IMH Financial Corporation (the “Company”) is a real estate investment and finance company based in the southwestern United States engaged in various and diverse facets of the real estate lending and investment process, including origination, acquisition, underwriting, servicing, enforcement, development, marketing, and disposition. The Company’s focus is to invest in, manage and dispose of commercial real estate mortgage investments or other real estate assets, and to perform all functions reasonably related thereto, including developing, managing and either holding for investment or disposing of real property acquired through acquisition, foreclosure or other means.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete set of financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results for the periods presented have been made. Operating results for the three and sixnine months ended JuneSeptember 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2016.

The accompanying unaudited, condensed consolidated financial statements include the accounts of IMH Financial Corporation and the following wholly-owned operating subsidiaries: 11333, Inc. (formerly known as Investors Mortgage Holdings, Inc.), an Arizona corporation, Investors Mortgage Holdings California, Inc., a California corporation, IMH Holdings, LLC, a Delaware limited liability company (“Holdings”), and various other wholly owned subsidiaries established in connection with the acquisition of real estate either through foreclosure or purchase and/or for borrowing purposes, as well as its majority owned or controlled real estate entities and its interests in variable interest entities (“VIEs”) in which the Company is determined to be the primary beneficiary. Holdings is a holding company for IMH Management Services, LLC, an Arizona limited liability company, which provides us and our affiliates with human resources and administrative services, including the supply of employees. Other entities in which we have invested and have the ability to exercise significant influence over operating and financial policies of the investee, but upon which we do not possess control, are accounted for by the equity method of accounting within the financial statements and they are therefore not consolidated.

The Company, through certain subsidiaries, obtained certain real estate assets and equity interests in a number of limited liability companies and limited partnerships with various real estate holdings and related assets as a result of certain loan and guarantor enforcement and collection efforts. Certain of these entities have been consolidated in the accompanying consolidated financial statements while others have beenwere accounted for under the equity method of accounting, prior to September 30, 2017, based on the extent of the Company’s controlling financial interest in each such entity. During the period ended September 30, 2017, the Company consolidated partnerships previously recorded under the equity method of accounting following the assignment of certain controlling interests in those partnerships. See Note 5 for a further discussion of the effects of the consolidation, our equity investments and VIEs.

As of JuneSeptember 30, 2017, our accumulated deficit aggregated $679.9$675.6 million primarily as a result of previous provisions for credit losses recorded relating to the decrease in the fair value of the collateral securing our legacy loan portfolio and impairment charges relating to the value of real estate owned (“REO”) assets acquired primarily through foreclosure, as well as on-going net operating losses resulting from the lack of income-producing assets, and the high cost of our previous debt financing. Beginning in 2008, we experienced significant defaults and foreclosures in our mortgage loan portfolio due primarily to the erosion of the U.S. and global real estate and credit markets during those periods. As a result, since that time we have been focused on enforcing our rights under our loan documents, working to repossess the collateral properties underlying those loans for purposes of disposing of or developing such assets, and pursuing recovery from guarantors under such loans.

Our liquidity plan has included obtaining additional financing, selling mortgage loans, and selling the majority of our legacy real estate assets. We secured various financings between 2011 and 2016 which, along with proceeds from asset sales, have been our primary sources of working capital. In February 2017, we sold our Sedona hotels, generating net cash of $42.2 million after payment of expenses and related debt.

As of JuneSeptember 30, 2017, we had (i) cash and cash equivalents of $39.7$34.1 million and (ii) held for sale REO assets with a carrying value of $14.6$15.3 million. We continue to evaluate potential disposition strategies for our remaining REO assets.assets and to seek additional sources of debt and equity for investment and working capital purposes.

