UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-K
ANNUAL REPORT
ANNUAL REPORT PURSUANT TO REGULATION A OF THE SECURITIES ACT OF 1933
For the fiscal year ended December 31, 2019
IRON BRIDGE MORTGAGE FUND, LLC |
(Exact name of issuer as specified in its charter) |
Oregon |
| 26-3458758 |
(State or other jurisdiction of incorporation or organization) |
| (IRS Employer Identification Number) |
| ||
9755 SW Barnes Road, Suite 420, Portland, OR |
| 97225 |
(Address of principal executive offices) |
| (Zip code) |
(503) 225-0300
(Registrant’s telephone number, including area code)
Senior Secured Demand Notes
(Title of each class of securities issued pursuant to Regulation A)
IRON BRIDGE MORTGAGE FUND, LLC
ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2019
| PAGE |
| |
4 |
| ||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 16 |
| |
43 |
| ||
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS | 45 |
| |
46 |
| ||
47 |
| ||
48 |
| ||
78 |
2 |
Table of Contents |
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 1-K (the “Form 1-K”) of Iron Bridge Mortgage Fund, LLC (the “Company”) includes forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are generally identifiable by the use of words such as “may,” “should,” “expects,” “plans,” “believes,” “estimates,” “predicts,” “potential,” and other similar words or expressions. Such statements include information concerning our plans, expectations, possible or assumed future results of operations, trends, financial results and business plans, and involve risks and uncertainties that are difficult to predict and subject to change based on various important factors, many of which are beyond our control. Such factors include, but are not limited to, those discussed in the “Risk Factors” section of our Offering Circular dated September 5, 2019 as filed with the Securities and Exchange Commission on September 10, 2019 (the “Offering Circular”). These and other important factors could cause actual results to differ materially from those contained in any forward-looking statement. You should not place undue reliance on our forward-looking information and statements. The forward-looking statements included in this Form 1-K speak only as of the date on which they are made, and we do not intend, and assume no obligation, to update those forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. All forward-looking statements contained in this Form 1-K are expressly qualified by these cautionary statements. Statements other than statements of historical fact are forward-looking statements.
The historical results described in this Form 1-K with respect to previous mortgage lending are historical only, and were influenced by available opportunities, diverse market conditions and other factors beyond the control of the Company. Any projections made in this Form 1-K are based on historical examples and the Company’s estimates of future conditions. There is no assurance that lending opportunities experienced in the past will occur in the future, that market conditions will be as favorable to the Company as they have been in the past, or that investors will enjoy returns on their investment comparable to those enjoyed by them or by others with respect to their participation in other investments sponsored by the Manager. The actual results experienced by the Company will differ, and such variation is likely to be material.
3 |
Table of Contents |
Overview
Iron Bridge Mortgage Fund, LLC (the “Company”) was formed in 2009 as an Oregon limited liability company for the purpose of making commercial purpose loans by lending funds to real estate investors to finance the ownership, entitlement, development or rehabilitation of residential and commercial real estate throughout the United States. The Company has no employees and is managed by Iron Bridge Management Group, LLC, an Oregon limited liability company (the ”Manager”), which is owned by Gerard Stascausky and operated by Gerard Stascausky and Sarah Gragg Stascausky (the “Managing Directors”). Gerard Stascausky and Sarah Gragg Stascausky combined bring to the Company over 20 years of investment banking experience and over 18 years of distressed real estate investment experience. The Manager provides Portfolio Loan origination and servicing services to the Company. See “Directors and Officers” on Page 43 of this Form 1-K.
The Company’s primary business is to provide commercial purpose loans for the acquisition and rehabilitation of distressed residential and commercial real estate as well as to provide opportunistic financing for real estate development and construction. The Company’s primary source of funding is private debt and Bank Borrowings. The commercial purpose loans extended by the Company are based upon underwriting criteria the Manager has found to be successful in the past.
The Company primarily originates and structures its own loans, with such loans being secured by first lien deeds of trust or mortgages. However, the Company may also take title to properties (either directly or through a wholly owned subsidiary) to facilitate prompt acquisitions from trustees at auction, pre-foreclosure acquisitions from defaulting borrowers, or any other real estate acquisition in which the Company believes taking title to the property is in the best interest of the Company. The wholly owned subsidiary may provide the Company a level of liability protection on owned assets, while preserving the Company’s economic interests.
The Company’s investments are primarily in non-owner occupied real estate loans. The only owner-occupied residential loans that may be owned by the Company are purchases of existing, non-performing residential loans, with the objective of renegotiating terms with the resident owner or foreclosing on the property. The Company does not originate new owner-occupied residential loans of any kind.
Company Vision
We believe that the real estate finance industry is in the early stages of a major transformation that should create significant value for borrowers, investors and real estate finance companies. Technology and new securities laws should drive increased efficiency. For borrowers, this should mean lower interest rates and better service. For investors, this should mean superior risk-adjusted returns that are not available in the public markets. And for the innovative companies that lead this change, it should mean an opportunity to create value while effectively managing risk.
Background and Strategy
Real estate finance markets are highly fragmented, with numerous large, mid-size, and small lenders and investment companies, such as banks, savings and loan associations, credit unions, insurance companies, institutional lenders and private lenders all competing for investment opportunities. Many of these market participants experienced losses in the real estate market, which started to decline in 2006 and reached its bottom in 2012. As a result of credit losses and restrictive government oversight, many of these financial institutions are not participating in this market to the extent they had before the credit crisis. In addition, it appears that the number of banks and other institutional lenders willing to lend for the acquisition and rehabilitation of commercial and residential investment properties has decreased. In particular, we believe that banks and other institutional lenders are generally more reluctant to lend money secured by residential property until the property is constructed or fully renovated and either rented or ready for purchase by an owner-occupant. Developers particularly rely on private lending sources such as the Company to fill the need for financing between the time a property is purchased and the time, after construction or rehabilitation, when it is ready to be rented or sold. We believe the Company fills a significant gap by providing much needed financing of this type for areas with a growing need for such financing, and that profitable investment opportunities will be available to the Company based on the fragmented nature of the rehab lending market and the limited competition from banks and other institutional lenders.
