2012, we had in our portfolio approximately $51,646,000 in delinquent loans, which includes loans in non-accrual status. We also had approximately $31,700,000 of non-income producing real estate held for sale or investment for a total of $83,346,000 in non-performing assets, which represented approximately 44% of our total capital.


 
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Our underwriting standards may be more lenient than those of conventional lenders, which could result in a higher percentage of foreclosed properties, which could reduce the amount of distributions to you.
 
Our underwriting standards and procedures may be more lenient than those of conventional lenders in that we will invest in loans secured by property that may not meet the underwriting standards of conventional real estate lenders or make loans to borrowers who may not meet the credit standards of conventional lenders.  This may lead to more non-performing assets in our loan portfolio and create additional risks to your return. We approve real estate loans more quickly than other lenders. We rely on third-party reports and information such as appraisals and environmental reports to assist in underwriting loans. We may accept documentation that was not specifically prepared for us or commissioned by us. This creates a greater risk of the information contained therein being out of date or incorrect. Generally, we will spend less time than conventional lenders assessing the character and credit history of our borrowers and the property that secures our loans. Due to the accelerated nature of our loan approval process, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to the borrower and the security. There may be a greater risk of default by our borrowers, which may impair our ability to make timely distributions to you and which may reduce the amount we have available to distribute to you.

We depend upon real estate security to secure our real estate loans, and we may suffer a loss if the value of the underlying property declines.

We depend upon the value of real estate security to protect us on the loans that we make. We utilize the services of independent appraisers to value the security underlying our loans. However, notwithstanding the experience of the appraisers, mistakes can be made, or the value of the real estate may decrease due to subsequent events. Our appraisals are generally dated within 12 months of the date of loan origination and may have been commissioned by the borrower. Therefore, the appraisals may not reflect a decrease in the value of the real estate due to events subsequent to the date of the appraisals. For a construction loan most of the appraisals will be prepared on an as-if developed basis. If the loan goes into default prior to completion of the project, the market value of the property may be substantially less than the appraised value. Additional capital may be required to complete a project in order to realize the full value of the property.  If a default occurs and we do not have the capital to complete a project, we may not recover the full amount of our loan.

Foreclosures create additional ownership risks.

When we acquire property by foreclosure, we have economic and liability risks as the owner, such as:

 
• 
earning less income and reduced cash flows on foreclosed properties than could be earned and received on mortgage loans;
     
 
• 
not being able to realize sufficient amounts from sales of the properties to avoid losses;
     
 
• 
properties being acquired with one or more co-owners (called tenants-in-common) where development or sale requires written agreement or consent by all; without timely agreement or consent, we could suffer a loss from being unable to develop or sell the property;
     
 
• 
maintaining occupancy of the properties;
     
 
• 
controlling operating expenses;
     
 
• 
coping with general and local market conditions;
     
 
• 
complying with changes in laws and regulations pertaining to taxes, use, zoning and environmental protection;
     
 
possible liability for injury to persons and property; and
     
  possible liability for environmental remediation.
 
 
 
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        During the year ended December 31, 2011, OMIF recorded impairment losses on twelve of its real estate properties held for sale and investment in the aggregate amount of approximately $15,023,000.  During the nine months ended September 30, 2012, OMIF recorded impairment losses on eight of its real estate properties held for sale and investment in the aggregate amount of approximately $1,033,000.

Development on properties we acquire creates risks of ownership we do not have as a lender.

When we acquire property by foreclosure or otherwise as a lender, we may develop the property, either singly or in combination with other persons or entities. This could be done in the form of a joint venture, limited liability company or partnership, with Owens Financial Group, Inc. and/or unrelated third parties. This development can create the following risks:

 
• 
Reliance upon the skill and financial stability of third party developers and contractors;
     
 
• 
Inability to obtain governmental permits;
     
 
• 
Delays in construction of improvements;
     
 
• 
Increased costs during development; and
     
 
• 
Economic and other factors affecting sale or leasing of developed property.
 
Larger loans result in less diversity and may increase risk.

As of September 30, 2012, OMIF was invested in a total of 24 mortgage loans, with an aggregate face value of approximately $65,156,000. The average value of those loans was approximately $2,715,000, and the median value was $1,300,000. There were ten of such loans with a face value each of 3% or more of the aggregate face value of all loans, and the largest loan relationship had a total face value of 37% of total loans.

As a general rule, we can decrease risk of loss from delinquent mortgage loans by investing in a greater total number of loans. Investing in fewer, larger loans generally decreases diversification of the portfolio and increases risk of loss and possible reduction of return to investors in OMIF in the case of a delinquency of such a loan.

Incorrect original collateral assessment (valuation) could result in losses and decreased distributions to you.

Appraisals are obtained from qualified, independent appraisers on all properties securing trust deeds, which may have been commissioned by the borrower and may precede the placement of the loan with us. However, there is a risk that the appraisals prepared by these third parties are incorrect, which could result in defaults and/or losses related to these loans.

Completed, written appraisals are not always obtained on our loans prior to original funding, due to the quick underwriting and funding required on the majority of our loans. Although the loan officers often discuss value with the appraisers and perform other due diligence and calculations to determine property value prior to funding, there is a risk that we may make a loan on a property where the appraised value is less than estimated, which could increase the loan’s loan-to-value, or LTV, ratio and subject us to additional risk.

We may make a loan secured by a property on which the borrower previously commissioned an appraisal. Although we generally require such appraisal to have been made within one year of funding the loan, there is a risk that the appraised value is less than the actual value, increasing the loan’s LTV ratio and subjecting us to additional risk.
 
 
Geographical concentration of mortgages may result in additional delinquencies.

Northern California real estate secured approximately 69% of the total mortgage loans held by OMIF as of September 30, 2012. Northern California consists of Monterey, Kings, Fresno, Tulare and Inyo counties and all counties north of those. In addition, 12%, 6%, 4%, 4%, 3% and 2% of total mortgage
 
 
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loans were secured by Arizona, Pennsylvania, Utah, Washington, Hawaii and Louisiana real estate, respectively. These concentrations may increase the risk of delinquencies on our loans when the real estate or economic conditions of one or more of those areas are weaker than elsewhere, for reasons such as:

 
• 
economic recession in that area;
     
 
• 
overbuilding of commercial or residential properties; and
     
 
• 
relocations of businesses outside the area due to factors such as costs, taxes and the regulatory environment.
     
These factors also tend to make more commercial or residential real estate available on the market and reduce values, making suitable mortgages less available to us. In addition, such factors could tend to increase defaults on existing loans.

Commercial real estate markets in California have suffered in recent years, and we expect that this may continue to adversely affect our operating results. In addition, approximately 81% of our mortgage loans are secured by real estate in the states of California and Arizona, which have experienced dramatic reductions in real estate values over the past four years.

Investments in construction and rehabilitation loans may be riskier than loans secured by operating properties.

Although our loan portfolio does not contain any construction or rehabilitation mortgage loans, and we have no outstanding construction or rehabilitation loan commitments as of September 30, 2012, OMIF has made construction and rehabilitation loans in the past, and we may make additional construction and rehabilitation loan commitments in the future. Construction and rehabilitation mortgage loans may be riskier than loans secured by properties with an operating history, because:

 
• 
the application of the loan proceeds to the construction or rehabilitation project must be assured;
     
 
• 
the completion of planned construction or rehabilitation may require additional financing by the borrower; and
     
 
• 
permanent financing of the property may be required in addition to the construction or rehabilitation loan.
     
Investments in loans secured by leasehold interests may be riskier than loans secured by fee interests in properties.

Although our loan portfolio does not contain any loans secured by leasehold interests as of September 30, 2012, OMIF has made such loans in the past, and we may resume leasehold-secured lending in the future. Loans secured by leasehold interests are riskier than loans secured by real property because the loan is subordinate to the lease between the property owner (lessor) and the borrower, and our rights in the event the borrower defaults are limited to stepping into the position of the borrower under the lease, subject to its requirements of rents and other obligations and period of the lease.

Investments in second, third and wraparound mortgage and deed of trust loans may be riskier than loans secured by first deeds of trust.

Second, third and wraparound mortgage and deed of trust loans (those under which we generally make the payments to the holders of the prior liens) are riskier than first mortgage and deed of trust loans because:

 
• 
their position is subordinate in the event of default; and
     
 
there could be a requirement to cure liens of a senior loan holder, and, if this is not done, we would lose our entire interest in the loan.
 
 
 
 
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As of September 30, 2012, OMIF’s loan portfolio contained 11% in second mortgage and deed of trust loans and 11% in third mortgage and deed of trust loans. As of September 30, 2012, OMIF was invested in no wraparound mortgage or deed of trust loans.

We typically make “balloon payment” loans, which are riskier than loans with payments of principal over an extended period of time.

The loans we invest in or purchase generally require the borrower to make a “balloon payment” on the principal amount upon maturity of the loan. A balloon payment is a large principal balance that is payable after a period of time during which the borrower has repaid none or only a small portion of the principal balance. As of September 30, 2012, 99.8% of our loans required balloon payments at the end of their terms. Loans with balloon payments are riskier than loans with even payments of principal over an extended time period like 15 or 30 years because the borrower’s repayment depends on its ability to sell the property profitably, obtain suitable refinancing or otherwise raise a substantial amount of cash when the loan comes due. There are no specific criteria used in evaluating the credit quality of borrowers for loans requiring balloon payments. Furthermore, a substantial period of time may elapse between the review of the financial statements of the borrower and the date when the balloon payment is due. As a result, there is no assurance that a borrower will have sufficient resources to make a balloon payment when due.

Our loans are not insured or guaranteed by any governmental agency.

Our loans are not insured or guaranteed by a federally-owned or -guaranteed mortgage agency. Consequently, our recourse if there is a default may only be to foreclose upon the real property securing a loan. The value of the foreclosed property may have decreased and may not be equal to the amount outstanding under the corresponding loan, resulting in a decrease of the amount available to distribute to you.

Our loans permit prepayment, which may lower returns.

The majority of our loans do not include prepayment penalties for a borrower paying off a loan prior to maturity. The absence of a prepayment penalty in our loans may lead borrowers to refinance higher interest rate loans in a market of falling interest rates. This would then require us to reinvest the prepayment proceeds in loans or alternative short-term investments with lower interest rates and a corresponding lower return to you.

Equity or cash flow participation in loans could result in loss of our secured position in loans.

We may obtain participation in the appreciation in value or in the cash flow from a secured property. If a borrower defaults and claims that this participation makes the loan comparable to equity (like stock) in a joint venture, we might lose our secured position as lender in the property. Other creditors of the borrower might then wipe out or substantially reduce our investment. We could also be exposed to the risks associated with being an owner of real property. We are not presently involved in any such arrangements.

If a third party were to assert successfully that one of our loans was actually a joint venture with the borrower, there might be a risk that we could be liable as joint venturer for the wrongful acts of the borrower toward the third party.

Some losses that might occur to borrowers may not be insured and may result in defaults.

Our loans require that borrowers carry adequate hazard insurance for our benefit. Some events, however, are uninsurable, or insurance coverage for them is economically not practicable. Losses from earthquakes, floods or mudslides, for example, which occur in California, may be uninsured and cause losses to us on entire loans. Since September 30, 2012, no such loan loss has occurred.

While we are named loss payee in all cases and will receive notification in event of a loss, if a borrower allows insurance to lapse, an event of loss could occur before we know of the lapse and have time to obtain insurance ourselves.
 
 
 
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Insurance coverage may be inadequate to cover property losses, even though Owens Financial Group, Inc. imposes insurance requirements on borrowers that it believes are adequate.

If any of our insurance carriers become insolvent, we could be adversely affected.

We carry several different lines of insurance, placed with several large insurance carriers. If any one of these large insurance carriers were to become insolvent, we would be forced to replace the existing insurance coverage with another suitable carrier, and any outstanding claims would be at risk for collection. In such an event, we cannot be certain that we would be able to replace the coverage at similar or otherwise favorable terms. Replacing insurance coverage at unfavorable rates and the potential of uncollectible claims due to carrier insolvency could adversely affect our results of operations and cash flows.

Any borrowing by us will increase your risk and may reduce the amount we have available to distribute to you.

We may borrow funds to expand our capacity to invest in real estate loans. Any such borrowings will require us to carefully manage our cost of funds. No assurance can be given that we will be successful in this effort. Should we be unable to repay the indebtedness and make the interest payments on the loans, the lender will likely declare us in default and require that we repay all amounts owing under the loan facility. Even if we are repaying the indebtedness in a timely manner, interest payments owing on the borrowed funds may reduce our income and the distributions you receive.

We may borrow funds from several sources, and the terms of any indebtedness we incur may vary. However, some lenders may require as a condition of making a loan to us that the lender will receive a priority on loan repayments received by us. As a result, if we do not collect 100% on our investments, the first dollars may go to our lenders and we may incur a loss which will result in a decrease of the amount available for distribution to you. In addition, we may enter into securitization arrangements in order to raise additional funds. Such arrangements could increase our leverage and adversely affect our cash flow and our ability to make distributions to you.

After the REIT conversion, we will need cash to meet our minimum REIT distribution requirements and limit U.S. federal income taxation. Because we will be required to distribute annually to our stockholders at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains) to qualify as a REIT and because we intend to distribute substantially all of our REIT taxable income and net capital gain, our ability to expand our loan portfolio will depend in large part on external sources of capital. In addition, if our minimum distribution requirements to maintain our REIT status and minimize U.S. federal income taxation become large relative to our cash flow as a result of our taxable income exceeding our cash flow from operations, then we may be required to borrow funds or raise capital by selling assets to meet those distribution requirements. Any equity financing may result in substantial dilution to our stockholders, and any debt financing may include restrictive covenants. We may not be able to raise capital on reasonable terms, if at all.