We require liquidity and capital resources for new asset acquisitions and for our general working capital needs, including maintenance, development costs and capital expenditures for our operating properties and non-operating REO assets, professional fees, general and administrative operating costs, loan enforcement costs, financing costs, debt service payments, dividends to our preferred shareholders, as well as to acquire our target assets.shareholders. We expect our primary sources of liquidity over the next twelve months to consist of our current cash, mortgage loan interest income, from anticipated originations, revenues from remaining operating properties, revenues fromownership or management of the Sedona hotels, proceeds from borrowings and equity issuances, and proceeds from the disposition of our existing loan and REO assets held for sale. We believe that our cash and cash equivalents coupled with our operating and investing revenues, as well as proceeds that we anticipate from the disposition of our loans and real estate held for sale, and debt and equity financing will be sufficient to allow us to fund our operations for a period of at least one year from the date these condensed consolidated financial statements are issued.

While we have been successful in securing financing through JuneSeptember 30, 2017 to provide adequate funding for working capital purposes, which has been supplemented by proceeds from the sale of certain REO assets, receipts of principal and interest on mortgage receivable collections,and related investments, there is no assurance that we will be successful in selling our remaining loan and REO assets in a timely manner or in obtaining additional or replacement financing, if needed, to sufficiently fund future operations, repay existing debt or to implement our investment strategy. Our failure to generate sustainable earning assets and to successfully liquidate a sufficient number of our loans and REO assets may have a material adverse effect on our business, results of operations and financial position.

 

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

Comprehensive income includes items that impact changes in shareholders’ equity but are not recorded in earnings. The Company did not have any such items during the three and sixnine months ended JuneSeptember 30, 2017 and 2016. Accordingly, comprehensive income (loss) is equal to net income (loss) for those periods.

In February 2017, the senior lender-controlled reserve accounts held at December 31, 2016 were released to us upon sale of the Sedona hotels, which were the underlying collateral. However, as an accommodation to the buyer of the hotels and in order to provide for a smooth transition, we established certain operating accounts in our capacity as property manager, in our name for the benefit of the buyer, until such time that new accounts could be established in the name of the buyer. Upon opening of the buyer’s new accounts, these temporary accounts will be closed. Since these accounts are legally in the name of the Company, we have presented the balances of these accounts, totaling $0.6$0.3 million at JuneSeptember 30, 2017, in restricted cash with an offsetting liability to funds held for others.

Our revenues include base management and incentive management fees from management of hotels. Management fees are typically composed of a base fee, which is a percentage of the revenues of hotels, and an incentive fee, which is generally based on hotel profitability. We recognize base management fees as revenue when we earn them under the contracts. In interim periods and at year-end, we recognize incentive management fees that would be due as if the contracts were to terminate at that date, exclusive of any termination fees payable or receivable by us.

Interest on mortgage loans is recognized as revenue when earned using the interest method based on a 360 or 365 day year, in accordance with the related mortgage loan terms. We do not recognize interest income on loans once they are deemed to be impaired and placed in non-accrual status. Generally, a loan is placed in non-accrual status when it is past its scheduled maturity by more than 90 days, when it becomes delinquent as to interest due by more than 90 days or when the related fair value of the collateral is less than the total principal, accrued interest and related costs. We may determine that a loan, while delinquent in payment status, should not be placed in non-accrual status in instances where the fair value of the loan collateral significantly exceeds the principal and the accrued interest, as we expect that income recognized in such cases is probable of collection. Unless and until we have determined that the value of underlying collateral is insufficient to recover the total contractual amounts due under the loan term, generally our policy is to continue to accrue interest until the loan is more than 90 days delinquent with respect to accrued, uncollected interest or more than 90 days past scheduled maturity, whichever comes first. Mortgage loans classified as held for sale are recorded on the lower of carrying value or fair value less cost to sell.

We do not typically remove a loan from non-accrual status until (a) the borrower has brought the respective loan current as to the payment of past due interest, and (b) we are reasonably assured as to the collection of all contractual amounts due under the loan based on the value of the underlying collateral of the loan, the receipt of additional collateral required and the financial ability of the borrower to service our loan.