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Table of Contents |
Portfolio Loan Characteristics
Project Type. The primary focus of the Company’s lending activities is on single-family residential rehab and new construction projects. As described above, the Company believes that this market is underserved by banks and other institutional lenders. In addition, the relatively short-term nature of these projects (generally 12 months or less) allows the Company and its Portfolio Borrowers to adjust quickly to changing market conditions.
The following table provides information about the distribution of the Company’s loan portfolio by project type segmented further by number of loans and the unpaid principal balance (“UPB”) of those loans.
|
| As of the Year |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Number of loans |
|
|
|
|
|
|
|
|
| |||
Single-family residential rehab |
|
| 220 |
|
|
| 165 |
|
|
| 187 |
|
Single-family residential new construction |
|
| 25 |
|
|
| 19 |
|
|
| 34 |
|
Multi-family residential rehab |
|
| 2 |
|
|
| 1 |
|
|
| 11 |
|
Multi-family residential new construction |
|
| 0 |
|
|
| 2 |
|
|
| 0 |
|
Commercial |
|
| 4 |
|
|
| 0 |
|
|
| 0 |
|
Land entitlements |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of UPB |
|
|
|
|
|
|
|
|
|
|
|
|
Single-family residential rehab |
|
| 81 | % |
|
| 84 | % |
|
| 74 | % |
Single-family residential new construction |
|
| 11 | % |
|
| 13 | % |
|
| 24 | % |
Multi-family residential rehab |
|
| 2 | % |
|
| 2 | % |
|
| 2 | % |
Multi-family residential new construction |
|
| 0 | % |
|
| 1 | % |
|
| 0 | % |
Commercial |
|
| 6 | % |
|
| 0 | % |
|
| 0 | % |
Land entitlements |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
As of December 31, 2019, the percentage of UPB categorized by project type consisted of 81% Single-Family Residential Rehab (220 loans), 11% Single-Family Residential New Construction (25 loans), 2% Multi-Family Residential Rehab (2 loans), 0% Multi-Family Residential New Construction, 6% Commercial (4 loans) and 0% Land Entitlements.
By comparison, as of December 31, 2018 the percentage of UPB categorized by project type consisted of 84% Single-Family Residential Rehab (165 loans), 13% Single-Family Residential New Construction (19 loans), 2% Multi-Family Residential Rehab (1 loans), 1% Multi-Family Residential New Construction (2 loans), 0% Commercial and 0% Land Entitlements.
By comparison, as of December 31, 2017 the percentage of UPB categorized by project type consisted of 74% Single-Family Residential Rehab (187 loans), 24% Single-Family Residential New Construction (34 loans), 2% Multi-Family Residential Rehab (11 loans), 0% Multi-Family Residential New Construction, 0% Commercial and 0% Land Entitlements.
During the residential real estate downturn from 2009 through 2012, the Company only made residential rehab loans on existing single family properties. From 2013 through 2015, the Company modestly increased the amount of loans it made for single-family and multi-family new construction. This trend reflected the general improvement in the real estate market over that time and a corresponding shift in the business models of our borrowers from fixing distressed properties purchased through foreclosure sales or from bank owned inventory to more value-added projects, such as square footage additions or new construction. During 2015, 2016 and 2017, the Company’s single-family and multi-family new-construction loans, in aggregate, remained consistent at less than 25% of loan portfolio UPB. During 2018 and 2019, the Company made fewer new construction loans in favor of more residential rehab loans. The Company believes that the real estate securing residential rehab loans is generally more secure compared to the real estate securing new construction loans because, on average, the amount of construction funds required to complete rehab projects is less, the time to complete a rehab projects is shorter, and rehab projects usually come with an existing certificate of occupancy allowing the owner to more easily rent the property in an adverse economic environment.
It is important to point out that the Company does not make loans for land entitlement purposes only. These land entitlement loans represent phase one of two phase projects that require land entitlement to be completed prior to new construction commencing on either single-family or multi-family residential structures.
Geographical Distribution. The Company continues to experience steady loan demand and stable real estate resale activity. However, the real estate market is increasingly being driven by regional economics and less so by the macro boom and bust cycle of recent years. While real estate is generally benefiting from improvements in employment and low interest rates, the bounce off the bottom for real estate prices has slowed and regional economics are becoming a larger factor in local real estate trends. For this reason, the Company believes that increasing its geographic diversification and having the ability to rebalance its loan portfolio between geographies is important to effectively manage risk.
5 |
Table of Contents |
The following table provides the geographic distribution of the Company’s loan portfolio by state segmented further by the number and unpaid principal balance of loans (“UPB”) that were active at the end of the period and those loans that paid off during the period.