We expect our real estate loans will not be marketable, and we expect no secondary market to develop.

We do not expect our real estate loans to be marketable, and we do not expect a secondary market to develop for them. As a result, we will generally bear all the risk of our investment until the loans mature. This will limit our ability to hedge our risk in changing real estate markets and may result in reduced returns to our investors.

We may have difficulty protecting our rights as a secured lender.

We believe that our loan documents will enable us to enforce our commercial arrangements with borrowers. However, the rights of borrowers and other secured lenders may limit our practical realization of those benefits. For example:

 
• 
Judicial foreclosure is subject to the delays of protracted litigation. Although we expect non-judicial foreclosure to be quicker, our collateral may deteriorate and decrease in value during any delay in foreclosing on it;
     
 
• 
The borrower’s right of redemption during foreclosure proceedings can deter the sale of our collateral and can for practical purposes require us to manage the property;
     
 
 
 
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  Unforeseen environmental hazards may subject us to unexpected liability and procedural delays in exercising our rights;
     
  • 
The rights of senior or junior secured parties in the same property can create procedural hurdles for us when we foreclose on collateral;
     
  •  We may not be able to pursue deficiency judgments after we foreclose on collateral; and
     
  •  State and federal bankruptcy laws can prevent us from pursuing any actions, regardless of the progress in any of these suits or proceedings.
 
 
By becoming the owner of property, we may incur additional obligations, which may reduce the amount of funds available for distribution.

We intend to own real property only if we foreclose on a defaulted loan and purchase the property at the foreclosure sale. Acquiring a property at a foreclosure sale may involve significant costs. If we foreclose on a security property, we expect to obtain the services of a real estate broker and pay the broker’s commission in connection with the sale of the property. We may incur substantial legal fees and court costs in acquiring a property through contested foreclosure and/or bankruptcy proceedings. In addition, significant expenditures, including property taxes, maintenance costs, renovation expenses, mortgage payments, insurance costs and related charges, must be made on any property we own, regardless of whether the property is producing any income.

Under applicable environmental laws, any owner of real property may be fully liable for the costs involved in cleaning up any contamination by materials hazardous to the environment. Even though we might be entitled to indemnification from the person that caused the contamination, there is no assurance that the responsible person would be able to indemnify us to the full extent of our liability. Furthermore, we would still have court and administrative expenses for which we may not be entitled to indemnification.

A prolonged economic slowdown, lengthy or severe recession or significant increase in interest rates could harm our business.

The risks associated with our business are more acute during periods of economic slowdown or recession because these periods can be accompanied by decreased demand for consumer credit and declining real estate values. Because we are a non-conventional lender willing to invest in riskier loans, rates of delinquencies, foreclosures and losses on our loans could be higher than those generally experienced in the mortgage lending industry during periods of economic slowdown or recession. Furthermore, if interest rates were to increase significantly, the costs of borrowing may become too expensive, which may negatively impact new loan originations by reducing demand for real estate lending. For the nine months ended September 30, 2012, and fiscal years ended December 31, 2010 and 2011, there were no new loan originations for OMIF other than carryback financing related to real estate sales and purchases of loans to protect OMIF’s interest in certain of its loans.  Any sustained period of increased delinquencies, foreclosures or losses or a significant increase in interest rates could adversely affect our ability to originate, purchase and securitize loans, which could significantly harm our business, financial condition, liquidity and results of operations.

Our results are subject to fluctuations in interest rates and other economic conditions.

      As of September 30, 2012, most of our loans do not have a prepayment penalty or exit fee. Based on our manager’s historical experience, we expect that at least 90% of our loans will continue to not have a prepayment penalty. Should interest rates decrease, our borrowers may prepay their outstanding loans with us in order to receive a more favorable rate. This may reduce the amount of income we have available to distribute to you.

      Our results of operations will vary with changes in interest rates and with the performance of the relevant real estate markets. If the economy is healthy, we expect that more people will be borrowing money to acquire, develop or renovate real property. However, if the economy grows too fast, interest rates may increase too much and the cost of borrowing may become too expensive. Alternatively, if the economy enters a recession, real estate development may slow. A slowdown in real estate activity may reduce the opportunities for real estate lending and we may have fewer loans to make or acquire, thus reducing our revenues and the distributions you receive.
 
 
 
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      One of the results of interest rate fluctuations is that borrowers may seek to extend their low-interest-rate loans after market interest rates have increased. If, at a time of relatively low interest rates, a borrower should prepay obligations that have a higher interest rate from an earlier period, we will likely not be able to reinvest the funds in mortgage loans earning that higher rate of interest. In the absence of a prepayment fee, we will receive neither the anticipated revenue stream at the higher rate nor any compensation for its loss. This is a risk if the loans we invest in do not have prepayment penalties or exit fees.
 
 
We face competition for real estate loans that may reduce available returns and fees available.

Our competitors consist primarily of conventional real estate lenders and real estate loan investors, including commercial banks, insurance companies, mortgage brokers, pension funds and other institutional lenders. Many of the companies against which we and Owens Financial Group, Inc. compete have substantially greater financial, technical and other resources than either OMIF or Owens Financial Group, Inc. If our competition decreases interest rates on their loans or makes funds more easily accessible, we may be required to reduce our interest rates, which would reduce our revenues and the distributions you receive.

Owens Financial Group, Inc. will serve pursuant to a long-term Management Agreement that may be difficult to terminate and may not reflect arm’s-length negotiations.

We will enter into a long-term Management Agreement with Owens Financial Group, Inc. The Management Agreement will continue in force for the duration of the existence of Owens Realty Mortgage, Inc., unless terminated earlier pursuant to the terms of the Management Agreement. The Management Agreement may be terminated prior to the termination of our existence: (a) upon the affirmative vote of the holders of a majority of the outstanding shares of Common Stock; (b) by Owens Financial Group, Inc. pursuant to certain procedures set forth in the Management Agreement relating to changes in compensation; (c) automatically in the event of an assignment of the Management Agreement by Owens Financial Group, Inc. (with certain exceptions), unless consented to by Owens Realty Mortgage, Inc. with the approval of the board of directors and holders of a majority of the outstanding shares of Common Stock entitled to vote on the matter; (d) by us upon certain conditions set forth in the Management Agreement, including a breach thereof by Owens Financial Group, Inc.; or (e) by Owens Financial Group, Inc. upon certain conditions set forth in the Management Agreement, including a breach thereof by Owens Realty Mortgage, Inc. Consequently, it may be difficult to terminate our Management Agreement and replace Owens Financial Group, Inc. in the event that its performance does not meet our expectations or for other reasons, unless the conditions for termination of the Management Agreement are satisfied. The Management Agreement was negotiated by related parties and may not reflect terms as favorable as those subject to arm’s-length bargaining.

Owens Financial Group, Inc. will face conflicts of interest concerning the allocation of its personnel’s time.

Owens Financial Group, Inc. and William C. Owens, who owns 56.0976% of the outstanding shares of stock of Owens Financial Group, Inc., anticipate that they may also sponsor other real estate programs having investment objectives and policies similar to ours. As a result, Owens Financial Group, Inc. and William C. Owens may have conflicts of interest in allocating their time and resources between our business and other activities. During times of intense activity in other programs and ventures, Owens Financial Group, Inc. and its key people will likely devote less time and resources to our business than they ordinarily would. Our Management Agreement with Owens Financial Group, Inc. does not specify a minimum amount of time and attention that Owens Financial Group, Inc. and its key people are required to devote to Owens Realty Mortgage, Inc. Thus, Owens Financial Group, Inc. may not spend sufficient time managing our operations, which could result in our not meeting our investment objectives. Currently, Owens Financial Group, Inc. does not sponsor other real estate programs or any other programs that have an objective and policies similar to those of Owens Realty Mortgage, Inc. or OMIF.

Owens Financial Group, Inc. will face conflicts of interest arising from our fee structure.

Owens Financial Group, Inc. will receive fees from borrowers that would otherwise increase our returns. Because Owens Financial Group, Inc. receives all of these fees, our interests will diverge from those of Owens Financial Group, Inc. and William C. Owens when Owens Financial Group, Inc. decides whether we should charge the borrower higher interest rates or Owens Financial Group, Inc. should receive higher fees from borrowers.
 
 
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Owens Financial Group, Inc. earned a total of approximately $1,425,000 for the nine months ended September 30, 2012 and approximately $2,577,000 and $2,457,000 for each of the fiscal years ended December 31, 2011 and 2010, respectively, for managing OMIF. In addition, Owens Financial Group, Inc. earned a total of approximately $60,000, $955,000 and $227,000 in fees from borrowers for the nine months ended September 30, 2012 and the fiscal years ended December 31, 2011 and 2010, respectively. The total amount earned by Owens Financial Group, Inc. that is paid by borrowers represents fees on loans originated or extended for OMIF (including loans fees, late payment charges and miscellaneous fees).

With respect to properties we acquire through foreclosure, we may be unable to renew leases or re-lease space as leases expire on favorable terms or at all, which could have a material adverse effect on our financial condition, results of operations, cash flow, cash available for distribution to you, per share trading price of our Common Stock and our ability to satisfy our debt service obligations.

Because we compete with a number of real estate operators in connection with the leasing of our properties, the possibility exists that one or more of our tenants will extend or renew its lease with us when the lease term expires on terms that are less favorable to us than the terms of the then-expiring lease, or that such tenant or tenants will not renew at all. Because we depend, in large part, on rental payments from our tenants, if one or more tenants renews its lease on terms less favorable to us or does not renew its lease, or if we do not re-lease a significant portion of the space made available, our financial condition, results of operations, cash flow, cash available for distribution, per-share trading price of our Common Stock and ability to satisfy our debt service obligations could be materially adversely affected.

If any of our foreclosed properties incurs a vacancy, it could be difficult to sell or re-lease.

One or more of our properties may incur a vacancy by either the continued default of a tenant under its lease or the expiration of one of our leases. Certain of our properties may be specifically suited to the particular needs of a tenant (e.g., a retail bank branch or distribution warehouse), and major renovations and expenditures may be required in order for us to re-lease vacant space for other uses. We may have difficulty obtaining a new tenant for any vacant space we have in our properties. If the vacancy continues for a long period of time, we may suffer reduced revenues, resulting in less cash available to be distributed to you. In addition, the resale value of a property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.

Our properties may be subject to impairment charges.

We periodically evaluate our real estate investments for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions, tenant performance and legal structure. For example, the early termination of, or default under, a lease by a tenant may lead to an impairment charge. If we determine that an impairment has occurred, we would be required to make an adjustment to the net carrying value of the property, which could have a material adverse effect on our results of operations in the period in which the impairment charge is recorded.

Operating expenses of our properties acquired through foreclosure will reduce our cash flow and funds available for future distributions.

For certain of our properties acquired through foreclosure, we are responsible for operating costs of the property. In some of these instances, our leases require the tenant to reimburse us for all or a portion of these costs, in the form of either an expense reimbursement or increased rent. Our reimbursement may be limited to a fixed amount or a specified percentage annually. To the extent operating costs exceed our reimbursement, our returns and net cash flows from the property and hence our overall operating results and cash flows could be materially adversely affected.
 
 
 
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We would face potential adverse effects from tenant defaults, bankruptcies or insolvencies.

The bankruptcy of our tenants may adversely affect the income generated by our properties. If our tenant files for bankruptcy, we generally cannot evict the tenant solely because of such bankruptcy. In addition, a bankruptcy court could authorize a bankrupt tenant to reject and terminate its lease with us. In such a case, our claim against the tenant for unpaid and future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and it is unlikely that a bankrupt tenant would pay in full amounts it owes us under the lease. Any shortfall resulting from the bankruptcy of one or more of our tenants could adversely affect our cash flow and results of operations.

We face intense competition, which may decrease or prevent increases in the occupancy and rental rates of our properties.

We compete with numerous developers, owners and operators of retail, industrial and office real estate, many of which own properties similar to ours in the same markets in which our properties are located. If one of our properties becomes vacant and our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer substantial rent abatements. As a result, our financial condition, results of operations, cash flow, per share trading price of our Common Stock and ability to satisfy our debt service obligations and to make distributions to you may be adversely affected.

We may be required to make significant capital expenditures to improve our foreclosed properties in order to retain and attract tenants, causing a decline in operating revenue and reducing cash available for debt service and distributions to you.

If adverse economic conditions continue in the real estate market, we expect that, upon expiration of leases at our properties, we will be required to make rent or other concessions to tenants, and/or accommodate requests for renovations, build-to-suit remodeling and other improvements. As a result, we may have to make significant capital or other expenditures in order to retain tenants whose leases expire and to attract new tenants. Additionally, we may need to raise capital to make such expenditures. If we are unable to do so or capital is otherwise unavailable, we may be unable to make the required expenditures. This could result in non-renewals by tenants upon expiration of their leases, which would result in declines in revenue from operations and reduce cash available for debt service and distributions to you.

United States Federal Income Tax Risks Relating to Our REIT Qualification

Our failure to qualify as a REIT would subject us to U.S. federal income tax, which would reduce amounts available for distribution to our stockholders.

Following the REIT conversion, we intend to elect to be taxed as a REIT under the Code. Our qualification as a REIT requires us to satisfy numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within our control. We intend that our organization and method of operation will enable us to qualify as a REIT, but we may not so qualify or we may not be able to remain so qualified in the future. Future legislation, new regulations, administrative interpretations or court decisions could adversely affect our ability to qualify as a REIT or adversely affect our stockholders.