We do not generally reverse accrued interest on loans once they are deemed to be impaired and placed in non-accrual status. In conducting our periodic valuation analysis, we consider the total recorded investment for a particular loan, including outstanding principal, accrued interest, anticipated protective advances for estimated outstanding property taxes for the related property and estimated foreclosure costs, when computing the amount of valuation allowance required. As a result, our valuation allowance may increase based on interest income recognized in prior periods, but subsequently deemed to be uncollectible as a result of our valuation analysis.

We generally allocate cash receipts first to interest, except when such payments are specifically designated by the terms of the loan as a principal reduction. Loans with a principal or interest payment one or more days delinquent are in technical default and are subject to various fees and charges including default interest rates, penalty fees and reinstatement fees. Often these fees are negotiated in the normal course of business and, therefore, not subject to estimation. Accordingly, revenue for such fees is recognized over the remaining life of the loan as an adjustment to the interest income yield.

We defer fees for loan originations, processing and modifications, net of direct origination costs, at origination and amortize such fees as an adjustment to interest income using the effective interest method. Revenue for non-refundable commitment fees is recognized over the remaining life of the loan as an adjustment to the interest income yield.

We defer premiums or discounts arising from acquired loans at acquisition and amortize such premiums or discounts as an adjustment to interest income over the contractual term of the related loan using the effective interest method. We include the unamortized portion of the premium or discount as a part of the net carrying value of the loan on the condensed consolidated balance sheets. Costs not directly paid to the seller of the loan are expensed as incurred and not amortized, except for any fees paid directly to the seller.

Certain reclassifications have been made to 2016 amounts to conform to the current year presentation. See “Note 8 – Segment Information” for additional information regarding these reclassifications. In February 2017, the Company entered into an agreement to sell the Sedona hotels to a third party, at which time such assets met the criteria for held for sale classification. Due to the material nature of the Sedona hotel operations, the disposition of this asset group was deemed to represent a strategic shift that will have a major effect on our current operations and financial results under GAAP. Accordingly, this also caused the reclassification of the respective assets, liabilities, revenues and expenses related to the Sedona hotels to be presented as Assets from discontinued operations and Liabilities from discontinued operations in the condensed consolidated balance sheets, and Income (Loss) from discontinued operations, net of tax in the condensed consolidated statements of operations, respectively. See Note 12 for a summary of discontinued operations. The balance of Mortgage Loans Held for Sale, Net as of December 31, 2016 was reclassified to Mortgage Loans, Net in the condensed consolidated balance sheets to conform with the Company’s determination that such assets did not meet the applicable accounting criteria of held for sale as of that date.

In determining whether a group of assets disposed (or to be disposed) of should be presented as a discontinued operation, the Company makes a determination of whether the criteria for held-for-sale classification is met and whether the disposition represents a strategic shift that has (or will have) a major effect on our operations and financial results. If these determinations can be made affirmatively, the results of operations of the group of assets being disposed of (as well as any gain or loss on the disposal transaction) are aggregated for separate presentation apart from continuing operating results of the Company in the condensed consolidated financial statements.

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs.

The Company did not originate any loans during the sixnine months ended JuneSeptember 30, 2017 or 2016. During the sixnine months ended JuneSeptember 30, 2017, the Company purchased one new mezzanine loan from a related party (fully(as described in Note 11) at a discount for $7.0 million, with a face value of $7.6 million and incurred and expensed costs related to underwriting the loan of $0.2 million. The loan is collateralized by a pledge of 100% of the direct equity interests in the owner of an office building located in St. Louis, Missouri. The loan had an original maturity date of September 9, 2016 with three one-year extensions, the second of which was exercised by the borrower, subsequentthereby extending the maturity date to June 30, 2017.September 9, 2018. The loan has an annual interest rate of 9.5% plus one-month LIBOR. The discount is being amortized over the term of the loan using the effective interest method.

We did not sell any mortgage loans during the sixnine months ended JuneSeptember 30, 2017. During the sixnine months ended JuneSeptember 30, 2016, the Company sold one loan with a carrying value of $3.1 million for a net loss of $0.1 million.

During the sixnine months ended JuneSeptember 30, 2017, we did not collect any mortgage payments. During the sixnine months ended JuneSeptember 30, 2016, we collected mortgage loan payoffs totaling $7.6 million.