| As of or for the Year Ended December 31, | |||||||||||
| 2019 |
| 2018 |
| 2017 |
| ||||||
Arizona |
| |||||||||||
Number of active loans, end of period |
| 8 |
| - |
| - |
| |||||
Percentage of total UPB |
| 2 | % |
| - |
| - |
| ||||
Number of paid off loans, during period |
| 3 |
| - |
| - |
| |||||
Percentage of paid off UPB |
| <1 | % |
| - |
| - | |||||
California |
| |||||||||||
Number of active loans, end of period |
| 85 |
| 59 |
| 46 |
| |||||
Percentage of total UPB |
| 50 | % |
| 53 | % |
| 39 | % | |||
Number of paid off loans, during period |
| 89 |
| 76 |
| 63 |
| |||||
Percentage of paid off UPB |
| 44 | % |
| 39 | % |
| 28 | % | |||
Colorado |
| |||||||||||
Number of active loans, end of period |
| 13 |
| 15 |
| 10 |
| |||||
Percentage of total UPB |
| 8 | % |
| 9 | % |
| 6 | % | |||
Number of paid off loans, during period |
| 24 |
| 13 |
| 11 |
| |||||
Percentage of paid off UPB |
| 9 | % |
| 6 | % |
| 8 | % | |||
Connecticut |
| |||||||||||
Number of active loans, end of period |
| - |
| 1 |
| - |
| |||||
Percentage of total UPB |
| - |
| <1 | % |
| - | |||||
Number of paid off loans, during period |
| 1 |
| 1 |
| 1 |
| |||||
Percentage of paid off UPB |
| <1 | % |
| <1 | % |
| <1 | % | |||
Florida |
| |||||||||||
Number of active loans, end of period |
| 2 |
| 3 |
| 5 |
| |||||
Percentage of total UPB |
| 1 | % |
| 2 | % |
| 1 | % | |||
Number of paid off loans, during period |
| 4 |
| 8 |
| 4 |
| |||||
Percentage of paid off UPB |
| 2 | % |
| 1 | % |
| <1 | % | |||
Georgia |
| |||||||||||
Number of active loans, end of period |
| 6 |
| 1 |
| 1 |
| |||||
Percentage of total UPB |
| 1 | % |
| <1 | % |
| <1 | % | |||
Number of paid off loans, during period |
| 6 |
| 6 |
| 5 |
| |||||
Percentage of paid off UPB |
| <1 | % |
| <1 | % |
| <1 | % | |||
Illinois |
| |||||||||||
Number of active loans, end of period |
| 6 |
| 23 |
| 55 |
| |||||
Percentage of total UPB |
| 2 | % |
| 6 | % |
| 13 | % | |||
Number of paid off loans, during period |
| 17 |
| 57 |
| 79 |
| |||||
Percentage of paid off UPB |
| 3 | % |
| 8 | % |
| 15 | % | |||
Indiana |
| |||||||||||
Number of active loans, end of period |
| 12 |
| 1 |
| 3 |
| |||||
Percentage of total UPB |
| 1 | % |
| <1 | % |
| 1 | % | |||
Number of paid off loans, during period |
| 5 |
| 4 |
| 3 |
| |||||
Percentage of paid off UPB |
| 1 | % |
| <1 | % |
| <1 |
| |||
Louisiana |
| |||||||||||
Number of active loans, end of period |
| - |
| 2 |
| - |
| |||||
Percentage of total UPB |
| - |
| 1 | % |
| - |
| ||||
Number of paid off loans, during period |
| 2 |
| - |
| - |
| |||||
Percentage of paid off UPB |
| <1 | % |
| - |
| - |
| ||||
Maryland |
| |||||||||||
Number of active loans, end of period |
| 1 |
| - |
| - |
| |||||
Percentage of total UPB |
| <1 | % |
| - |
| - |
| ||||
Number of paid off loans, during period |
| - |
| - |
| - |
| |||||
Percentage of paid off UPB |
| - |
| - |
| - |
| |||||
Massachusetts |
| |||||||||||
Number of active loans, end of period |
| - |
| - |
| 3 |
| |||||
Percentage of total UPB |
| - |
| - |
| 1 | % | |||||
Number of paid off loans, during period |
| - |
| 6 |
| - |
| |||||
Percentage of paid off UPB |
| - |
| 1 | % |
| - | |||||
Missouri |
| |||||||||||
Number of active loans, end of period |
| 2 |
| 1 |
| - |
| |||||
Percentage of total UPB |
| <1 | % |
| <1 | % |
| - |
| |||
Number of paid off loans, during period |
| 2 |
| - |
| - |
| |||||
Percentage of paid off UPB |
| <1 | % |
| - |
| - |
| ||||
New Jersey |
| |||||||||||
Number of active loans, end of period |
| 1 |
| 2 |
| 3 |
| |||||
Percentage of total UPB |
| <1 | % |
| <1 | % |
| <1 | % | |||
Number of paid off loans, during period |
| 2 |
| 9 |
| 8 |
| |||||
Percentage of paid off UPB |
| <1 | % |
| 1 | % |
| 1 | % | |||
North Carolina |
| |||||||||||
Number of active loans, end of period |
| 1 |
| 1 |
| 2 |
| |||||
Percentage of total UPB |
| <1 | % |
| <1 | % |
| <1 | % | |||
Number of paid off loans, during period |
| 2 |
| 3 |
| 2 |
| |||||
Percentage of paid off UPB |
| <1 | % |
| <1 | % |
| <1 | % |
6 |
Table of Contents |
| As of or for the Year Ended December 31, | |||||||||||
| 2019 |
| 2018 |
| 2017 |
| ||||||
Oklahoma |
| |||||||||||
Number of active loans, end of period |
| - |
| - |
| 1 |
| |||||
Percentage of total UPB |
| - |
| - |
| <1 | % | |||||
Number of paid off loans, during period |
| - |
| 1 |
| - |
| |||||
Percentage of paid off UPB |
| - |
| <1 | % |
| - | |||||
Oregon |
| |||||||||||
Number of active loans, end of period |
| 58 |
| 39 |
| 59 |
| |||||
Percentage of total UPB |
| 21 | % |
| 16 | % |
| 24 | % | |||
Number of paid off loans, during period |
| 71 |
| 91 |
| 100 |
| |||||
Percentage of paid off UPB |
| 22 | % |
| 29 | % |
| 34 | % | |||
Pennsylvania |
| |||||||||||
Number of active loans, end of period |
| - |
| 1 |
| 6 |
| |||||
Percentage of total UPB |
| - |
| <1 | % |
| 1 | % | ||||
Number of paid off loans, during period |
| 1 |
| 6 |
| 6 |
| |||||
Percentage of paid off UPB |
| <1 | % |
| <1 | % |
| 1 | % | |||
South Carolina |
| |||||||||||
Number of active loans, end of period |
| 3 |
| 5 |
| 4 |
| |||||
Percentage of total UPB |
| 1 | % |
| 2 | % |
| <1 | % | |||
Number of paid off loans, during period |
| 3 |
| 4 |
| 4 |
| |||||
Percentage of paid off UPB |
| 1 | % |
| <1 | % |
| <1 |
| |||
Tennessee |
| |||||||||||
Number of active loans, end of period |
| 2 |
| 2 |
| 1 |
| |||||
Percentage of total UPB |
| 1 | % |
| 1 | % |
| <1 | % | |||