If we fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax (including any applicable alternative minimum tax) on our taxable income at corporate rates, and we would not be allowed to deduct distributions made to our stockholders in computing our taxable income. We may also be disqualified from treatment as a REIT for the four taxable years following the year in which we failed to qualify. The additional tax liability would reduce our net earnings available for investment or distribution to stockholders. In addition, we would no longer be required to make distributions to our stockholders. Even if we continue to qualify as a REIT, we will continue to be subject to certain U.S. federal, state and local taxes on our income and property.
 
 
 
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Changes in the tax laws could make investments in REITs less attractive and could reduce the tax benefits of our REIT conversion.

The U.S. federal income tax laws governing REITs and the administrative interpretations of those laws may be amended or changed at any time. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or you as a stockholder.

Taxable REIT subsidiaries are subject to corporate-level tax, which may devalue our Common Stock relative to other companies.

Taxable REIT subsidiaries are corporations subject to corporate-level tax. Owens Realty Mortgage, Inc.’s use of taxable REIT subsidiaries may cause the market to value its Common Stock lower than the stock of other publicly traded REITs which may not use taxable REIT subsidiaries and lower than the equity of mortgage pools taxable as non-publicly traded partnerships, which generally are not subject to any U.S. federal income taxation on their income and gain.

Distributions from a REIT are currently taxed at a higher rate than corporate distributions.

The maximum U.S. federal income tax rate on both distributions from certain domestic and foreign corporations and net capital gain for individuals is 20%. However, this rate of tax on distributions generally will not apply to our distributions (except those distributions identified by Owens Realty Mortgage, Inc. as “capital gain dividends” which are taxable as long-term capital gain), and therefore such distributions generally will be taxed as ordinary income. Ordinary income generally is subject to U.S. federal income tax at a maximum rate of 39.6% for individuals. The higher tax rate on Owens Realty Mortgage, Inc.’s distributions may cause the market to devalue our Common Stock relative to stock of those corporations whose distributions qualify for the lower rate of taxation.

A portion of our business is potentially subject to prohibited transactions tax.

As a REIT, we will be subject to a 100% tax on our net income from “prohibited transactions.” In general, prohibited transactions are sales or other dispositions of property to customers in the ordinary course of business. Sales by us of property in the course of our business will generally constitute prohibited transactions.

We intend to hold certain property foreclosed upon by OMIF prior to the REIT conversion through one or more wholly-owned corporate taxable REIT subsidiaries to avoid the 100% tax on prohibited transactions.  Foreclosed property that will be held for investment will not be transferred to corporate taxable REIT subsidiaries. In lieu of placing properties in taxable REIT subsidiaries, we may also sell foreclosed properties prior to the REIT conversion, which could result in a lower amount realized by us than if such properties were sold at a later date. Under the Code, no more than 25% of the value of the assets of a REIT may be represented by securities of one or more taxable REIT subsidiaries, and a taxable REIT subsidiary generally cannot operate a lodging or health care facility. These limitations may limit our ability to hold properties through taxable REIT subsidiaries. In the event that we determine that the foreclosed properties are held for investment and, therefore, are not subject to the 100% tax on prohibited transactions, there is no guarantee that the IRS will agree with our determination.  Finally, in the event that any of our foreclosed properties constitute lodging or health care facilities that cannot be operated by a taxable REIT subsidiary, such properties will be operated by an “eligible independent contractor,” as defined in Section 856(d)(9)(A) of the Code.

Our use of taxable REIT subsidiaries may have adverse U.S. federal income tax consequences.

We must comply with various tests to qualify and continue to qualify as a REIT for U.S. federal income tax purposes, and our income from and investments in taxable REIT subsidiaries do not constitute permissible income and investments for purposes of some of the REIT qualification tests. While we will attempt to ensure that our dealings with our taxable REIT subsidiaries will not adversely affect our REIT qualification, we cannot assure you that we will successfully achieve that result. Furthermore, we may be subject to a 100% penalty tax, or our taxable REIT subsidiaries may be denied deductions, to the extent our dealings with our taxable REIT subsidiaries are not deemed to be arm’s length in nature.
 
 
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We may endanger our REIT status if the distributions we receive from our taxable REIT subsidiaries exceed applicable REIT gross income tests.

The annual gross income tests that must be satisfied to ensure REIT qualification may limit the amount of dividends that we can receive from our taxable REIT subsidiaries and still maintain our REIT status. Generally, not more than 25% of our gross income may be derived from non-real estate related sources, such as dividends from a taxable REIT subsidiary. If, for any taxable year, the dividends we receive from our taxable REIT subsidiaries, when added to our other items of non-real estate related income, represent more than 25% of our total gross income for the year, we could be denied REIT status, unless we were able to demonstrate, among other things, that our failure of the gross income test was due to reasonable cause and not willful neglect.

Risks of Ownership of Our Common Stock

A public market for our Common Stock may not develop or be maintained.

There has never been a public market for our Common Stock prior to the REIT conversion. Owens Realty Mortgage, Inc. will apply to list its Common Stock on the NYSE MKT or on a national securities exchange acceptable to Owens Realty Mortgage, Inc. Approval for listing of the shares on the NYSE MKT, or on a national securities exchange acceptable to Owens Realty Mortgage, Inc., is a condition to consummation of the merger and REIT conversion. We cannot assure you that an established or liquid trading market for the Common Stock will develop or that it will continue if it does develop. In the absence of a public market, you may be unable to liquidate your investment in Owens Realty Mortgage, Inc.

The market price and trading volume of our Common Stock may be volatile following the REIT conversion.

The market price of our Common Stock may be highly volatile and be subject to wide fluctuations. In addition, the trading volume in our Common Stock may fluctuate and cause significant price variations to occur. Given our current redemption obligations, there may be significant initial downward pressure on the market price of our Common Stock after the REIT conversion as stockholders liquidate their investment in Owens Realty Mortgage, Inc. As of September 30, 2012, Limited Partners holding approximately 108,200,000 LP Units, representing approximately 38% of all outstanding LP Units and units represented by the Carried Interest and GP Contribution Interest, had requested withdrawals. These requests to redeem LP Units total approximately $102,192,000 (tax basis) and represent approximately 38% of OMIF’s total tax basis capital.  Additionally, Owens Realty Mortgage, Inc. will be dissolved on December 31, 2034, unless our charter is amended. As we move closer to the dissolution date, we expect to stop making new loans, and we expect that our stock price will approach our book value per share.

We cannot assure you that the market price of our Common Stock will not fluctuate or decline significantly in the future. Some of the factors, many of which are beyond our control, that could negatively affect our stock price or result in fluctuations in the price or trading volume of our Common Stock include:

 
• 
additional increases in loans defaulting or becoming non-performing or being written off;
     
 
• 
actual or anticipated variations in our operating results or distributions;
     
 
• 
publication of research reports about us or the real estate industry;
     
 
• 
changes in market valuations of similar companies;
     
 
• 
changes in tax laws affecting REITs;
     
 
• 
adverse market reaction to any increased indebtedness we incur in the future; and
     
 
• 
general market and economic conditions.
 
 
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Market interest rates could have an adverse effect on our stock price.

One of the factors that will influence the price of our Common Stock will be the distribution return on our Common Stock (as a percentage of the price of our Common Stock) relative to market interest rates. Thus, an increase in market interest rates may lead prospective purchasers of our Common Stock to expect a higher distribution yield, which would adversely affect the market price of our Common Stock.

Due to the limitations of our anticipated share purchase program, even if the program is implemented, it may not sufficiently prevent the price of our Common Stock from declining significantly and you may not be able to receive liquidity through the program.
 
Following the REIT conversion, Owens Realty Mortgage, Inc. currently expects to establish a share purchase program designed to temporarily support the price of its Common Stock. However, the share purchase program is only expected to be in effect in the event the average closing price of a share of Common Stock is less than $12.50 over a consecutive two trading-day period.  After the purchase program goes into effect it is expected to terminate upon the earliest of the following events: (i) at such time as the total number of shares purchased under the program exceeds 5% of the total shares of Common Stock outstanding immediately upon the effectiveness of the REIT conversion; (ii) at such time as total purchases made under the program exceed a cost to the Company of $7,000,000; or (iii) at such time as the average closing price of a share of Common Stock is at least $12.50 over a ten consecutive trading-day period.

As a result, the program may be insufficient to support the price of our Common Stock if a large volume of sales of shares of our Common Stock decrease the prevailing market price of our Common Stock.  Even if a substantial number of sales of our Common Stock shares are not affected, the mere perception of the possibility of these sales could depress the market price of our Common Stock.
 
Additionally, the share purchase program we are considering is expected to expire upon any of the above described termination events.  As a result, your ability to receive liquidity on your investment through the program may be restricted. You should not rely on our expected share purchase program to provide you with liquidity.

Under the anticipated terms of the share purchase program we are considering, the program may terminate prior to any share purchases occurring under the program.

Among other possible termination events, the share purchase program we are considering is expected to terminate at such time as the average closing price of a share of Common Stock is at least $12.50 over a ten consecutive trading-day period. Accordingly, if our Common Stock trades at or above $12.50 over a ten consecutive trading-day period immediately following the REIT conversion, the share purchase program may terminate prior to any share purchases occurring under the program.

Risks Related to Our Organization and Structure

Our charter restricts the ownership and transfer of our outstanding stock, which may have the effect of delaying, deferring or preventing a transaction or change of control of Owens Realty Mortgage, Inc.

In order for us to qualify as a REIT, no more than 50% of the value of outstanding shares of our stock may be owned, beneficially or constructively, by five or fewer individuals at any time during the last half of each taxable year other than the year for which we elect to be taxed as a REIT.  Subject to certain exceptions, our charter prohibits any stockholder from owning actually or constructively more than 9.8%, in value or in number of shares, whichever is more restrictive, of the outstanding shares of our Common Stock, and 9.8% in value of the outstanding shares of all classes or series of our stock.  The constructive ownership rules under the Code are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity.  As a result, the acquisition of less than 9.8% of our outstanding Common Stock or the outstanding shares of all classes or series of our stock by an individual or entity could cause that individual or entity to own constructively in excess of the relevant ownership limits.  Our charter also prohibits any person from owning shares of our stock that would result in our being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT. Any attempt to own or transfer shares of our Common Stock in violation of these restrictions may result in the shares being automatically transferred to a charitable trust or may be void.
 
 
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Certain provisions of Maryland law may limit the ability of a third party to acquire control of Owens Realty Mortgage, Inc.

Following the REIT conversion, you will be a stockholder of Owens Realty Mortgage, Inc. The charter and bylaws of Owens Realty Mortgage, Inc. and Maryland corporate law contain provisions (as further described under “Certain Provisions of Maryland Law and of Our Charter and Bylaws” and “Comparison of Rights of Limited Partners of OMIF and Stockholders of Owens Realty Mortgage, Inc.”) that could delay, defer or prevent a transaction or a change in control of us that might involve a premium price for holders of our Common Stock or otherwise be in their best interests.

Subject to certain limitations, provisions of the MGCL prohibit certain business combinations between Owens Realty Mortgage, Inc. and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of us who beneficially owned 10% or more of the voting power of our then outstanding stock at any time during the two-year period immediately prior to the date in question) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder became an interested stockholder.  After the five-year period, business combinations between us and an interested stockholder or an affiliate of an interested stockholder must generally either provide a minimum price (as defined in the MGCL) to our stockholders in cash or other consideration in the same form as previously paid by the interested stockholder or be recommended by our board of directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of our outstanding shares of voting stock and at least two-thirds of the votes entitled to be cast by stockholders other than the interested stockholder and its affiliates and associates.  These provisions of the MGCL relating to business combinations do not apply, however, to business combinations that are approved or exempted by our board of directors prior to the time that the interested stockholder becomes an interested stockholder.  As permitted by the MGCL, our board of directors has adopted a resolution exempting any business combination between us and any other person, provided that the business combination is approved by our board of directors (including a majority of directors who are not affiliates or associates of such persons), and between us and Owens Financial Group, Inc. and its affiliates and associates.  However, our board of directors may repeal or modify this resolution at any time in the future, in which case the applicable provisions of this statute will become applicable to business combinations between us and interested stockholders.

The “control share” provisions of the MGCL provide that a holder of “control shares” of a Maryland corporation (defined as shares which, when aggregated with other shares controlled by the stockholder (except solely by virtue of a revocable proxy), entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) has no voting rights with respect to such shares except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquiror of control shares, our officers and our employees who are also our directors.  Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock.  There can be no assurance that this provision will not be amended or eliminated at any time in the future.

Additionally, Title 3, Subtitle 8 of the MGCL permits our board of directors, without stockholder approval and regardless of any provision in our charter or bylaws, to elect to be subject to certain provisions of the MGCL that may have the effect of delaying, deferring or preventing a transaction or a change of control of Owens Realty Mortgage, Inc. that might involve a premium to the market price of our Common Stock or otherwise be in our stockholders’ best interests.  We have not elected to be subject to any of the provisions of Title 3, Subtitle 8 of the MGCL. See “Certain Provisions of Maryland Law and of Our Charter and Bylaws.”


 
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Our board of directors has the power to cause us to issue additional shares of our stock without stockholder approval.

Our charter authorizes us to issue additional authorized but unissued shares of common or preferred stock.  In addition, our board of directors may, without stockholder approval, amend our charter to increase the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares.  As a result, our board of directors may establish a series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our shares of Common Stock or otherwise be in the best interests of our stockholders.  See “Description of Owens Realty Mortgage, Inc. Stock—Power to Reclassify Unissued Shares of Our Stock—Power to Increase or Decrease Authorized Shares of Stock and Issue Additional Shares of Common and Preferred Stock.”

Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interests.

Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. As permitted by the MGCL, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

 
• 
actual receipt of an improper benefit or profit in money, property or services; or
     
 
• 
a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

In addition, our charter authorizes us to obligate ourselves to indemnify our present and former directors and officers for actions taken by them in those and other capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify, to the maximum extent permitted by Maryland law, each present or former director or officer who is made, or threatened to be made, a party to any proceeding because of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. See “Certain Provisions of Maryland Law and of Our Charter and Bylaws—Indemnification and Limitation of Liability of Directors and Officers.

 
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VOTING AND PROXIES

This proxy statement/prospectus is being furnished to you in connection with the solicitation of proxies by the board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, for use at the special meeting for the purposes described in this proxy statement/prospectus and in the accompanying notice of special meeting of Limited Partners of OMIF.

Date, Time and Place of the Special Meeting

The special meeting of Limited Partners of OMIF will be held on April 3, 2013 at 1:00 p.m., local time, at the Walnut Creek Marriott, 2355 N. Main Street, Walnut Creek, CA 94596.

Purpose of the Special Meeting

At the special meeting, holders of record of LP Units as of the close of business on the record date will be eligible to vote upon the following proposal:

 
• 
To adopt and approve the agreement and plan of merger between OMIF and Owens Realty Mortgage, Inc., and to approve the transactions contemplated thereby, pursuant to which the REIT conversion will be effected; and
     
 
• 
To transact any other business that is properly brought before the special meeting or at any adjournments or postponements thereof.

Recommendation of Owens Financial Group, Inc., the General Partner

The board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, has unanimously approved the merger agreement, the REIT conversion and the other transactions contemplated by the merger agreement and has determined that these actions are advisable and in the best interests of OMIF and its Limited Partners. The board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, unanimously recommends that you vote “FOR” the adoption and approval of the merger agreement, which will effect the REIT conversion, and the approval of the other transactions contemplated by the merger agreement.

As of the close of business on the record date, Owens Financial Group, Inc. owned approximately 1,041,433 LP Units; however, Owens Financial Group, Inc. is not entitled to vote such LP Units with respect to the merger. William C. Owens owns 56.0976% of the capital stock of Owens Financial Group, Inc., and each of Bryan H. Draper, William E. Dutra and Andrew J. Navone owns 14.6341% of the capital stock of Owens Financial Group, Inc. As of the close of business on the record date, directors and executive officers of Owens Financial Group, Inc. and Owens Realty Mortgage, Inc. owned and were entitled to vote approximately 1,416,879 LP Units, representing approximately 0.51% of the LP Units entitled to vote with respect to the merger proposal.  We expect that Owens Financial Group, Inc.’s and Owens Realty Mortgage, Inc.’s directors and executive officers will vote all of their LP Units “FOR” the merger proposal.  LP Units held by Owens Financial Group, Inc. will not count for purposes of determining the existence of a quorum or the approval of the merger agreement and the transactions contemplated thereby by the Limited Partners.

Record Date and Unit Information

The board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, has fixed the close of business on January 28, 2013 as the record date for the determination of Limited Partners entitled to receive notice of, and to vote at, the special meeting. As of the close of business on the record date, there were approximately 277,564,089 LP Units outstanding and entitled to vote and approximately 2,463 holders of record entitled to vote. Each OMIF unit has one vote on all matters properly brought before the special meeting or at any adjournments or postponements of the special meeting.
 
 
 
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Quorum; Vote Required

We must have a quorum at the special meeting to transact any business. This means that a majority of our outstanding LP Units (excluding LP Units held by Owens Financial Group, Inc.) must be represented in person or by proxy at the special meeting. If a properly executed proxy card is returned and the holder of LP Units has abstained from voting, the LP Units represented by the proxy will be counted for purposes of determining the presence of a quorum at the special meeting. An abstention on the merger proposal will have the effect of a vote cast against such proposal. If you fail to return a proxy card or attend the special meeting and do not vote, it will have the same effect as a vote against the merger proposal.

The adoption and approval of the merger agreement and the approval of the transactions contemplated thereby requires an affirmative vote of the holders of a majority of outstanding LP Units entitled to vote at the special meeting (excluding LP Units held by Owens Financial Group, Inc.). A vote for the adoption and approval of the merger agreement has the effect of approving the REIT conversion and the related transactions contemplated by the merger agreement. We have attached a copy of the merger agreement as Annex A to this proxy statement/prospectus. If Limited Partners approve the merger agreement, OMIF will not make any material changes to it unless further Limited Partner approval is obtained.

OMIF reserves the right to cancel or defer the merger even if Limited Partners of OMIF vote to approve the merger agreement and the transactions contemplated thereby and the other conditions to the consummation of the merger are satisfied or waived if the board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, determines that the merger is no longer in the best interests of OMIF and its Limited Partners. There is no time limit for OMIF to cancel or defer the merger.

You are not entitled to dissenters’ rights of appraisal as a result of the merger and REIT conversion.

LP Units Owned by Directors and Executive Officers of Owens Financial Group, Inc. and Owens Realty Mortgage, Inc.

As of the record date, the directors and executive officers of Owens Financial Group, Inc., the sole general partner of OMIF, and of Owens Realty Mortgage, Inc., as a group, beneficially owned and were entitled to vote approximately 1,416,879 LP Units, representing approximately 0.51% of LP Units entitled to vote with respect to the merger proposal. Additionally, approximately 1,041,433 LP Units are held directly and indirectly by Owens Financial Group, Inc., in which William C. Owens owns a 56.0976% interest, and of which each of Bryan H. Draper, William E. Dutra, and Andrew J. Navone owns a 14.6341% interest; however, Owens Financial Group, Inc. is not entitled to vote its LP Units with respect to the merger proposal. None of the directors or executive officers of Owens Financial Group, Inc. or Owens Realty Mortgage, Inc. have entered into any voting agreements with respect to his votes on the merger proposal. However, we expect that the directors and executive officers of Owens Financial Group, Inc. and Owens Realty Mortgage, Inc. will vote all of their LP Units “FOR” the merger proposal, which will effect the REIT conversion.

Voting Procedures

Whether or not you expect to attend the special meeting in person, we urge you to authorize a proxy to vote your LP Units by signing, dating and returning the enclosed proxy card at your earliest convenience. This will ensure the presence of a quorum at the special meeting. Submitting your proxy now will not prevent you from voting your LP Units at the special meeting if you desire to do so, as your vote by proxy is revocable at your option.

If you sign and return the proxy card at or before the special meeting, your LP Units will be voted as you specify on the proxy card. If you sign and return the proxy card but do not specify a vote, your LP Units will be voted “FOR” the merger proposal.

We will appoint an inspector of elections to count the votes cast in person or by proxy at the special meeting. If you mark your proxy to abstain from voting on any matter, your LP Units will be counted for purposes of determining the existence of a quorum, but will not be voted on that matter and will have the effect of a vote cast against such matter.
 
 
 
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You may revoke your proxy at any time after you have sent in your proxy card and before your proxy is voted at the special meeting by:

 
• 
giving written notice to our general partner at Owens Financial Group, Inc., 2221 Olympic Boulevard, Walnut Creek, California 94595 that you revoke your proxy;
     
 
• 
completing and returning a new proxy card, dated as of a later date; or
     
 
• 
attending the special meeting and voting in person, although attendance at the special meeting will not by itself revoke a proxy.

We are not aware of any matter that will be brought before the special meeting other than those described in this proxy statement/prospectus. If any other matters are properly presented at the special meeting, the persons appointed as proxies or their substitutes will have discretion to vote or act on the matter according to their best judgment and applicable law unless the proxy indicates otherwise.

Solicitation of Proxies and Expenses

OMIF intends to outsource its proxy solicitation to Georgeson, Inc., or Georgeson. Personnel for Georgeson will solicit proxies by telephone, mail and over the Internet.  OMIF will bear the cost of this proxy solicitation, which is not anticipated to exceed $20,000.

Stockholder Proposals

Proposals that are intended to be presented by a stockholder at our 2014 annual meeting of stockholders and included in our proxy materials must be received at our principal offices at 2221 Olympic Boulevard, Walnut Creek, California 94595 within a reasonable time before we begin to print and send our proxy materials for the 2014 annual meeting, and must meet all of the other requirements of Rule 14a-8 promulgated under the Exchange Act. If a stockholder intends to present a proposal at our 2014 annual meeting of stockholders but will not seek the inclusion of such proposal in our proxy materials, then the proposal must be received by us not earlier than 150 days prior to the date of our 2014 annual meeting of stockholders or later than 120 days prior to the date of our 2014 annual meeting of stockholders.
 
 

 
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MERGER PROPOSAL

ADOPTION AND APPROVAL OF THE MERGER AGREEMENT
PURSUANT TO WHICH THE REIT CONVERSION WILL BE EFFECTED

This section of this proxy statement/prospectus describes the background of the REIT conversion and certain organizational considerations. You can obtain a more complete understanding of the REIT conversion by reading the merger agreement, a copy of which is attached to this proxy statement/prospectus as Annex A and is incorporated into this proxy statement/prospectus by reference. You are encouraged to read the merger agreement and the other annexes to this proxy statement/prospectus carefully and in their entirety.

Background of the REIT Conversion

As of September 30, 2012, approximately 1,094 Limited Partners, representing approximately 44% of all Limited Partners, have requested redemption of approximately 108,200,000 LP Units. This represents approximately 38% of all outstanding LP Units and units represented by the Carried Interest and GP Contribution Interest. Although the LP Units are registered with the SEC, there is currently no trading market for the LP Units and Limited Partners seeking liquidity have to rely upon the redemption rights provided in the Partnership Agreement. These rights are subject to certain limitations, including a maximum limit which provides that in no event shall the sum of all redemptions permitted under the Partnership Agreement, together with certain permitted transfers and distributions of net proceeds under the Partnership Agreement, exceed 10% of the aggregate capital accounts of all outstanding Limited Partners’ LP Units in any calendar year. This limitation is in place to comply with a safe harbor provision under the tax law permitting OMIF to maintain its partnership status. The total redemption requests have exceeded the annual allowable limit such that requests would be fully subscribed through approximately 2017 for the vast majority of these accounts.

OMIF has been unable to honor its maximum allowable redemption requests, beginning January 1, 2009, due to insufficient cash, net of reserves, and until its bank line of credit was repaid in December 2010, due to restrictions under the terms of the line of credit. In addition, OMIF’s ability to make additional investments in mortgage loans, and thereby generate interest income, has been restricted by provisions within the Partnership Agreement that preclude the origination of investments while qualified redemption requests remain pending and unpaid. Any cash that has been distributed has been returned to all Limited Partners on a pro rata basis. Consequently, Limited Partners seeking to attain liquidity for their LP Units have been unable to do so.

On April 14, 2011, at a special meeting, management of Owens Financial Group, Inc. discussed the inability of Limited Partners to redeem LP Units and outlined potential strategic options. The discussion included the possible liquidation and dissolution of OMIF, the redemption of LP Units at some reduced valuation, and the conversion into a publicly-traded REIT. The discussion included a review of OMIF’s:

· outstanding loan portfolio;
· real-estate-owned portfolio and current fair market values;
· financial statements;
· Partnership Agreement; and
· withdrawal request information.

After discussion of the various options, management concluded that it should (i) further evaluate the financial and tax implications of liquidating OMIF and (ii) perform due diligence related to a possible conversion to a publicly-traded REIT.

On or around May 26, 2011, representatives of OMIF met with representatives from Vestin Mortgage, or Vestin, a commercial lender, who in March 2006 completed the conversion of a limited liability company to a publicly-traded REIT. The parties discussed the process required to complete the conversion and the implications of a conversion for OMIF’s Limited Partners. The Vestin representatives and the representatives of OMIF also discussed the potential for downward pressure on the stock of the REIT resulting from the conversion at the time of listing as a result of the large number of redemption requests outstanding.
 
 
 
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On July 6, 2011, at a special meeting, management of Owens Financial Group, Inc. discussed the REIT conversion process, benefits and drawbacks, and potential market interest for the REIT’s shares after the REIT conversion. Management concluded after consulting with broker dealers who make markets in REIT shares that OMIF’s tenure, historical performance and asset size were likely to be sufficient to result in a liquid market for the shares should OMIF complete a conversion. Management also discussed that the backlog of pending withdrawal requests would likely result in a near-term decline in the REIT share price in the event a significant number of Limited Partners seek to sell their shares soon after conversion. However, management believes that any near-term pressure on the share price would more than likely dissipate over time as the REIT, following its merger with OMIF, resumed its lending activities.

On August 9, 2011, at a special meeting, management of Owens Financial Group, Inc. discussed the results and findings of its due diligence process relating to the potential liquidity options. Management considered the implications of a complete liquidation of OMIF. It was determined that although the liquidation strategy could be undertaken most expeditiously, this option would probably result in a significant, unrecoverable loss of capital for the Limited Partners. Impaired loans and real estate owned represented more than approximately three-quarters of the total assets of OMIF. A liquidation strategy would likely result in sales at material discounts to the appraised values. Real estate values had only begun to stabilize. Many sectors of the market were trading at significant discounts to historical values. A complete liquidation of the assets would require the sale of properties that may be near their low point of value. Furthermore, once it was public knowledge that OMIF was liquidating its assets, potential buyers could use this fact to exert further downward pressure on asset prices. In addition, the costs associated with the administration of the liquidation of assets would be a significant expense to OMIF.

At this meeting, management also reviewed the concept of converting OMIF to a publicly-traded REIT. They considered the potential initial downward pressure on the value of publicly-traded shares, the near and long term liquidity benefits, and income generating potential for the REIT as a result of the resumption of lending activities.