Given the non-performing status of our legacy loans, we do not expect to receive any loan payoffs on loans that are past their respective maturity dates. We may find it necessary to foreclose, modify, extend, make protective advances, or sell such loans in order to protect collateral, maximize return, or generate additional liquidity.

At JuneAs of September 30, 2017, we held total REO assets of $34.0$51.1 million, of which $14.6$15.3 million were held for sale and $19.4$35.9 million were classified as other real estate owned. At December 31, 2016, we held total REO assets of $122.1 million, of which $17.8 million was held for sale, $88.7 million were held as operating properties (which have been reclassified as assets of discontinued operations on the accompanying condensed consolidated balance sheets), and $15.5 million were classified as other real estate owned.

A summary of operating properties and REO assets owned as of JuneSeptember 30, 2017 and December 31, 2016, respectively, by method of acquisition, is as follows (in thousands):

Following is a roll-forward of REO activity from December 31, 2016 to JuneSeptember 30, 2017 (dollars in thousands):

As discussed in Note 5, during the nine months ended September 30, 2017, we acquired the remaining interest of Park City Development, LLC in Lakeside JV. Following the acquisition of that interest, we were deemed to control the entity and changed our accounting for the investment from an unconsolidated equity investment to a consolidated investment, at which time we recorded the related real estate, other assets and liabilities. Similarly, as described in Note 5, on September 29, 2017, we acquired a controlling interest in a group of seven partnerships with real estate assets located in New Mexico (collectively referred to as the “New Mexico Partnerships”), which were previously accounted for under the equity method of accounting. As a result of this transaction, we were required to consolidate the New Mexico Partnerships, at which time we recorded the related real estate, other assets and liabilities at their preliminary estimated fair values.

During the sixnine months ended JuneSeptember 30, 2017, the Company sold REO from fourseven projects (in whole or portions thereof), for $97.1$98.3 million (net of transaction costs and other non-cash adjustments) resulting in a total net gain on sale of $8.5$8.9 million, of which $6.8 million is included as a component of discontinued operations in the unaudited condensed consolidated statement of operations. During the sixnine months ended JuneSeptember 30, 2016, we sold fivesix REO assets (or portions thereof) for $3.3$3.4 million (net of transaction costs and other non-cash adjustments), resulting in a total net gain of less than $0.1 million.

In the first quarter of 2017, we reclassified our two Sedona hotel operating properties to REO held for sale as a result of management’s decision and actions to dispose of such assets. The properties were sold in February 2017.

Based on the material nature of the hotel assets, the operations and gain on sale of the Sedona hotels is reported as discontinued operations on the financial statements. See Note 12, Discontinued Operations, for additional information.

In January 2017, Lakeside DV Holdings, LLC (“LDV Holdings”), a wholly-owned subsidiary of the Company, purchased the interest held in Lakeside JV by Park City Development, LLC (“PCD”) for $0.7 million and terminated PCD as manager. Upon purchase of PCD’s interest, LDV Holdings became the sole owner of Lakeside JV. As a result, Lakeside JV became a consolidated entity of the Company. The Company’s investment in Lakeside JV was previously accounted for under the equity method.

TheIn 2015, the Company has acquired certain real estate assets and equity interests in a number of limited liability companies and limited partnerships with various real estate holdings and related assets as a result of enforcement and collection efforts. CertainPrior to September 29, 2017, certain of these entities have beenwere consolidated in the accompanying condensed consolidated financial statements while others have beenwere accounted for under the equity method of accounting, depending on the extent of the Company’s financial interest in and level of control over each such entity.