Number of paid off loans, during period |
| 2 |
| 1 |
| - |
| |||||
Percentage of paid off UPB |
| <1 | % |
| <1 | % |
| - |
| |||
Texas |
| |||||||||||
Number of active loans, end of period |
| 12 |
| 6 |
| 6 |
| |||||
Percentage of total UPB |
| 2 | % |
| 1 | % |
| 2 | % | |||
Number of paid off loans, during period |
| 33 |
| 12 |
| 5 |
| |||||
Percentage of paid off UPB |
| 5 | % |
| 2 | % |
| 1 | % | |||
Utah |
| |||||||||||
Number of active loans, end of period |
| 5 |
| - |
| - |
| |||||
Percentage of total UPB |
| 1 | % |
| - |
| - |
| ||||
Number of paid off loans, during period |
| 6 |
| - |
| - |
| |||||
Percentage of paid off UPB |
| 1 | % |
| - |
| - |
| ||||
Virginia |
| |||||||||||
Number of active loans, end of period |
| 4 |
| 1 |
| 3 |
| |||||
Percentage of total UPB |
| 2 | % |
| <1 | % |
| 1 | % | |||
Number of paid off loans, during period |
| 1 |
| 2 |
| - |
| |||||
Percentage of paid off UPB |
| <1 | % |
| <1 | % |
| - |
| |||
Washington |
| |||||||||||
Number of active loans, end of period |
| 30 |
| 24 |
| 24 |
| |||||
Percentage of total UPB |
| 7 | % |
| 7 | % |
| 9 | % | |||
Number of paid off loans, during period |
| 52 |
| 45 |
| 47 |
| |||||
Percentage of paid off UPB |
| 10 | % |
| 9 | % |
| 11 | % |
As of December 31, 2019, the geographic concentration of active Portfolio Loans of 1% or more of the UPB in any state was as follows: Arizona 2%, California 50%, Colorado 8%, Florida 1%, Georgia 1%, Illinois 2%, Indiana 1%, Oregon 21%, South Carolina 1%, Tennessee 1%, Texas 2%, Utah 1%, Virginia 2% and Washington 7%.
This compares to December 31, 2018 when the geographic concentration of active Portfolio Loans of 1% or more of the UPB in any state was as follows: California 53%, Colorado 9%, Florida 2%, Illinois 6%, Louisiana 1%, Oregon 16%, South Carolina 2%, Tennessee 1%, Texas 1% and Washington 7%.
This compares to December 31, 2017 when the geographic concentration of active Portfolio Loans of 1% or more of the UPB in any state was as follows: California 39%, Colorado 6%, Florida 1%, Illinois 13%, Indiana 1%, Massachusetts 1%, Oregon 24%, Pennsylvania 1%, Texas 2%, Virginia 1% and Washington 9%.
During 2016, the Company maintained stable lending activity across its existing geographies and began lending in Florida, Massachusetts, New Jersey, North Carolina, Oklahoma and South Carolina. During 2017, the Company began lending in Georgia, Tennessee and Virginia. During 2018, the Company began lending in Louisiana and increased its portfolio concentration toward non-judicial foreclosure states. The Company believes that lending in non-judicial foreclosure states is less risky, generally, than lending in judicial foreclosure states because the amount of time and expense required to foreclose non-performing loans is less. As of December 31, 2019, 2018 and 2017, the percentage of loan portfolio UPB secured by property located in non-judicial states was 94%, 87% and 81%, respectively.
The Company believes that the benefits of geographic diversity outweigh the risks associated with managing a wide geographic distribution of borrowers and real estate collateral. Specifically, the Company evaluates and adjusts its loan program offerings to borrowers in those states that offer better investment returns per unit of risk. Some of the variables evaluated by the Company in making the decision to expand or contract in a specific geographic market include the competitive pricing pressure from competing lenders, availability of borrower projects, the margins on those borrower projects and trends in regional economic activity.
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Borrowers. The Company’s Portfolio Borrowers are often comprised of one to three member teams that form a company and take title to Projects in their company name. The team members usually have prior experience in real estate development, construction, finance or sales. For example, a common three-person team might include a real estate agent, general contractor and financier, each contributing their expertise to the team. The real estate agent might be tasked with identifying attractive Projects, making suggestions regarding what capital improvements should be made to the Projects and helping to market and sell the Projects. The contractor might be tasked with assessing the cost, complexity and time necessary to make the planned capital improvements to the Project and managing that construction process. The financier might be tasked with managing the lender relationships, equity investor relationships, if any, and handling all back office accounting.
Between 2009 and 2015, the Company did not pursue a formal marketing or advertising program to grow its base of Portfolio Borrowers. The growth in the number of Portfolio Borrowers came almost exclusively through word of mouth. However, beginning in 2016, the Company implemented a marketing and advertising plan, which has helped the Company identify qualified Portfolio Borrowers and advantageous lending opportunities in each geographic market.
It has been our experience that providing Portfolio Borrowers with exceptional service leads to business referrals, which we believe is the best form of marketing. In addition, because our Portfolio Borrowers are often repeat customers, the value of each Portfolio Borrower relationship is much higher than it would be if the Portfolio Borrowers were not repeat customers.