In mid-August 2011, representatives of OMIF met with Ira Levine, a partner with the law firm of Levine, Garfinkel, Katz, LLP and counsel to Vestin, to discuss the REIT conversion process and the transaction costs. At this meeting Mr. Levine recommended that the representatives speak with Venable LLP, a Washington, D.C. based law firm that has represented many publicly-traded REITs in the United States. Soon thereafter, representatives of OMIF and Ira Levine held a conference call with James J. Hanks, Jr., a Baltimore, Maryland-based partner with Venable LLP. On this call the participants discussed the REIT conversion process, timeframes and costs, relevant aspects of Maryland law and Venable’s experience and track record. The participants also discussed the legal challenges involved with converting from a public partnership to a publicly-traded company. Following the meetings with both law firms, Owens Financial Group, Inc. decided to engage Levine, Garfinkel, Katz, LLP to provide an initial draft registration statement on Form S-4 followed by the engagement of Venable LLP as counsel in connection with the completion of the process.

In December 2011, OMIF engaged ValuCorp International, Inc., or ValuCorp, to begin a valuation of OMIF in a “liquidation scenario” (defined below).  OMIF engaged ValuCorp based in part from an industry referral, and because it believed ValuCorp had the requisite competence and independence to prepare the liquidation analysis and their proposed fees and timing were reasonable. ValuCorp is an independent, full service business valuation firm with twelve professionals at seven offices across the country.

On May 22, 2012, management of Owens Financial Group, Inc. held a regularly scheduled meeting. At the meeting management reviewed the rationale for OMIF’s conversion to a publicly-traded REIT. The discussion considered the value of OMIF’s assets as well as information gathered from many meetings and conversations with persons knowledgeable about the process and the execution of a REIT offering. Management continued to believe that the REIT conversion remained in the best interests of the Limited Partners.

In August 2012, OMIF instructed ValuCorp to complete the valuation of OMIF in a “liquidation scenario” (defined as the sale of assets for the purpose of attaining an orderly liquidation value, based on a hypothetical cash sale within one year of June 30, 2012). In connection with the preparation of its valuation report, ValuCorp performed onsite due diligence, interviewed management, reviewed OMIF’s public SEC filings, analyzed general economic conditions, as well as the outlook for the commercial specialty lender industry and performed other analyses and investigations which it deemed appropriate and consistent with accepted business valuation techniques. No limitations were placed on ValuCorp’s analysis. ValuCorp presented their final orderly liquidation valuation opinion and concluded that, in a one year, orderly liquidation scenario, the value of the LP Units was $139,202,392 or $0.49964 per LP
 
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Unit. The valuation noted that “under an Orderly Liquidation scenario the actual value could be substantially lower.” The ValuCorp report defines an “Orderly Liquidation” as a liquidation value at which the assets are sold over a reasonable period of time to maximize proceeds received. ValuCorp earned approximately $37,000 as compensation for its work in connection with the foregoing. A copy of ValuCorp’s opinion, dated September 15, 2012 is attached as Annex E to this proxy statement/prospectus. The full text of the ValuCorp report has been filed with the SEC as an exhibit to the registration statement of which this proxy statement/prospectus is a part.

On September 27, 2012, the board of directors of Owens Financial Group, Inc., the sole general partner of OMIF, convened a special meeting to review and discuss the value of OMIF’s assets and the ValuCorp valuation opinion and report and to reexamine the liquidity scenarios. After the discussion, the board unanimously agreed that the conversion to a publicly-traded REIT is in the best interests of the Limited Partners and directed Owens Financial Group, Inc. to continue to take steps necessary to prepare for and effect the REIT conversion, subject to final board and Limited Partner approval.

During the fall of 2012, representatives of OMIF had various conversations with representatives from the New York Stock Exchange regarding the proposed REIT conversion and the qualifications for public listing. After discussing the qualitative and quantitative requirements, New York Stock Exchange personnel provided a verbal indication that based upon the information provided, Owens Realty Mortgage, Inc., following the REIT conversion would likely meet the standards for listing on the NYSE MKT. Subsequently, management of Owens Financial Group, Inc. provided information requested by the NYSE Regulations, Inc. for listing eligibility purposes. On November 30, 2012, Owens Realty Mortgage, Inc. received a letter indicating that NYSE Regulations, Inc. on behalf of NYSE MKT has cleared Owens Realty Mortgage, Inc. to file an original listing application to list on the NYSE MKT.  This letter does not provide any guarantee that Owens Realty Mortgage, Inc. will be listed following the REIT conversion, but does permit Owens Realty Mortgage, Inc. to continue forward with the process toward seeking a listing on the NYSE MKT.    

On January 23, 2013, the board of directors of Owens Financial Group, Inc. met to consider the proposed REIT conversion. After reconfirming its decision that the proposed REIT conversion is in the best interests of Limited Partners, the board authorized the execution of the merger agreement and approved the merger that will effect the REIT conversion, subject to certain conditions contained in the merger agreement, including Limited Partner approval. On the same date, the board of directors of Owens Realty Mortgage, Inc., after determining that the REIT conversion is in the best interests of Owens Realty Mortgage, Inc., authorized the execution of the merger agreement and approved the merger that will affect the REIT conversion, subject to certain conditions contained in the merger agreement.  On January 23, 2013, Owens Realty Mortgage, Inc. and OMIF entered into the merger agreement.

Our Reasons for the REIT Conversion

The board of Owens Financial Group, Inc., the sole general partner of OMIF, has unanimously determined that the merger, which will affect the REIT conversion, and the related restructuring transactions are fair to, and in the best interests of, OMIF and its Limited Partners. In reaching its determination, the board consulted with OMIF’s legal advisors with respect to the tax implications of the reorganization and related REIT qualifications, as well as with management of Owens Financial Group, Inc. and other internal and external sources deemed to be reliable and competent as to the process and potential outcomes. The factors considered by the board included, without limitation, the following:

·     
To provide liquidity opportunities (post-conversion) for OMIF’s Limited Partners as Owens Realty Mortgage, Inc. will list shares of its Common Stock on the NYSE MKT, or on a national securities exchange acceptable to Owens Realty Mortgage, Inc. Approval for listing of the post-conversion shares on the NYSE MKT, or on a national securities exchange acceptable to Owens Realty Mortgage, Inc., is a condition to the consummation of the merger and REIT conversion;

·     
To provide the opportunity to resume commercial mortgage lending activities, with the goal of increasing monthly income and distributions to stockholders;
 

 
 
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·     
To maximize the availability of assets for investment in commercial mortgage loans by eliminating the need to satisfy redemption requests; and
 
·     
To expand Owens Realty Mortgage, Inc.’s base of potential stockholders. By listing on the NYSE MKT, or on a national securities exchange acceptable to Owens Realty Mortgage, Inc., and providing positive operating performance, Owens Realty Mortgage Inc.’s stockholder base may expand as a greater number of potential investors, attracted to yield, will be exposed to Owens Realty Mortgage, Inc., which may improve the overall liquidity of the Common Stock.

The board also weighed the advantages against the potential risks of the REIT conversion, including:

·     
The need to comply with the highly complicated REIT qualification provisions under the Code;

·     
The backlog of redemption requests could result in a near-term decline in the stock price of Owens Realty Mortgage, Inc. due to a large number of Limited Partners attempting to sell their shares;
 
·     
The listing (or quoting) of the shares, post-conversion, without a concurrent capital offering attracting additional investors could negatively impact the price per share in the near-term;
 
·     
The market price of the shares could be reduced until such time that net income distributions become commensurate with industry expectations; and
 
·     
The potential risks discussed in “Risk Factors – Risks and Effects of the Merger and the REIT Conversion” beginning on page 19.

The foregoing discussion includes the material information and factors considered by the board of Owens Financial Group, Inc., the sole general partner of OMIF. The board did not quantify or otherwise assign relative weights to the particular factors considered but conducted an overall analysis of the information presented to, and considered by, it in reaching its determination.

Organizational Actions

We formed Owens Realty Mortgage, Inc. as a Maryland corporation because we believe that Maryland law is generally favorable to organizing and conducting business as a REIT. As discussed below, Maryland law facilitates qualification as a REIT by authorizing the charter of a Maryland corporation to provide for restrictions on ownership and transferability designed to permit a corporation to qualify as a REIT under the Code or for any other purpose. In addition, unlike other states, including Delaware, Maryland does not presently impose a franchise tax on corporations, which will result in cost savings to us in annual franchise tax payments and related fees. Maryland’s status as a jurisdiction favorable to REITs is evidenced by the large number of publicly-traded REITs that have chosen to operate as a regular Maryland corporation or as a special statutory Maryland real estate investment trust.

To satisfy certain requirements that are applicable to REITs and to limit stock ownership above certain levels, Owens Realty Mortgage, Inc. has included restrictions on ownership and transfer of Common Stock in its charter. Under the laws of some states, including Delaware, such restrictions would not be binding with respect to securities issued before adoption of the restriction unless holders of such securities agree to or vote for such restriction. Under Maryland law and because of the merger, however, all shares of Common Stock issued in the merger and thereafter would be subject to the ownership and transfer limits in the Owens Realty Mortgage, Inc. charter, for which authority exists under Maryland law.

Pursuant to the Owens Realty Mortgage, Inc. charter, if certain proposed transfers of stock or other events occur that result in a person owning shares in excess of the ownership limit, then that number of shares of stock actually or constructively owned by that person in violation of the ownership limit will be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries. The intended transferee will not acquire any rights in the shares. Shares held by the trustee will constitute issued and outstanding shares of stock. The trustee of the trust will have all voting rights
 
 
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and rights to dividends or other distributions with respect to shares held in the trust, which rights will be exercised for the exclusive benefit of the charitable beneficiary. Any dividend or other distribution paid before Owens Realty Mortgage, Inc.’s discovery that shares of stock have been transferred to the trust must be paid to the trustee upon demand and any dividend or other distribution authorized but unpaid must be paid when due to the trustee. Any dividends or distributions paid to the trustee will be held in trust for the charitable beneficiary. Subject to Maryland law, effective as of the date that such shares have been transferred to the trustee, the trustee will have the authority (at the trustee’s sole discretion) (1) to rescind as void any vote cast by the intended transferee before Owens Realty Mortgage, Inc.’s discovery that such shares have been transferred to the trustee and (2) to recast such vote in accordance with the desires of the trustee acting for the benefit of the charitable beneficiary. However, if Owens Realty Mortgage, Inc. has already taken irreversible corporate action, then the trustee may not rescind and recast such vote.

Prior to the consummation of the REIT conversion, we intend to transfer various properties that OMIF foreclosed upon to one or more wholly-owned corporate taxable REIT subsidiaries in order to comply with certain REIT qualification restrictions and to avoid penalty taxes on any income from the future sale of these properties. Income from these wholly-owned taxable REIT subsidiaries will be either distributed to Owens Realty Mortgage, Inc., where it will contribute to income available for distribution to our stockholders or be reinvested into Owens Realty Mortgage, Inc.’s business, or be retained by the taxable REIT subsidiaries and used to fund their operations. In lieu of placing properties in taxable REIT subsidiaries, we may also sell foreclosed properties prior to the REIT conversion, which could result in a lower amount realized by us than if such properties were sold at a later date.

In the event Limited Partners of OMIF do not approve the merger agreement and the transactions contemplated thereby, and consequently the REIT conversion, at the special meeting, OMIF will continue to operate as a California Limited Partnership, the merger will not take place and the other transactions comprising the conversion to a REIT will not be completed at this time.

OMIF reserves the right to cancel or defer the merger even if Limited Partners of OMIF vote to approve the merger agreement and the transactions contemplated thereby and the other conditions to the consummation of the merger are satisfied or waived if the board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, determines that the merger is no longer in the best interests of OMIF and its Limited Partners. There is no time limit for OMIF to cancel or defer the merger.

 
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TERMS OF THE MERGER

The following is a summary of the material terms of the merger agreement. This summary is qualified in its entirety by reference to the merger agreement attached to this proxy statement/prospectus as Annex A and incorporated herein by reference. You should read carefully the merger agreement in its entirety as it is the legal document that governs the merger.

Structure and Completion of the Merger

The merger agreement provides that OMIF will merge with and into Owens Realty Mortgage, Inc., whereupon the separate existence of OMIF will cease and Owens Realty Mortgage, Inc. will be the surviving entity in the merger. At the effective time of the merger, each outstanding 25 LP Units will be converted into one share of Common Stock. The units of OMIF representing the general partner interest of Owens Financial Group, Inc. will be treated as follows: (a) the 1,496,600 units representing the Carried Interest will be cancelled upon consummation of the merger; and (2) the approximate 1,378,256 units representing the GP Contribution Interest will be converted into shares of Common Stock in the same manner LP Units are converted into shares of Common Stock. The 1,000 shares of Common Stock owned by William C. Owens, the sole stockholder of Owens Realty Mortgage, Inc. prior to the REIT conversion, will be cancelled in exchange for $1,000 in the merger. No fractional shares of Common Stock will be issued in connection with the merger. Instead, cash adjustments will be paid in respect of any shares of Common Stock that would otherwise be issuable, and the amount of such cash adjustments shall be determined in good faith by the board of directors of Owens Realty Mortgage, Inc. In connection with the merger, Owens Realty Mortgage, Inc. will directly or indirectly succeed to and continue to operate all of the business of OMIF.

OMIF anticipates that the merger will become effective as promptly as practicable following approval by the OMIF Limited Partners of the merger agreement and the transactions contemplated thereby at the special meeting and satisfaction or waiver of the other conditions to the merger. If Limited Partners approve the merger agreement and the transactions contemplated thereby, no material changes will be made to it unless further Limited Partner approval is obtained. The merger agreement provides that OMIF and Owens Realty Mortgage, Inc. may abandon the merger at any time before its effectiveness by mutual consent. OMIF and Owens Realty Mortgage, Inc. have no current intention of abandoning the merger after the special meeting if approval is obtained and the other conditions to the merger are satisfied or waived. See “Terms of Merger - Conditions to the Merger.