The consolidation of the aforementioned entities occurred as a result of the termination of a court-appointed receivership over the corporate entities which maintained the general partner interests and thereby controlled the activities of such entities through that date. On September 29, 2017, the receiver assigned and delivered to the Company the stock certificates of the corporate entities, including the underlying interest in partnerships. As a result, as of that date, the Company received full possession, custody and control of its interests in the corporate entities and related interest in partnerships. The Company’s ownership interests in thesethe consolidated entities range from 2.4%3.8% to 48.0%100.0% and collectively,were determined to be variable interest entities. The Company determined the Company’s netpartnerships are deemed to be variable interest entities and that through its general and limited partnership interests, the Company is the primary beneficiary of such entities because 1) it has the power to direct the activities of the entities that most significantly impact the economic performance of such entities, and 2) with the financial assistance provided to such entities, the Company has the risk of absorbing losses or rights to receive benefits that could be potentially significant to the entities; as such, they should be consolidated. Intercompany receivables and liabilities have been eliminated in consolidation in the accompanying condensed consolidated financial statements.

Financial data presented for previous periods have not been restated to reflect the consolidation of the entities. The assets and liabilities of the newly consolidated entities were recorded at their preliminary estimated fair values. As a result of the assignment of the corporate entity and related general partner interests and recording of assets and liabilities at fair value for the affected entities, and after elimination of intercompany balances, the Company recorded the elimination of the investment in theseunconsolidated entities totals $4.1of $4.0 million, and $3.1recorded a decrease in mortgage loans of $0.4 million, at Junea decrease in other receivables of $2.4 million, an increase in other real estate owned of $17.8 million, an increase in other assets of $1.1 million, an increase in liabilities of $0.2 million, and non-controlling interests of $6.5 million as of September 30, 2017 and December 31, 2016, respectively.2017. In addition, the Company recorded net recovery income of $6.1 million during the period ended September 30, 2017.

In addition, during the six months ended June 30, 2017,2016, a subsidiary of the Company advancedentered into a series of promissory notes and related agreements with five of the partnerships to advance a total of $0.6up to $0.7 million to five partnerships underfor the termspurposes of certain note agreementsfunding various operating costs and repair and maintenance costs in connection with a damaged well affecting the partnerships. The partnership notes are secured by the assets of the respective partnerships. The outstanding principal of such notes totaled $1.0 million at June 30, 2017, hadpartnerships, bear interest rates ranging from the JP Morgan Chase Prime rate plus 2.0% (6.25% at JuneSeptember 30, 2017) to 8% and mature no later than July 31, 2018.

In April 2017, the court-appointed receiver over the general partner of one of the five partnerships made a capital call of all partners to fund various operating and capital requirements. While the Company met its obligation under this request, none of the remaining partners did so, at which point the Company funded those portions as well totaling $1.1 million.million to the partnership. As a result of the other partners’ failure to make the required contributions, the general partner declared a default by such limited partners under the terms of the partnership agreement and assigned those limited partner interests to the Company’s limited partner subsidiary. The assignment is being contested by oneUpon transfer of the limited partners. As a resultgeneral partner interest at termination of the legal contingencyreceivership on September 29, 2017, the Company has full authority to act on behalf of this matter, whilethe partnership. Accordingly, we have recorded the contributions made by the Company in our investment in unconsolidated entities in the accompanying condensed consolidated balance sheets, we have not recorded the possible effects of recordingthe ownership of those additional limited partner interests upon consolidation as of JuneSeptember 30, 2017.

The Company’s maximum exposure to loss consists of its combined equity in the corporate entities and partnerships which totaled $19.7 million as of September 30, 2017.

The following presents certain summarized financial informationAs of the entities in which the Company holdsSeptember 30, 2017, we no longer hold investments that are recorded on the equity method as a result of June 30, 2017 and December 31, 2016 (in thousands):

During bothPrior to consolidation, during each of the sixnine months ended JuneSeptember 30, 2017 and 2016, the equity loss recorded on these equity method investments in the accompanying condensed consolidated statements of operations was $0.2 million. During the three months ended JuneSeptember 30, 2017 and 2016, the equity loss recorded on these equity method investments in the accompanying condensed consolidated statements of operations was $0.1 million$68.0 thousand and $46.0$48.0 thousand, respectively.

 

Our valuation analysis process and procedures are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. We perform a valuation analysis of our loans, REO held for sale, Other REO and equity investments not less frequently than on a quarterly basis. We consider all relevant, material circumstances to determine if, and the extent to which, a valuation allowance is required.