The following table provides information regarding borrower concentrations as of the dates indicated.
|
| As of the Year |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Portfolio Loans |
|
| 251 |
|
|
| 187 |
|
|
| 232 |
|
Portfolio Borrowers |
|
| 166 |
|
|
| 135 |
|
|
| 151 |
|
Average number of loans per borrower |
|
| 1.5 |
|
|
| 1.4 |
|
|
| 1.5 |
|
Average percentage of loans per borrower |
|
| 1 | % |
|
| 1 | % |
|
| 1 | % |
Top borrower (percentage of UPB) |
|
| 6 | % |
|
| 8 | % |
|
| 8 | % |
Top 3 borrowers (percentage of UPB) |
|
| 14 | % |
|
| 18 | % |
|
| 17 | % |
As of December 31, 2019, the portfolio consisted of 251 active loans provided to 166 borrowers. The average number of loans per borrower was 1.5 loans. The largest borrower represented 6% of UPB, while the top 3 borrowers represented 14% of UPB.
This compares to December 31, 2018 when the portfolio consisted of 187 active loans provided to 135 borrowers. The average number of loans per borrower was 1.4 loans. The largest borrower represented 8% of UPB, while the top 3 borrowers represented 18% of UPB.
This compares to December 31, 2017 when the portfolio consisted of 232 active loans provided to 151 borrowers. The average number of loans per borrower was 1.5 loans. The largest borrower represented 8% of UPB, while the top 3 borrowers represented 17% of UPB.
The average number of loans per borrower has remained consistent over time. However, borrower concentration increased modestly during 2017 and 2018 as the Company shifted its loan portfolio toward more experienced borrowers who do more projects and borrower more money on average. During 2019, borrower concentration decreased modestly as the Company grew its loan portfolio.
Loan Term. All of the Company’s loans are made with maturity dates of 12 months or less. However, it is the Company’s policy to provide borrowers, whose loans are not in default, with six-month loan extensions, as needed, to allow more time to finish projects. Loans categorized with aging of 12+ months reflect those loans with loan extensions.
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As mentioned above, the primary focus of the Company’s lending activities is on single-family residential rehab and new construction projects. We believe that banks and other institutional lenders underserve this market, which provides the Company with the opportunity to earn attractive rates of return per unit of risk. In addition, the relatively short-term nature of these projects allows the Company and its Portfolio Borrowers to adjust quickly to changing market conditions.
The following table sets forth the distribution of loans by age at the dates indicated:
|
| As of the Year |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Number of loans |
|
|
|
|
|
|
|
|
| |||
00-06 months |
|
| 176 |
|
|
| 107 |
|
|
| 123 |
|
06-09 months |
|
| 28 |
|
|
| 34 |
|
|
| 33 |
|
09-12 months |
|
| 19 |
|
|
| 11 |
|
|
| 18 |
|
12+ months |
|
| 28 |
|
|
| 35 |
|
|
| 58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of number of loans |
|
|
|
|
|
|
|
|
|
|
|
|
00-06 months |
|
| 70 | % |
|
| 57 | % |
|
| 53 | % |
06-09 months |
|
| 11 | % |
|
| 18 | % |
|
| 14 | % |
09-12 months |
|
| 8 | % |
|
| 6 | % |
|
| 8 | % |
12+ months |
|
| 11 | % |
|
| 19 | % |
|
| 25 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance |
|
|
|
|
|
|
|
|
|
|
|
|
00-06 months |
| $ | 53,167,479 |
|
| $ | 34,548,794 |
|
| $ | 28,935,266 |
|
06-09 months |
|
| 10,600,733 |
|
|
| 15,836,408 |
|
|
| 9,158,379 |
|
09-12 months |
|
| 9,784,634 |
|
|
| 5,863,478 |
|
|
| 8,696,998 |
|
12+ months |
|
| 16,253,032 |
|
|
| 12,341,859 |
|
|
| 21,620,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of unpaid principal balance |
|
|
|
|
|
|
|
|
|
|
|
|
00-06 months |
|
| 59 | % |
|
| 50 | % |
|
| 42 | % |
06-09 months |
|
| 12 | % |
|
| 23 | % |
|
| 13 | % |
09-12 months |
|
| 11 | % |
|
| 9 | % |
|
| 13 | % |
12+ months |
|
| 18 | % |
|
| 18 | % |
|
| 32 | % |
As of December 31, 2019, the age distribution of the 251 active Portfolio Loans was as follows: 176 loans within 0-6 months (59% of UPB), 28 loans within 6-9 months (12% of UPB), 19 loans within 9-12 months (11% of UPB) and 28 loans greater than 12 months (18% of UPB).
This compares to December 31, 2018 when the age distribution of the 187 active Portfolio Loans was as follows: 107 loans within 0-6 months (50% of UPB), 34 loans within 6-9 months (23% of UPB), 11 loans within 9-12 months (9% of UPB) and 35 loans greater than 12 months (18% of UPB).
This compares to December 31, 2017 when the age distribution of the 232 active Portfolio Loans was as follows: 123 loans within 0-6 months (42% of UPB), 33 loans within 6-9 months (13% of UPB), 18 loans within 9-12 months (13% of UPB) and 58 loans greater than 12 months (32% of UPB).
During 2018, the percentage of UPB related to loans over 12 months in length declined, reflecting a reduction in larger new construction projects that required more time to complete. During 2019, the Company maintained a relatively low number of larger new construction projects.
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Loan Turnover. The following table provides information associated with the Company’s Portfolio Loan turnover for the periods shown:
|
| As of or for the Year |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Loans originated, during period |
|
| 391 |
|
|
| 308 |
|
|
| 333 |
|
Loans paid off, during period |
|
| 326 |
|
|
| 345 |
|
|
| 338 |
|
Loans foreclosed, during period |
|
| 2 |
|
|
| 8 |
|
|
| 7 |
|
Portfolio Loans, end of period |
|
| 251 |
|
|
| 187 |
|
|
| 232 |
|
Total historical payoffs, end of period |
|
| 2,506 |
|
|
| 2,179 |
|
|
| 1,826 |
|
Total historical originations, end of period |
|
| 2,757 |
|
|
| 2,366 |
|
|
| 2,058 |
|
During the year ended December 31, 2019, the Company originated 391 new Portfolio Loans, saw 326 Portfolio Loans pay off, and foreclosed or took deeds in lieu of foreclosure on 2 loans, which became REO properties. As of December 31, 2019, the Company had originated 2,757 loans since inception of which 2,506 had paid off, resulting in a net 251 active Portfolio Loans.