The board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, and the board of directors of Owens Realty Mortgage, Inc. have both approved the merger agreement and the transactions contemplated by the merger agreement, subject to approval of the Limited Partners of OMIF. Assuming the Limited Partners of OMIF approve the merger agreement and the transactions contemplated thereby at the special meeting and the other conditions to the merger are satisfied or waived, the merger will become effective at the time set forth in the articles of merger and certificate of merger or the later of the time: (a) the articles of merger are accepted for record by the SDAT in accordance with Maryland law or (b) the certificate of merger is accepted for filing by the California Secretary of State in accordance with the California Corporations Code.

It is expected that our Common Stock will be approved for listing on the NYSE MKT, or on a national securities exchange acceptable to Owens Realty Mortgage, Inc., at or before the effective time of the merger. If the shares of Common Stock are not approved for listing on the NYSE MKT, or on a national securities exchange acceptable to Owens Realty Mortgage, Inc., we will not consummate the merger.

Other Effects of the Merger

We expect the following to occur in connection with the merger:

 
• 
Charter Documents and Governing Law. Owens Realty Mortgage, Inc. and its stockholders will be governed by Maryland law and the charter and bylaws of Owens Realty Mortgage, Inc., copies of which are attached to this proxy statement/prospectus as Annexes B and C, respectively.
     
 
• 
Other Restructuring Transactions. Certain properties acquired through foreclosure prior to completion of the merger will be transferred to one or more wholly-owned corporate taxable REIT subsidiaries in order to comply with certain REIT qualification restrictions and to avoid penalty taxes on
     
 
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    any income from the future sale of these properties. Properties held for investment will not be transferred to corporate subsidiaries. The composition and value of any assets to be transferred can only be determined at the time of the REIT conversion. In lieu of placing properties in taxable REIT subsidiaries, we may also sell foreclosed properties prior to the REIT conversion, which could result in a lower amount realized by us than if such properties were sold at a later date.
     
 
 
Directors and Officers. The director and officers of Owens Realty Mortgage, Inc. immediately before the merger will continue to be the director and officers, respectively, of Owens Realty Mortgage, Inc. immediately after the merger. Additionally, we expect that upon the consummation of the merger, four additional directors will be elected to the board of directors of Owens Realty Mortgage, Inc. See “Management—Directors and Executive Officers.”
     
 
 
Management Agreement. Owens Financial Group, Inc. will serve as the manager of Owens Realty Mortgage, Inc., subject to the oversight of the board of directors of Owens Realty Mortgage, Inc. pursuant to the terms and conditions of the form of Management Agreement attached as Annex D to this proxy statement/prospectus.
     
 
 
Listing of Owens Realty Mortgage, Inc. Common Stock. We expect that the Common Stock will trade on the NYSE MKT or on a national securities exchange acceptable to Owens Realty Mortgage, Inc. following completion of the merger. If the shares of Common Stock are not approved for listing on the NYSE MKT or on a national securities exchange acceptable to Owens Realty Mortgage, Inc., we will not consummate the merger.
 

Conditions to the Merger

The respective obligations of OMIF and Owens Realty Mortgage, Inc. to complete the merger are subject to satisfaction or waiver of the conditions specified in the merger agreement. The closing conditions include:

 
• 
Owens Realty Mortgage, Inc. Registration Statement. Owens Realty Mortgage, Inc.’s registration statement registering the shares of its Common Stock to be issued in the merger, of which this proxy statement/prospectus forms a part, must be effective, no stop order suspending its effectiveness may be in effect, and no proceeding for suspending its effectiveness may be pending or threatened by the SEC.
     
 
• 
Limited Partner and Stockholder Approval. The merger agreement and the merger must be approved by Limited Partners holding a majority of the outstanding LP Units (excluding LP Units held by Owens Financial Group, Inc.). The merger agreement must be approved by the holders of a majority of the outstanding shares of Common Stock.
     
 
Exchange Listing. The Common Stock must have been approved for listing on the NYSE MKT, or on a national securities exchange acceptable to Owens Realty Mortgage, Inc.
     
 
• 
Tax Opinion. OMIF must receive from counsel a legal opinion generally to the effect that (a) the merger qualifies as a transaction described in Section 351 of the Code and (b) Owens Realty Mortgage, Inc.’s organization and proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT for the taxable year 2013 and thereafter.
     
 
Adverse Legislation. No statute, rule, regulation, executive order, decree, injunction or other order may have been enacted, entered, promulgated or enforced by any court or governmental authority that has the effect of prohibiting the consummation of the merger.
     
 
• 
Governmental and Third-Party Consents. Any necessary state and local governmental and third-party consents must have been received. Owens Financial Group, Inc., acting on behalf of OMIF, may waive this closing condition.
     
 
• 
No Adverse Tax Legislation. Owens Financial Group, Inc., acting on behalf of OMIF, must have determined, in its sole discretion, that no legislation or proposed legislation with a reasonable possibility of being enacted would have the effect of impairing the ability of Owens Realty Mortgage, Inc. to qualify as a REIT.
 
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Termination of the Merger Agreement

Either OMIF or Owens Realty Mortgage, Inc. may terminate the merger agreement at any time prior to the effective time if:

 
• 
a governmental authority has issued a final, non-appealable order, decree or ruling, or taken any other action, that would permanently prohibit the merger;
     
 
• 
the Limited Partners of OMIF fail to approve the merger agreement and the resulting merger; 
     
 
the stockholders of Owens Realty Mortgage, Inc. fail to approve the merger; or
     
 
• 
any other closing condition is not satisfied or waived.
     
OMIF has no current intention of abandoning the merger after the special meeting if Limited Partner approval is obtained and the other conditions to the merger are satisfied or waived. However, OMIF reserves the right to cancel or defer the merger even if Limited Partners of OMIF vote to approve the merger agreement and the transactions contemplated thereby and the other conditions to the consummation of the merger are satisfied or waived if the board of directors of Owens Financial Group, Inc., as the sole general partner of OMIF, determines that the merger is no longer in the best interests of OMIF and its Limited Partners. There is no time limit for OMIF to cancel or defer the merger.

Interests of Owens Financial Group, Inc. and Its Directors and Executive Officers, and the Directors and Executive Officers of Owens Realty Mortgage, Inc. in the REIT Conversion

If the REIT conversion is consummated, OMIF’s total capital will not continue to be reduced to satisfy redemption requests. Instead, the capital may be used to invest in new loans from which Owens Financial Group, Inc. can continue to earn fees. William C. Owens, the Chairman, President and Chief Executive Officer of Owens Financial Group, Inc. and  the Chief Executive Officer, President, and director of Owens Realty Mortgage, Inc., owns 56.0976% of the capital stock of Owens Financial Group, Inc. and will benefit from any increase in the profitability of Owens Financial Group, Inc. Bryan H. Draper, a director and the Secretary and Chief Financial Officer of Owens Financial Group, Inc. and the Secretary, Chief Financial Officer, and Treasurer of Owens Realty Mortgage, Inc., William E. Dutra, a director and Senior Vice President of Owens Financial Group, Inc. and Andrew J. Navone, a director and a Senior Vice President of Owens Financial Group, Inc., each own 14.6341% of the capital stock of Owens Financial Group, Inc. and each will benefit from any increase in the profitability of Owens Financial Group, Inc. Except for the foregoing and except for the Management Agreement and the potential conflicts of interest that may arise with Owens Financial Group, Inc. managing our affairs, we are not aware of any interests of Owens Financial Group, Inc. or its directors and executive officers, or the directors and officers of Owens Realty Mortgage, Inc. in the merger that are different from, or in addition to, the interests of other Limited Partners of OMIF.

Regulatory Approvals

We are not aware of any U.S. federal, state or local regulatory requirements that must be complied with or approvals that must be obtained prior to consummation of the merger, other than:

 
• 
compliance with applicable U.S. federal and state tax and securities laws; and
     
 
• 
the filing and acceptance of articles of merger and a certificate of merger as required by the MGCL and the California Corporations Code, respectively.

 
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Absence of Dissenters’ Rights

The Limited Partners of OMIF will not be entitled to dissenter’s rights of appraisal as a result of the merger and the REIT conversion.

Restrictions on Sales of Owens Realty Mortgage, Inc. Common Stock Issued in the Merger

Subject to the restrictions on ownership and transfer in Owens Realty Mortgage, Inc.’s charter, all shares of Common Stock that current OMIF Limited Partners receive pursuant to the merger will be freely transferable, except for shares received by persons deemed to be “affiliates” of OMIF or Owens Realty Mortgage, Inc. under the Securities Act. These affiliates may not sell their shares of Common Stock received in connection with the merger unless the sale, transfer or other disposition is:

 
• 
made in conformity with the requirements of Rule 145(d) under the Securities Act;
     
 
• 
made pursuant to an effective registration statement under the Securities Act; or
     
 
• 
otherwise exempt from registration under the Securities Act.
     
Persons who may be deemed affiliates for this purpose generally include individuals or entities that control, are controlled by, or are under common control with, either OMIF, Owens Realty Mortgage, Inc. or Owens Financial Group, Inc., and may include some of each company’s respective directors and officers, as well as some of each company’s respective principal stockholders. The registration statement of which this proxy statement/prospectus forms a part does not cover the resale of shares of Common Stock to be received by affiliates in the merger.

Accounting Treatment of the Merger

OMIF owns all the operating assets and liabilities involved in the merger, and these assets will be transferred to Owens Realty Mortgage, Inc., as the surviving entity in the merger. These assets and liabilities will be transferred at historical carrying values in accordance with accounting principles generally accepted in the United States. The primary effect of the merger is reorganizing the equity structure available to investors and providing them with liquidity. Accordingly, equity balances will be recapitalized to reflect shares issued in the merger and REIT conversion.






 
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OTHER RESTRUCTURING TRANSACTIONS; FORMATION OF TAXABLE REIT SUBSIDIARIES

We intend to effect certain structural changes prior to, or substantially concurrent with, the proposed merger. These restructuring transactions are designed to ensure, following consummation of the merger, Owens Realty Mortgage, Inc.’s eligibility to elect REIT status and to improve Owens Realty Mortgage, Inc.’s tax efficiency.  For example, we intend to transfer to one or more wholly-owned corporate taxable REIT subsidiaries certain properties acquired through foreclosure prior to completion of the merger in order to comply with certain REIT qualification restrictions and to avoid penalty taxes on any income from the future sale of these properties.  Properties held for investment will not be transferred to corporate subsidiaries.  The composition and value of any assets to be transferred can only be determined at the time of the REIT conversion. In lieu of placing properties in taxable REIT subsidiaries, we may also sell foreclosed properties prior to the REIT conversion, which could result in a lower amount realized by us than if such properties were sold at a later date.

 
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EXECUTIVE COMPENSATION

OMIF has no directors, officers or employees. Owens Financial Group, Inc. and its directors, officers and employees manage and control the affairs of OMIF, perform the day-to-day business of OMIF, and have general and final authority in all matters affecting OMIF’s business. OMIF does not pay or award any cash or equity compensation to any persons other than amounts paid to Owens Financial Group, Inc. under the terms of the Partnership Agreement. OMIF does not have any employment agreements with any person, any arrangement that provides for the payment of retirement benefits, or any change-in-control arrangements with any person.

The following tables summarize the compensation and reimbursed expenses paid to or earned by Owens Financial Group, Inc. for the nine months ended September 30, 2012, and the years ended December 31, 2011 and 2010, showing the actual amounts and the maximum allowable amounts. No other compensation was paid by OMIF or by OMIF borrowers to Owens Financial Group, Inc. during these periods. Such fees were established by Owens Financial Group, Inc. and were not determined by arms-length negotiation. For a summary of types of compensation described below, see “Related Party Transactions.”


   
Nine Months Ended
   
September 30, 2012
       
Maximum
Form of Compensation
 
Actual
 
Allowable
Paid by OMIF:
           
Management Fees**
 
$
1,301,000
 
$
1,356,000
Servicing Fees
   
123,000
   
123,000
Carried Interest
   
   
Subtotal
 
$
1,424,000
 
$
1,479,000
             
Paid by Borrowers:
           
Acquisition and Origination Fees
 
$
24,000
 
$
24,000
Late Payment Charges
   
36,000
   
36,000
Miscellaneous Fees
   
   
Subtotal
 
$
60,000
 
$
60,000
             
Total
 
$
1,484,000
 
$
1,539,000
Reimbursement by OMIF of
     Other Expenses
 
$
500,000
 
$
500,000
     


     
   
Year Ended
   
December 31, 2011
       
Maximum
Form of Compensation
 
Actual
 
Allowable
Paid by OMIF:
           
Management Fees**
 
$
2,312,000
 
$
2,909,000
Servicing Fees
   
264,000
   
264,000
Carried Interest
   
   
Subtotal
 
$
2,576,000
 
$
3,173,000
             
Paid by Borrowers:
           
Acquisition and Origination Fees
 
$
168,000
 
$
168,000
Late Payment Charges
   
779,000
   
779,000
Miscellaneous Fees
   
8,000
   
8,000
Subtotal
 
$
955,000
 
$
955,000
             
Total
 
$
3,531,000
 
$
4,128,000
Reimbursement by OMIF of
     Other Expenses
 
$
641,000
 
$
641,000


 
50

 



   
Year Ended
December 31, 2010
       
Maximum
Form of Compensation
 
Actual
 
Allowable
Paid by OMIF:
           
Management Fees**
 
$
1,966,000
 
$
5,905,000
Servicing Fees
   
491,000
   
491,000
Carried Interest
   
   
Subtotal
 
$
2,457,000
 
$
6,396,000
             
Paid by Borrowers:
           
Acquisition and Origination Fees
 
$
83,000
 
$
83,000
Late Payment Charges
   
132,000
   
132,000
Miscellaneous Fees
   
12,000
   
12,000
Subtotal
 
$
227,000
 
$
227,000
             
Total
 
$
2,684,000
 
$
6,623,000
Reimbursement by OMIF of
     Other Expenses
 
$
63,000
 
$
63,000

** The management fees paid to Owens Financial Group, Inc. are determined by Owens Financial Group, Inc. within the limits set by the Partnership Agreement.