Impairment for collateral dependent loans is measured at the balance sheet date based on the then fair value of the collateral in relation to contractual amounts due under the terms of the applicable loan if foreclosure is probable. Substantially all of our loans in default are deemed to be collateral dependent.

 

REO assets that are classified as held for sale and Other REO are measured at the lower of carrying amount or fair value, less estimated cost to sell. If an asset is considered impaired, an impairment loss is recognized for the difference between the asset’s carrying amount and its fair value, less estimated cost to sell. If we elect to change the disposition strategy for our other real estate owned, and such assets were deemed to be held for sale, we may record additional impairment charges, and the amounts could be significant.

 

We assess the extent, reliability and quality of market participant inputs such as sales pricing, cost data, absorption, discount rates, and other assumptions, as well as the significance of such assumptions in deriving the valuation. We generally employ one of five valuation approaches (as applicable), or a combination of such approaches, in determining the fair value of the underlying collateral of each loan, REO held for sale and Other REO asset: (i) the development approach; (ii) the income capitalization approach; (iii) the sales comparison approach; or (iv) the receipt of recent offers on specific properties. The development, income capitalization, and sales comparison approach use significant unobservable inputs and are therefore classified as Level 3 inputs. A recent offer is an observable input and is therefore considered a Level 2 input. The valuation approach taken depends on several factors including:

With respect to properties or loans for which we (or the borrower) have received a bona fide written third-party offer (or entered into a purchase and sale agreement) to buy the related property, we generally utilize the offer or agreement amount even where the amount is outside our current valuation range, as offers and purchase agreements are considered lower (Level 2) inputs. An offer or agreement is only considered for valuation purposes if we deem it to be valid, reasonable, negotiable, and we believe the counterparty has the financial wherewithal to execute the transaction. When deemed appropriate, the offers received may be discounted to allow for potential changes in our on-going negotiations.

 

The underlying collateral of our loans, REO held for sale and Other REO assets vary by stage of completion, which consists of either raw land (also referred to as pre-entitled land), entitled land, partially developed land, or mostly developed/completed lots or projects. While we continue to utilize third party valuations for selected assets on a periodic basis as circumstances warrant, we rely primarily on our outside asset management consultants and internal staff to gather available market participant data from independent sources to establish assumptions used to derive fair value of the collateral supporting our loans and real estate owned for a majority of our loan and REO assets.

Our fair value measurement is based on the highest and best use of each property which is generally consistent with our current use for such property. In addition, our assumptions are based on assumptions that we believe market participants for those assets would also use. During the three months ended JuneSeptember 30, 2017, we performed both a macro analysis of market trends and economic estimates, as well as a detailed analysis on selected significant REO assets. In addition, our fair value analysis included a consideration of management’s pricing strategy in disposing of such assets.

The following is a summary of the procedures performed in connection with our fair value analysis as of and for the three and sixnine months ended JuneSeptember 30, 2017:

 

Based on our analysis, aside from the newly consolidated entities, the valuation approach taken and assumptions utilized with respect to each asset at December 31, 2016 remained generally applicableconsistent at JuneSeptember 30, 2017, except for those assets subject to a recent bona fide written third-party offer or executed purchase and sales agreements. See our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for a summary of the key assumptions and valuation methodologies utilized to derive fair value.

 

The results of our valuation efforts generally provide a range of values for the collateral valued or REO assets rather than a single point estimate because of variances in the potential value indicated from the available sources of market participant information. The selection of a value from within a range of values depends upon general overall market conditions as well as specific market conditions for each property valued and its stage of entitlement or development. In selecting the single best estimate of value, we consider the information in the valuation reports, credible purchase offers received and agreements executed, as well as multiple observable and unobservable inputs.