This compares to the year ended December 31, 2018 when the Company originated 308 new Portfolio Loans, saw 345 Portfolio Loans pay off, and foreclosed or took deeds in lieu of foreclosure on 8 loans, which all became REO properties. As of December 31, 2018, the Company had originated 2,336 loans since inception of which 2,179 had paid off, resulting in a net 187 active Portfolio Loans.
This compares to the year ended December 31, 2017 when the Company originated 333 new Portfolio Loans, saw 338 Portfolio Loans pay off, and foreclosed or took deeds in lieu of foreclosure on 7 loans, which all became REO properties. As of December 31, 2017, the Company had originated 2,058 loans since inception of which 1,826 had paid off, resulting in a net 232 active Portfolio Loans.
Total loan origination and associated Portfolio Loan turnover increased gradually each year from 2013 through 2017 as the Company worked to balance a steady increase in capital formation with quality loan origination. During 2018, the number of loans originated decreased as the Company shifted its origination toward states with larger loan sizes.
Loan Size. The following table sets forth the distribution of loans by size (based on the unpaid principal balance) at the dates indicated:
|
| As of the Year |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Average loan size |
| $ | 357,792 |
|
| $ | 366,794 |
|
| $ | 294,875 |
|
Median loan size |
|
| 248,993 |
|
|
| 254,190 |
|
|
| 199,000 |
|
$0-$100,000 |
|
| 29 |
|
|
| 20 |
|
|
| 46 |
|
$100,001-$200,000 |
|
| 71 |
|
|
| 50 |
|
|
| 72 |
|
$200,001-$300,000 |
|
| 47 |
|
|
| 39 |
|
|
| 39 |
|
$300,001-$500,000 |
|
| 54 |
|
|
| 33 |
|
|
| 36 |
|
$500,001-$1,000,000 |
|
| 39 |
|
|
| 35 |
|
|
| 33 |
|
$1,000,000-$1,500,000 |
|
| 7 |
|
|
| 8 |
|
|
| 5 |
|
$1,500,000-$2,000,000 |
|
| 4 |
|
|
| 2 |
|
|
| 1 |
|
As of December 31, 2019, the average and median loan sizes were $357,792 and $248,993, down $9,002 and $5,197 from the average and median loan sizes of $366,794 and $254,190 at December 31, 2018, respectively.
This compares to December 31, 2018 when the average and median loan sizes were $366,794 and $254,190, up $68,919 and $55,190 from the average and median loan sizes of $294,875 and $199,000 at December 31, 2017, respectively.
This compares to December 31, 2017 when the average and median loan sizes were $294,875 and $199,000, up $21,289 and $10,000 from the average and median loan sizes of $273,586 and $189,000 at December 31, 2016, respectively.
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The Company saw a modest increase in average and median loan sizes from 2017 through 2019, reflecting the Company’s shift toward west coast states, which have relatively higher priced real estate on average.
The Company’s objective is to make loans secured by real estate priced in the liquid segments of each geographic market. Therefore, the distribution of loan sizes between time periods largely reflects both changes in real estate prices over time and a mix shift between geographies. While the Company is sensitive to loan size diversification, it does not target a mix of loan sizes.
Portfolio Loan Criteria and Policies
Underwriting. The Company engages in the business of making loans secured by first lien deeds of trust or mortgages that encumber real estate located in the United States, its territories and possessions. The Company may also invest indirectly in a loan by acquiring an ownership interest in an entity formed for the sole purpose of holding a qualifying loan. The Company’s loans are not insured or guaranteed by any governmental agency or private entity.
For each Portfolio Borrower, the Company performs a criminal background check, orders a credit report, measures liquidity, interviews the borrower to assess experience level and evaluates the quality of previous work. The Company also requires each Portfolio Borrower to provide a construction cost budget, detailing the cost and scope of planned capital improvements, and a profit analysis, detailing the borrower’s estimated resale price, total project cost and estimated profit.
As an asset-based lender, the Company’s underwriting guidelines are heavily weighted toward real estate valuation, liquidity and loan-to-value (LTV) coverage. Specifically, the Company operates under the following underwriting guidelines:
| · | the Company does not lend unless secured by a first lien deed of trust or mortgage; |
| · | the Company does not lend unless the borrower has a clearly defined exit strategy; |
| · | the Company does not lend without assessing the borrower’s ability and willingness to pay; and |
| · | the Company does not lend more than 70% of the estimated “after-repair value” of the collateral (70% LTV coverage). |
The Company has the sole discretion whether to originate a mortgage loan at a given LTV. Some of the factors considered by the Company when determining the maximum LTV to be extended on a mortgage loan are:
| · | age, type, condition, and location of the collateral; |
| · | borrower creditworthiness and credit history; |
| · | loan amount and credit terms requested; |
| · | additional cross-collateralized properties; |
| · | proposed changes to or reconstruction of the collateral; |
| · | tenant history and occupancy rate (if applicable); and |
| · | amount of the interest reserve or construction loan (if any). |
In determining the value of real estate collateral for purposes of loan underwriting and LTV calculations, the Company inspects the properties and evaluates comparable property values in the area through the use of Multiple Listing Service (MLS) data. Based on this information, the Company prepares an estimate of the “after-repair value” of each property. The Company’s “after-repair” value estimates assume that all planned capital improvements to the real estate collateral have been completed and that the Company has disbursed all construction loan proceeds, and represents the Company’s estimate of the market value of the collateral after completion of the project based on information about comparable properties available at that time. In more complex transactions or for properties with limited comparable data, the Company may seek a formal valuation report such as an appraisal or broker price opinion. Appraisals are recognized in the mortgage banking industry to represent estimates of value, and should not be relied upon as the only measure of true worth or realizable value. Collateral value is determined solely in the judgment of the Company.