Aggregate actual compensation paid by OMIF and by borrowers to Owens Financial Group, Inc. during the nine months ended September 30, 2012 and the years ended December 31, 2011 and 2010, exclusive of expense reimbursement, was $1,484,000, $3,531,000 and $2,684,000, respectively, or 0.81%, 2.0% and 1.2%, respectively, of OMIF partners’ capital. If the maximum amounts had been paid to Owens Financial Group, Inc. during these periods, the compensation, excluding reimbursements, would have been $1,539,000, $4,128,000 and $6,623,000, respectively, or 0.84%, 2.3% and 3.1%, respectively, of partners’ capital.

Owens Financial Group, Inc. believes that the maximum allowable compensation payable to it is commensurate with the services provided. However, in order to maintain a competitive advantage for OMIF, Owens Financial Group, Inc. in the past has chosen not to take the maximum allowable compensation. However, due to reduced levels of mortgage investments held by OMIF, during the nine months ended September 30, 2012, Owens Financial Group, Inc. has chosen to take close to the maximum compensation that it is able to take pursuant to the Partnership Agreement and will likely continue to take the maximum compensation for the foreseeable future.

Owens Realty Mortgage, Inc. does not expect to have compensation policies or pay any compensation to any persons other than: (i) amounts paid to Owens Financial Group, Inc. as its manager under the terms of the Management Agreement attached hereto as Annex D; and (ii) board or committee meeting attendance fees that may be paid to directors.  Owens Realty Mortgage, Inc. has yet to commence business and accordingly, its director and executive officers have not yet earned, been awarded, or been paid any compensation by any person.

No director or officer or employee of OMIF, Owens Realty Mortgage, Inc. or Owens Financial Group, Inc. will receive any type of compensation, whether present, deferred or contingent, that is based on, or otherwise relates to, the merger and REIT conversion proposed hereby.



 
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MANAGEMENT AGREEMENT

The following is a summary of certain terms of the Management Agreement to be executed in connection with the REIT conversion. This summary is qualified in its entirety by reference to the form of Management Agreement attached to this proxy statement prospectus as Annex D and incorporated herein by reference. You should read carefully the Management Agreement in its entirety.

General Duties

Owens Financial Group, Inc. will serve as manager to Owens Realty Mortgage, Inc. and its subsidiaries after the REIT conversion. Subject to the oversight of Owens Realty Mortgage, Inc.’s board of directors and in accordance with Owens Realty Mortgage, Inc.’s charter and bylaws, Owens Financial Group, Inc. will be responsible for the day-to-day operations of Owens Realty Mortgage, Inc. and its subsidiaries and will perform such services and activities relating to the assets and operations of Owens Realty Mortgage, Inc. and its subsidiaries as may be appropriate, including:


 
• 
serving as consultant to Owens Realty Mortgage, Inc. and its subsidiaries with respect to the formulation of investment criteria, interest rate risk management and preparation of policy guidelines by Owens Realty Mortgage, Inc.’s board of directors;
     
 
• 
investigating, analyzing and selecting possible investment opportunities and acquiring, financing, retaining, selling, restructuring or disposing of investments consistent with Owens Realty Mortgage, Inc.’s investment policies;
     
 
• 
with respect to prospective purchases, sales or exchanges of investments, conducting negotiations on behalf of Owens Realty Mortgage, Inc. and its subsidiaries with sellers, purchasers and brokers and, if applicable, their respective agents and representatives;
     
 
• 
negotiating and entering into, on behalf of Owens Realty Mortgage, Inc. and its subsidiaries, repurchase agreements, credit finance agreements, securitizations, agreements relating to borrowings under programs established by the U.S. government, commercial papers, interest rate swap agreements and other hedging instruments, custodial agreements, warehouse facilities and all other agreements and engagements required for Owens Realty Mortgage, Inc. and its subsidiaries to conduct their business;
     
 
• 
advising, negotiating, managing and overseeing the origination, extension, modification, re-financing, evaluation, selection, acquisition, processing, brokerage and servicing of mortgage loans;
     
 
• 
foreclosing upon real property and other collateral on behalf of Owens Realty Mortgage, Inc. or any subsidiary and advising, developing, managing and either holding for investment on behalf of Owens Realty Mortgage, Inc. or any subsidiary, or disposing of real property or other collateral acquired by Owens Realty Mortgage, Inc. or any subsidiary through foreclosure of any secured assets, either directly or through general partnerships, joint ventures or otherwise;
     
 
• 
coordinating and managing operations of any joint venture or co-investment interests held by Owens Realty Mortgage, Inc. and its subsidiaries and conducting all matters with the joint venture or co-investment partners;
     
 
• 
providing executive and administrative personnel, office space and office services required in rendering services to Owens Realty Mortgage, Inc. and its subsidiaries;
     
 
• 
administering the day-to-day operations and performing and supervising the performance of such other administrative functions necessary to the management of Owens Realty Mortgage, Inc. and its subsidiaries as may be agreed upon by Owens Financial Group, Inc. and Owens Realty Mortgage, Inc.’s board of directors, including the collection of revenues and the payment of the debts and obligations of Owens Realty Mortgage, Inc. and its subsidiaries and maintenance of appropriate computer and technological services to perform such administrative functions;


 
52

 

 
• 
communicating on behalf of Owens Realty Mortgage, Inc. and its subsidiaries with the holders of any of their equity or debt securities as required to satisfy the reporting and other requirements of any governmental bodies or agencies or trading markets and to maintain effective relations with such holders;
     
 
• 
counseling Owens Realty Mortgage, Inc. in connection with policy decisions to be made by its board of directors;
     
 
• 
evaluating and recommending to Owens Realty Mortgage, Inc.’s board of directors hedging strategies and engaging in hedging activities (consistent with such strategies as so modified from time to time) on behalf of Owens Realty Mortgage, Inc. and its subsidiaries consistent with Owens Realty Mortgage, Inc.’s qualification as a REIT and with its investment policies;
     
 
• 
counseling Owens Realty Mortgage, Inc. regarding the maintenance of its qualification as a REIT and monitoring compliance with the various REIT qualification tests and other rules set out in the Code and the Treasury Regulations and using commercially reasonable efforts to cause Owens Realty Mortgage, Inc. to qualify for taxation as a REIT;
     
 
counseling Owens Realty Mortgage, Inc. and its subsidiaries regarding the maintenance of their exemptions from the status of an investment company required to register under the Investment Company Act of 1940, as amended, or the Investment Company Act, monitoring compliance with the requirements for maintaining such exemptions and using commercially reasonable efforts to cause them to maintain such exemptions from such status;
     
 
• 
assisting Owens Realty Mortgage, Inc. and its subsidiaries in developing criteria for asset purchase commitments that are specifically tailored to Owens Realty Mortgage, Inc.’s investment policies and making available to Owens Realty Mortgage, Inc. and its subsidiaries its knowledge and experience with respect to mortgage loans, real estate, real estate-related securities, other real estate-related assets and non-real estate-related assets;
     
 
• 
furnishing reports and statistical and economic research to Owens Realty Mortgage, Inc. and its subsidiaries regarding activities and services performed for Owens Realty Mortgage, Inc. and its subsidiaries by Owens Financial Group, Inc.;
     
 
• 
monitoring the operating performance of investments and providing periodic reports with respect thereto to Owens Realty Mortgage, Inc.’s board of directors, including comparative information with respect to such operating performance and budgeted or projected operating results;
     
 
• 
investing and reinvesting any moneys and securities of Owens Realty Mortgage, Inc. and its subsidiaries (including investing in short-term investments pending investment in other investments, payment of fees, costs and expenses, or payments of dividends or distributions to stockholders and partners of Owens Realty Mortgage, Inc. and its subsidiaries) and advising Owens Realty Mortgage, Inc. and its subsidiaries as to their capital structure and capital raising;
     
 
• 
purchasing and maintaining, on behalf of Owens Realty Mortgage, Inc., liability and other insurance coverage for Owens Realty Mortgage, Inc.;
     
 
• 
causing Owens Realty Mortgage, Inc. and its subsidiaries to retain qualified accountants, auditors and legal counsel, as applicable, to assist in developing appropriate accounting procedures and systems, internal controls and other compliance procedures and testing systems with respect to financial reporting obligations and compliance with the provisions of the Code applicable to REITs and to conduct quarterly and other compliance reviews with respect thereto;
     
 
• 
assisting Owens Realty Mortgage, Inc. and its subsidiaries in qualifying to do business in all applicable jurisdictions and to obtain and maintain all appropriate licenses;
     
 
• 
maintaining records for and accounts of Owens Realty Mortgage, Inc.’s operations and expenditures;
 
 

 
53

 

 
• 
assisting Owens Realty Mortgage, Inc. and its subsidiaries in complying with all regulatory requirements applicable to them in respect of their business activities, including preparing or causing to be prepared all financial statements required under applicable regulations and contractual undertakings and all reports and documents, if any, required under the Exchange Act, the Securities Act, or by the NYSE MKT, or any other applicable national securities exchange;
     
 
• 
assisting Owens Realty Mortgage, Inc. and its subsidiaries in taking all necessary action to enable them to make required tax filings and reports, including soliciting stockholders and partners for required information to the extent required by the provisions of the Code applicable to REITs;
     
 
• 
placing, or arranging for the placement of, all orders pursuant to Owens Financial Group, Inc.’s investment determinations for Owens Realty Mortgage, Inc. and its subsidiaries, either directly with the issuer or with a broker or dealer (including any affiliated broker or dealer);
     
 
• 
handling and resolving all claims, disputes or controversies (including all litigation, arbitration, settlement or other proceedings or negotiations) in which Owens Realty Mortgage, Inc. or its subsidiaries may be involved or to which they may be subject arising out of their day-to-day operations (other than with Owens Financial Group, Inc. or its affiliates), subject to such limitations or parameters as may be imposed from time to time by Owens Realty Mortgage, Inc.’s board of directors;
     
 
• 
using commercially reasonable efforts to cause expenses incurred by Owens Realty Mortgage, Inc. and its subsidiaries or on their behalf to be commercially reasonable or commercially customary and within any budgeted parameters or expense guidelines set forth in the Management Agreement and by Owens Realty Mortgage, Inc.’s board of directors from time to time;
     
 
• 
representing and making recommendations to Owens Realty Mortgage, Inc. and its subsidiaries in connection with the purchase and financing of, and commitment to purchase and finance, mortgage loans (including on a portfolio basis), real estate, real estate-related securities and loans, other real estate-related assets and non-real estate-related assets, and the sale and commitment to sell such assets;
     
 
• 
advising Owens Realty Mortgage, Inc. and its subsidiaries with respect to obtaining appropriate repurchase agreements, warehouse facilities or other secured and unsecured forms of borrowing for their assets;
     
 
• 
advising Owens Realty Mortgage, Inc. on preparing, negotiating and entering into applications and agreements relating to programs established by the U.S. government and other government-type or related entities;
     
 
• 
advising Owens Realty Mortgage, Inc. and its subsidiaries with respect to, and structuring long-term financing vehicles for, their portfolio of assets, and offering and selling securities publicly or privately in connection with any such structured financing;
     
 
• 
performing such other services as may be required from time to time for management and other activities relating to the investments, assets and business of Owens Realty Mortgage, Inc. and its subsidiaries as Owens Realty Mortgage, Inc.’s board of directors shall reasonably request or Owens Financial Group, Inc. shall deem appropriate under the particular circumstances; and
     
 
• 
using commercially reasonable efforts to cause Owens Realty Mortgage, Inc. and its subsidiaries to comply with all applicable laws.
     
Owens Financial Group, Inc. will also perform portfolio management services on behalf of Owens Realty Mortgage, Inc. and its subsidiaries with respect to their investments. Such services will include:
 
 
• 
consulting with Owens Realty Mortgage, Inc. and its subsidiaries on the purchase and sale of, and other investment opportunities in connection with, Owens Realty Mortgage, Inc.’s portfolio of assets;

 
54

 
 

 
• 
the collection of information and the submission of reports pertaining to Owens Realty Mortgage, Inc.’s assets, interest rates and general economic conditions;
     
 
• 
periodic review and evaluation of the performance of Owens Realty Mortgage, Inc.’s portfolio of assets;
     
 
acting as liaison between Owens Realty Mortgage, Inc. and its subsidiaries and banking, mortgage banking, investment banking and other parties with respect to the purchase, financing and disposition of assets; and
     
 
other customary functions related to portfolio management.
 
Additionally, Owens Financial Group, Inc. will perform monitoring services on behalf of Owens Realty Mortgage, Inc. and its subsidiaries with respect to any loan servicing activities provided by third parties. Such monitoring services will include:

 
• 
negotiating servicing agreements;
     
 
• 
acting as a liaison between the servicers of the assets and Owens Realty Mortgage, Inc. and its subsidiaries;
     
 
• 
review of servicers’ delinquency, foreclosure and other reports on assets;
     
 
supervising claims filed under any insurance policies; and
     
 
enforcing the obligation of any servicer to repurchase assets.

Owens Financial Group, Inc. and its affiliates will provide Owens Realty Mortgage, Inc. and its subsidiaries with a management team and other support personnel in order to provide the management services to Owens Realty Mortgage, Inc. and its subsidiaries. None of the officers, employees or other personnel of Owens Financial Group, Inc. will be dedicated exclusively to Owens Realty Mortgage, Inc.