 

Based on the results of our evaluation and analysis, we did not record any non-cash provision for credit losses on our loan portfolio during the three and sixnine months ended JuneSeptember 30, 2017 and 2016. However, we recorded other net recoveries of investment and credit losses totaling $0.3$6.1 million and $0.1 million for the three months ended JuneSeptember 30, 2017 and 2016, respectively, resulting from the collection of cash andand/or other assets recovered from certain guarantors on certain legacy loans and insurance

recoveries received during the period. We recorded $0.3$6.4 million and $0.1$0.2 million in other net recoveries of investment and credit losses for the sixnine months ended JuneSeptember 30, 2017 and 2016, respectively. We recorded no impairment charges for real estate owned during the three and six months ended June 30, 2017 and 2016.

As of JuneSeptember 30, 2017 and December 31, 2016, the valuation allowance totaled $12.7 million, representing 63.0%63.8% and 97.1%, respectively, of the total outstanding loan principal and accrued interest balances. With the existing valuation allowance recorded as of JuneSeptember 30, 2017, we believe that, as of that date, the fair value of our loans, REO assets held for sale, and other REO is adequate in relation to the net carrying value of the related assets and that no additional valuation allowance or impairment is considered necessary. While the above results reflect management’s assessment of fair value as of JuneSeptember 30, 2017 based on currently available

ThereThe Company recorded a loss from impairment of real estate owned of $0.3 million during the three and nine months ended September 30, 2017 and there were no losses recorded during the three and sixnine months ended June 30, 2017 or the three and six months ended JuneSeptember 30, 2016 in the categories for which net mortgage loans and REO held for sale were measured at fair value on a non-recurring basis based upon the lowest level of significant input to the valuation as of JuneSeptember 30, 2017 or 2016.

 

At JuneAs of September 30, 2017 and December 31, 2016, our debt, notes payable and special assessment obligations consisted of the following (in thousands): 

* This note was paid off in connection with the sale of the Sedona assets in February 2017 and has been reclassified into Liabilities of discontinued operations as of December 31, 2016 in the accompanying condensed consolidated balance sheet.

 

Interest expense for the three months ended JuneSeptember 30, 2017 and 2016 was $0.4 million and $2.3 million, respectively, of which none and $1.0$1.1 million, respectively, is included in income from discontinued operations in the accompanying condensed consolidated statements of operations. Interest expense for the sixnine months ended JuneSeptember 30, 2017 and 2016 was $1.9$2.4 million and $4.4$6.7 million, respectively, of which $1.1 million and $2.1$3.2 million, respectively, is included in income from discontinued operations in the accompanying condensed consolidated statements of operations.

In January 2015, the Company, through various of its subsidiaries, entered into certain loan agreements, promissory notes and related agreements with Calmwater Capital 3, LLC (“Calmwater”), including a $50.0 million non-recourse loan secured by first liens on the Company’s Sedona hotels. This loan was repaid in full in February 2017 upon sale of the Sedona hotels.

During 2015, the Company obtained seller-financing of $5.9 million in connection with the purchase of certain real estate located in New Mexico at a purchase price of $6.8 million. The note bears interest at the WSJ Prime Rate as of December 31, 2015 (recalculated annually) plus 2% through December 31, 2017, and the WSJ Prime Rate plus 3% thereafter. Interest only payments are due on December 31 of each year with the principal balance and any accrued unpaid interest due at maturity on December 31, 2019. The note may be prepaid in whole or in part without penalty.

In December 2014, the Company borrowed $5.0 million from SRE Monarch Lending, LLC (“SRE Monarch”) pursuant to an unsecured non-revolving credit facility (“SRE Note”). The Company used the loan proceeds to make a scheduled payment under the Company’s then-senior loan. SRE Monarch is a related party of Seth Singerman, one of the Company’s prior directors and an affiliate of one of our prior preferred equity holders.

During 2015 and 2016, the Company entered into a series of amendments to extend the SRE Note’s maturity date to December 22, 2016. The Company paid all accrued interest at the date of each amendment and paid various extension fees totaling $0.2$0.5 million during the sixnine months ended JuneSeptember 30, 2016, which fees were amortized over the loan term. The SRE Note was repaid in full in December 2016.