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The Company believes that performing in-house real estate valuations provides it with a competitive advantage. By performing hundreds of in-house valuations per year in multiple geographies, the Company is able to continually refine its appraisal process and analyze real estate market trends within different geographies. This internal valuation analysis enables the Company to make faster and more informed lending decisions, which we believe help mitigate risk while providing Portfolio Borrowers with a higher quality of service.
There are no limitations on the types or locations of real estate investment loans within the United States or any requirement for current yield as opposed to overall return. Moreover, the Company’s investment strategy does not seek to balance the investment portfolio by property types, return characteristics or location, but the Company is sensitive to concentration risk. The Manager has the discretion to lend the Company’s assets on both new construction and existing properties.
The Company will not enter into any new commitment to make a loan where the cumulative principal amount of such loan would exceed 10% of the principal value of Portfolio Loans plus cash and cash equivalents of the Company as of the date of such commitment.
The Manager has discretion to amend the Portfolio Loan criteria and policies from time to time. Therefore, in essence, the investment objectives are those defined by the manager from time to time.
Disbursement of Loan Proceeds
Company loans are funded through an escrow account handled by the Manager or a qualified attorney, title insurance company or escrow company. The escrow agent is instructed not to disburse any funds until the following conditions are met:
| · | Satisfactory title insurance coverage has been obtained, except as described in the following paragraph, with the title insurance policy naming the Company as the insured and providing title insurance in an amount equal to the principal amount of the loan. Title insurance insures only the validity and priority of the Company’s deed of trust or mortgage, and does not insure the Company against loss by reason of other causes, such as diminution in the value of the property securing the loan, over-appraisals or borrower defaults. The Company does not intend to arrange for mortgage insurance, which would afford some protection against loss if the Company foreclosed on a loan and there was insufficient equity in the property securing the loan to repay all sums owed. |
| The Company does not intend to arrange for title insurance policies on properties purchased from county auction, in which the borrower is borrowing from the Company under a Master Loan and Security Agreement. In such cases, the Company lends to the borrower during a period in which the borrower has equitable (but not marketable) title, and the Company performs its own title research. Once the Trustee’s Deed or Sherriff’s Deed is received and recorded following the foreclosure sale, the Company’s first lien position is perfected. The Master Loan and Security Agreement cross-collateralizes the loan against other properties owned by the borrower. | |
| · | Satisfactory hazard and liability insurance has been obtained for all loans, or only liability insurance in the event of a loan secured by unimproved land, which insurance shall name the Company as loss payee in an amount equal to the principal amount of the Company’s loan or the replacement value of the property, as dictated by legal statute. |
| · | All loan documents (notes, deeds of trust, etc.) and insurance policies name the Company as payee and beneficiary or additional loss insured, as applicable. In the event the Company purchases loans, the Company shall receive assignments of all beneficial interest in any document related to each loan so purchased. Company investments in loans may not be held in the name of the Manager or any other nominee. |
Disbursement of Construction Draws
The Company disburses construction draws to Portfolio Borrowers to pay for planned capital improvements to the real estate collateral based on a pre-defined scope of work, construction budget and time schedule. To mitigate risk in this process, the Company follows certain policies and procedures that incorporate some or all of the following practices. However, it is important to point out that the Company evaluates the risks related to each project, considering such variables as borrower experience, and project location, size, timing and scope of work to determine the right combination of practices to follow.
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Practices related to disbursement of construction draws include, but are not limited to, the following:
| · | Construction Cost Budget – The construction cost budget is a spread sheet provided by the borrower that provides the Company with line item detail related to the planned capital improvements. The construction cost budget is prepared during the underwriting processes, and the borrower will update and submit the construction cost budget with each draw request. |
| · | Summary Page – The summary page organizes the draw request into two categories: (1) reimbursable expenses to be paid by the Company to the borrower, and (2) direct payments by the Company to contractors and vendors. The Company will reimburse the borrower for completed work as long as the borrower provides proof of payment. The Company will pay contractors and vendor invoices directly for completed work. |
| · | Conditional Lien Waivers – Conditional lien waivers are legal agreements provided by contractors and material vendors to the Company or the borrower. The contractor or vendor agrees to waive its right to file a mechanics lien against the property for work performed through a specific date conditioned upon the receipt of a specific payment amount. |
| · | Final Lien Waivers – Final lien waivers are legal agreements provided by contractors and material vendors to the Company or the borrower. The contractor or vendor agrees to waive its right to file a mechanics lien against the property for all work performed on the property, conditioned upon the receipt of a final payment amount. |
| · | Property Inspections – The Company orders property inspections by qualified third party inspectors to evaluate the amount and quality of construction work performed at various stages of construction or redevelopment. |
| · | Advanced Funding – In certain circumstances, the Company may agree to advance a borrower funds to be used to make future capital improvements. In those cases, the Company requires that, among other things, the borrower provide proof of payment and that the work be 100% complete prior to a subsequent advance. In addition, the Company is often secured through cross-collateralization with other projects owned by the same borrower. |
Loan Servicing
The Company’s loans are serviced by the Manager and the Manager is compensated for such loan servicing activities. See “Management Fees” on Page 44 for additional details.
We believe that the quality of service provided by the Company to Portfolio Borrowers is an important competitive differentiator in the private lending industry. For this reason, the Company chooses to originate, underwrite and service all of its loans in-house. In-house loan underwriting enables the Company to make fast, common sense lending decisions, which Portfolio Borrowers appreciate. For example, new borrower applications generally can be processed in 48 hours, loan proposals generally can be made in 24 hours and existing Portfolio Borrowers can receive funding in two to five days. In addition, because the Company does not require third party approvals to make loans, Portfolio Borrowers have confidence in the funding commitments made by the Company.