Obligations of Owens Financial Group, Inc.

Owens Financial Group, Inc. will be subject to, and must at all times act in accordance with, Owens Realty Mortgage, Inc.’s investment policies, including the policies and restrictions contained in Owens Realty Mortgage, Inc.’s charter. Owens Financial Group, Inc. must require each seller or transferor of investment assets to Owens Realty Mortgage, Inc. and its subsidiaries to make such representations and warranties regarding such assets as may, in the judgment of Owens Financial Group, Inc., be necessary and appropriate. In addition, Owens Financial Group, Inc. must take such other action as it deems necessary or appropriate with regard to the protection and realization of the investments of Owens Realty Mortgage, Inc. and its subsidiaries.

Our board of directors will periodically review Owens Realty Mortgage, Inc.’s portfolio of investments (but will not necessarily review each proposed investment). If a majority of Owens Realty Mortgage, Inc.’s independent directors determine in their periodic review of transactions that a particular transaction does not comply with Owens Realty Mortgage, Inc.’s investment policies, then a majority of Owens Realty Mortgage, Inc.’s independent directors will consider what corrective action, if any, can be taken. Owens Financial Group, Inc. may rely upon the direction of the secretary of Owens Realty Mortgage, Inc. to evidence the approval of Owens Realty Mortgage, Inc.’s board of directors or independent directors with respect to a proposed investment.

Owens Financial Group, Inc. must refrain from any action that, in its sole judgment, would (a) adversely and materially affect the status of Owens Realty Mortgage, Inc. as a REIT under the Code, (b)  adversely and materially affect Owens Realty Mortgage, Inc.’s or any subsidiary’s status as an entity intended to be exempted or excluded from investment company status under the Investment Company Act or (c) violate any law, rule or regulation of any governmental body or agency having jurisdiction over Owens Realty Mortgage, Inc. or any subsidiary or that would otherwise not be permitted by Owens Realty Mortgage, Inc.’s charter or bylaws. If Owens Financial Group, Inc. is ordered to take any such action by Owens Realty Mortgage, Inc.’s board of directors, Owens Financial Group, Inc. must promptly notify the board of directors of its judgment that such action would adversely and materially affect such status or violate any such law, rule or regulation or Owens Realty Mortgage, Inc.’s charter or bylaws.
 
 
 
55

 

 
Neither Owens Realty Mortgage, Inc. nor its subsidiaries may invest in any security structured or issued by an entity managed by Owens Financial Group, Inc. or any of its affiliates, or purchase or sell any asset from or to any entity managed by Owens Financial Group, Inc. or its affiliates, unless the transaction is made in accordance with Owens Realty Mortgage, Inc.’s investment policies, including the policies and restrictions contained in Owens Realty Mortgage, Inc.’s charter, and the transaction is made in accordance with applicable law.

As frequently as Owens Financial Group, Inc. may deem necessary or advisable, or at the direction of Owens Realty Mortgage, Inc.’s board of directors, Owens Financial Group, Inc. must, at the sole cost and expense of Owens Realty Mortgage, Inc. and its subsidiaries, cause to be prepared reports and other information as may be reasonably requested by Owens Realty Mortgage, Inc. with respect to any investments.  Owens Financial Group, Inc. must also cause to be prepared, at the sole cost and expense of Owens Realty Mortgage, Inc. and its subsidiaries, all reports, financial or otherwise, with respect to Owens Realty Mortgage, Inc. and its subsidiaries reasonably required by Owens Realty Mortgage, Inc.’s board of directors in order for Owens Realty Mortgage, Inc. and its subsidiaries to comply with their charters and bylaws or any other materials required to be filed with any governmental body or agency, and must cause to be prepared all materials and data necessary to complete such reports and other materials, including an annual audit of Owens Realty Mortgage, Inc.’s and its subsidiaries’ books of account by a nationally recognized registered independent public accounting firm. In addition, Owens Financial Group, Inc. must prepare regular reports for Owens Realty Mortgage, Inc.’s board of directors to enable the board to review Owens Realty Mortgage, Inc.’s and its subsidiaries’ acquisitions, portfolio composition and characteristics, credit quality, performance and compliance with Owens Realty Mortgage, Inc.’s investment policies and other policies approved by its board of directors.

Other Activities of Owens Financial Group, Inc.

Nothing in the Management Agreement prevents Owens Financial Group, Inc. or any of its affiliates, officers, directors, employees or personnel, from engaging in other businesses or from rendering services of any kind to any other person, or binds or restricts Owens Financial Group, Inc. or any of its affiliates, officers, directors, employees or personnel from buying, selling or trading any securities or assets for their own accounts or for the account of others for whom Owens Financial Group, Inc. or any of its affiliates, officers, directors, employees or personnel may be acting.

Compensation

Owens Financial Group, Inc. will be compensated for its services as set forth in Owens Realty Mortgage, Inc.’s charter and summarized below. The fees Owens Financial Group, Inc. is entitled to receive from Owens Realty Mortgage, Inc. and borrowers are substantially the same as those fees paid to the general partner under the Partnership Agreement. These fees may not be changed without the approval of Owens Realty Mortgage, Inc.’s board of directors and the holders of a majority of the outstanding shares of stock of Owens Realty Mortgage, Inc. An amendment to Owens Realty Mortgage, Inc.’s charter which modifies the compensation to which Owens Financial Group, Inc. will be entitled will require the consent of Owens Financial Group, Inc. See “Management Agreement—Term and Termination.”

Fees paid by Owens Realty Mortgage, Inc. Owens Financial Group, Inc. will be entitled to receive from Owens Realty Mortgage, Inc. the following fees:

 
• 
Management Fee.  Owens Financial Group, Inc. will receive a management fee payable monthly, subject to a maximum fee of 2.75% per year of the average unpaid balance of Owens Realty Mortgage, Inc.’s mortgage loans at the end of each month in the calendar year. The maximum payment is calculated on an annual basis; thus, the management fee in any one month could exceed .2292% (2.75% / 12 months) of the unpaid balance of Owens Realty Mortgage, Inc.’s mortgage loans at the end of such month, provided that the maximum annual management fee will not exceed 2.75% of the average unpaid balance of Owens Realty Mortgage, Inc.’s mortgage loans at the end of each month in the calendar year.  In the event the management fee paid by Owens Realty Mortgage, Inc. in a calendar year exceeds such 2.75%, Owens Financial Group, Inc. must promptly refund such excess to Owens Realty Mortgage, Inc.  The management fee may accrue without interest when Owens Realty Mortgage, Inc.’s funds are not available for its payment.
     
 
 
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Loan Servicing Fee. Owens Financial Group, Inc. may act as servicing agent with respect to Owens Realty Mortgage, Inc.’s mortgage loans, in consideration for which it will be entitled to receive from Owens Realty Mortgage, Inc. a monthly fee, which, when added to all other fees paid in connection with the servicing of a particular loan, does not exceed the lesser of the customary, competitive fee in the community where the loan is placed for the provision of such mortgage services on that type of loan, or up to 0.25% per year of the unpaid balance of Owens Realty Mortgage, Inc.’s mortgage loans at the end of each month.
 
Fees paid by borrowers. Owens Financial Group, Inc. will be entitled to receive directly from borrowers the following fees:

 
• 
Acquisition and Origination Fees.  Owens Financial Group, Inc. or its affiliates will be entitled to receive and retain all fees and commissions paid or payable to it by any party other than Owens Realty Mortgage, Inc. and any subsidiary in connection with Owens Realty Mortgage, Inc. making or investing in mortgage loans. Included in the computation of such fees or commission will be any selection fee, mortgage placement fee, nonrecurring management fee, and any origination fee, loan fee or points paid by borrowers to Owens Financial Group, Inc., or any fee of a similar nature, however designated.
     
 
Late Payment Charges.  Owens Financial Group, Inc. will be entitled to receive and retain all additional charges paid by borrowers on delinquent loans and loans past maturity held by Owens Realty Mortgage, Inc., including additional interest and late payment fees.

Owens Financial Group, Inc. will not be entitled to receive or retain any real estate brokerage commissions, property management fees, insurance service fees or a promotional interest (as defined in Owens Realty Mortgage, Inc.’s charter) from Owens Realty Mortgage, Inc. In addition, Owens Financial Group, Inc. is not entitled to receive reimbursement of acquisition and origination expenses, including legal fees and expenses, travel and communications expenses, costs of appraisals, accounting fees and expenses, title insurance funded by Owens Realty Mortgage, Inc., and miscellaneous expenses incurred by Owens Financial Group, Inc. or its affiliates in the origination, selection and acquisition of mortgage loans.

Owens Financial Group, Inc. may voluntarily accept compensation that is less than the maximum fees and compensation described above, so long as no such change in compensation will result in a significant adverse impact on the stockholders of Owens Realty Mortgage, Inc.

Reimbursement of Expenses

All of the expenses of Owens Realty Mortgage, Inc. and its subsidiaries must be billed directly to and paid by Owens Realty Mortgage, Inc. Reimbursement to Owens Financial Group, Inc. or its affiliates for any expenses they paid, including, without limitation, legal and accounting expenses, filing fees, printing costs, goods, services and materials used by or for Owens Realty Mortgage, Inc. or its subsidiaries, must be paid by Owens Realty Mortgage, Inc. immediately following the expenditure. Owens Financial Group, Inc. and its affiliates may not be reimbursed by Owens Realty Mortgage, Inc. for services for which Owens Financial Group, Inc. is entitled to compensation by way of a separate fee, except for salaries (and related salary expenses, but excluding expenses incurred in connection with the administration of Owens Realty Mortgage, Inc.) for nonmanagement and nonsupervisory services which could be performed directly for Owens Realty Mortgage, Inc. by independent parties, such as legal, accounting, transfer agent, data processing and duplicating. No reimbursement is allowed for rent and depreciation, utilities, capital equipment and other administrative items, and salaries, fringe benefits, travel expenses and other administrative items incurred or allocated to any controlling person of Owens Financial Group or its affiliates. Nor may there be reimbursement for management and supervisory personnel (for example, services of employees of Owens Financial Group, Inc. or its affiliates who oversee the work which would have been performed by an independent party if such party had been so engaged). The amounts charged to Owens Realty Mortgage, Inc. may not exceed the lesser of the actual cost of such services or the amounts which Owens Financial Group, Inc. would be required to pay to independent parties for comparable services. Reimbursement may also be made for the allocable cost charged by independent parties for maintenance and repair of data processing and other special purpose equipment used for or by Owens Realty Mortgage, Inc.
 
 
57

 
 
 
Term and Termination

The Management Agreement will continue in effect for the duration of the existence of Owens Realty Mortgage, Inc., unless earlier terminated by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock, by Owens Financial Group, Inc. in response to an amendment to its compensation, as described below, automatically in certain circumstances relating to the assignment of the Management Agreement, as described below, or by either party for cause, as described below.

Within 10 days of acceptance by the SDAT of an amendment to Owens Realty Mortgage, Inc.’s charter that modifies the compensation to which Owens Financial Group, Inc. is entitled, which amendment Owens Financial Group, Inc. has not previously consented to in writing (which we refer to as a Compensation Amendment), Owens Realty Mortgage, Inc. must provide written notice to Owens Financial Group, Inc. of such Compensation Amendment.  Upon receipt of such notice, Owens Financial Group, Inc. will have 30 days to provide its written consent to the Compensation Amendment, in which case Owens Financial Group, Inc. will have waived any right to terminate the Management Agreement in connection with the Compensation Amendment and the Management Agreement will continue in full force and effect. Alternatively, Owens Financial Group, Inc. may provide written notice of its intent to terminate the Management Agreement (which we refer to as a Termination Notice), in which case the Management Agreement will terminate effective on the later of 30 days following Owens Realty Mortgage, Inc.’s receipt of such Termination Notice or the effective date of termination set forth in such Termination Notice.  If, within 30 days of receiving written notice from Owens Realty Mortgage, Inc. of a Compensation Amendment, Owens Financial Group, Inc. fails to provide its written consent to the Compensation Amendment or a Termination Notice, Owens Financial Group, Inc. will be deemed to have consented to the Compensation Amendment and to have waived any right to terminate the Management Agreement in connection with the Compensation Amendment, and the Management Agreement will continue in full force and effect.

With certain exceptions, the Management Agreement will automatically terminate if Owens Financial Group, Inc. assigns the Management Agreement, in whole or in part, unless the assignment is consented to in writing by Owens Realty Mortgage, Inc. Such consent requires the approval of the board of directors and holders of a majority of the outstanding shares of Common Stock entitled to vote on the matter.

Termination for Cause

At its option, Owens Realty Mortgage, Inc. may terminate the Management Agreement upon 30 days’ written notice of termination to Owens Financial Group, Inc. if any of the following events occurs:

 
• 
Owens Financial Group, Inc., its agents or its assignees materially breaches any provision of the Management Agreement and the breach continues for a period of 30 days after written notice specifying the breach and requesting that it be remedied in such 30-day period (or 90 days after written notice of such breach if  Owens Financial Group, Inc. takes steps to cure such breach within 30 days of the written notice);
     
 
Owens Financial Group, Inc. engages in any act of fraud, misappropriation of funds, or embezzlement against Owens Realty Mortgage, Inc. or any subsidiary;
     
 
there is an event of gross negligence, willful misconduct or intentional breach of the terms of the Management Agreement on the part of  Owens Financial Group, Inc. in the performance of its contractual duties;
     
 
there is a commencement of any proceeding relating to Owens Financial Group, Inc.’s bankruptcy or insolvency, including an order for relief in an involuntary bankruptcy case or Owens Financial Group, Inc. authorizing or filing a voluntary bankruptcy petition;