In March 2016, a subsidiary of the Company executed an agreement with SRE Monarch for a $4.0 million secured revolving line of credit facility (“SRE Revolver”). The SRE Revolver bore interest at a per annum base rate of 5% and was to mature on the earliest to occur of: 1) December 22, 2016 (after entering into a series of loan amendments extending this date); 2) the sale of the land serving as collateral under the SRE Revolver, or 3) the sale of Gabella. The SRE Revolver was secured by certain land owned by a subsidiary of the Company and was guaranteed by the Company. The full amount of the SRE Revolver was drawn during 2016. For the year ended December 30, 2016, we incurred total fees of $0.5 million in connection with the SRE Revolver, which were amortized to interest expense using the effective interest method over the term of the line of credit. In December 2016, the Company paid all of the outstanding principal and unpaid accrued interest concurrent with the sale of Gabella.

Under terms of the SRE Revolver, the Company was obligated to pay SRE Monarch an amount equal to five percent (5%) of the net sale proceeds upon sale of the land that served as collateral under the SRE Revolver prior to March 31, 2017 ("Facility Exit Date"). In the event that no sale of the collateral occurred or was expected to occur prior to the Facility Exit Date, we were obligated to pay SRE Monarch an amount equal to five percent (5%) of the presumed net sales proceeds based on the appraised value of the collateral. In the first quarter of 2017, we paid SRE Monarch $0.2 million to settle this obligation, at which time the lien on the collateral was removed.

One of the special assessment obligations had an outstanding balance of $2.9 million and $3.1 million as of JuneSeptember 30, 2017 and December 31, 2016, respectively, and has an amortization period that extends through April 30, 2030, with an annual interest rate ranging from 5% to 6%. This special assessment obligation is secured by certain real estate held for sale consisting of 171 acres of unentitled land located in Buckeye, Arizona which had a carrying value of $5.4$6.1 million at JuneSeptember 30, 2017. We made principal payments of $0.1 million on this special assessment obligation during the sixnine months ended JuneSeptember 30, 2017.

The other special assessment obligations are comprised of a series of special assessments that collectively had an outstanding balance of and $0.3$0.1 million and $0.5 million as of JuneSeptember 30, 2017 and December 31, 2016, respectively. These special assessment obligations have amortization periods that extend through 2022, with annual interest rates ranging from 6% to 7.5% and secured by certain real estate classified as REO held for sale consisting of 3.91.5 acres of unentitled land located in Dakota County, Minnesota which had a carrying value of $1.2$0.1 million at JuneSeptember 30, 2017. We made principal payments of $0.1$0.2 million on this special assessment obligation during the sixnine months ended JuneSeptember 30, 2017. During the sixnine months ended JuneSeptember 30, 2017, a portion of the property was sold. In conjunction with the sale, the buyer agreed to assume and additional $0.1$0.2 million of the special assessment obligation.

The responsibility for the repayment of each of the foregoing special assessment obligations rests with the owner of the property and will transfer to the buyer of the related real estate upon sale. Accordingly, if the assets to which these obligations arise from are sold before the full amortization period of such obligations, the Company would be relieved of any further liability since the buyer would assume the remaining obligations. Nevertheless, these special assessment obligations are deemed to be obligations of the Company in accordance with GAAP because they are fixed in amount and for a fixed period of time.

Operating segments are defined as components of an enterprise that engage in business activity from which revenues are earned and expenses incurred for which discrete financial information is available that is evaluated regularly by our chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company intends to expand its hospitality footprint and the use of the L’Auberge brand through the acquisition and/or management of other luxury and boutique hotels.

The information presented in our reportable segments tables that follow are based in part on internal allocations which involve management judgment. Substantially all revenues recorded are from external customers. There is no material intersegment activity.

Condensed consolidated financial information for our reportable operating segments, excluding assets from discontinued operations, as of JuneSeptember 30, 2017 and December 31, 2016 and for the three and sixnine months ended JuneSeptember 30, 2017 and 2016 is summarized as follows (in thousands):