We also believe that in-house loan servicing is important for mitigating loan portfolio risk. Maintaining a close relationship with Portfolio Borrowers and servicing Portfolio Loans through every step of the loan life cycle allows the Company to quickly identify and address problem loans.
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Loan servicing includes, but is not limited to, the following:
| · | Payment Reminder Statements – Calculating, generating and delivering payment reminders to Portfolio Borrowers on a monthly basis. The accrued interest calculations are performed on a daily basis and take into account intra-month adjustments to the unpaid principal balance related to construction draw advances and adjustments to the interest rate of the loans, if any. |
| · | Loan History Statements – Calculating, generating and delivering loan history statements to Portfolio Borrowers on a monthly basis. The loan history statements are updated on a daily basis and present a summary of all financial transaction activity related to the loan, including transaction dates, funding amounts, accrued interest amounts, payment amounts, loan advances, loan fees and payoff amounts. |
| · | Construction Loan Statements – Calculating, generating and delivering construction loan history statements to Portfolio Borrowers on a monthly basis. The construction loan history statements are updated on a daily basis and present all construction loan advances, including transaction dates, advance amounts, vendors paid and balance of construction loan remaining. |
| · | Interest Reserve Statements – Calculating, generating and delivering interest reserve history statements to Portfolio Borrowers on a monthly basis. The interest reserve statements are updated on a daily basis and present all interest reserve advances, if any, made to cover loan payments, including transaction dates, advance amounts and balance remaining. |
| · | Payment Collection – Portfolio Borrowers make loan payments monthly in arrears and are instructed to mail their checks or money orders directly to the Manager for deposit into the Company’s general account. Portfolio Borrowers may also elect to have their payments electronically debited from their bank accounts by the Company. |
| · | Construction Draw Processing – Accepting, evaluating and managing construction loan draw requests submitted by Portfolio Borrowers. Construction draw processing includes educating borrowers about the draw process, collecting required documentation, managing third-party property inspectors, evaluating the quality of work and percentage of completion against the balance of the construction loan, and disbursing funds to Portfolio Borrowers or contractors. |
| · | Loan Payoffs – Calculating, preparing and submitting loan payoff statements. The Company works directly with the escrow company or attorney handling the closing. Following a loan payoff and payoff reconciliation, the Company prepares a reconveyance form in order to release its security interest in the property. |
| · | Delinquent Loans and Foreclosure – The Company follows internal policies and procedures related to colleting payment on delinquent loans, offering and negotiating pre-foreclosure remedies and filing foreclosure. All foreclosure proceedings are handled by third-party foreclosure trustees or attorneys, as required by each state. |
Purchase and Sale of Loans
The Company typically originates its mortgage loans. However, the Company may also purchase loans from unrelated third parties. Loans purchased by the Company must not be in default at the time of purchase and must otherwise satisfy the lending guidelines described above. Generally, the purchase price to the Company for any such loan will be the lesser of par value or fair market value.
The Company does not presently invest in mortgage loans primarily for the purpose of reselling such loans in the ordinary course of business; however, the Company may sell mortgage loans or enter into inter-creditor agreements if the Manager determines that it is advantageous for the Company to do so based upon the current interest rates, the length of time that the loan has been held by the Company, and the overall investment objectives of the Company.
The Company makes mortgage loans for investment and does not expect to engage in real estate operations in the ordinary course of business, except as may be required if the Company forecloses on a property on which it has invested in a mortgage loan and takes over ownership and management of the property. The Company may sell non-performing Portfolio Loans or foreclosed property securing Portfolio Loans, or sell an interest in such collateral to an affiliate of the Company, for the purpose of restructuring the Portfolio Loan or repositioning the property for sale.
None of the Company, its Manager, Managing Directors or affiliates is precluded from (i) selling a property to any of the Company’s securityholders in connection with a foreclosure, including with purchase financing, or (ii) making a loan to, purchasing a loan from or entering into a loan or co-lending transaction or activity with any Senior Noteholder, Junior Noteholder or equity owner of the Company, provided that any transaction meets our contractual obligations under our agreements related to the Senior Notes or any other contractual or legal obligations.
Legal Proceedings
The Company is not subject to any legal proceedings that are material to its business or financial condition.
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Competition
The real estate market is competitive and rapidly changing. We expect competition to persist and intensify in the future, which could harm our ability to identify suitable Portfolio Loans. The business in which the Company is engaged is highly competitive, and the Company and Manager and its affiliates compete with numerous other established entities, including banks and credit unions. The Company and Manager also expect to encounter significant competition from other market participants including private lenders, private equity fund managers, real estate developers, pension funds, real estate investment trusts, other private parties, potential investors or homeowners, and other people or entities with objectives similar in whole or in part to those of the Company. Competition could result in reduced volumes, reduced fees or the failure of the Company to achieve or maintain more widespread market acceptance, any of which could harm the Company’s business. Most of our current or potential competitors have significantly more financial, technical, marketing and other resources than the Company, and may be able to devote greater resources to the development, promotion, sale and support of their platforms and distribution channels. The Company’s potential competitors may also have longer operating histories, or extensive customer bases, greater brand recognition and broader customer relationships than we have.
The Company has historically been able to earn Portfolio Loan yields above the industry average by providing superior service to its Portfolio Borrowers and by opportunistically expanding its loan origination in those markets that offer the best return per unit of risk. However, we anticipate that our portfolio yields will continue to decline over time as we adjust our loan programs to remain price competitive. In order to remain competitive long-term the Company must continue to provide its borrowers with a superior quality of service and lower its cost of capital in order to provide borrowers with more competitively priced loans.
Governmental Regulation
Investment Company Act. An investment company is defined under the Investment Company Act to include any issuer engaged primarily in the business of investing, reinvesting, or trading in securities. Absent an exemption, investment companies are required to register as such with the SEC and to comply with various governance and operational requirements. If we were considered an “investment company” within the meaning of the Investment Company Act, we would be subject to numerous requirements and restrictions relating to our structure and operation. If we were required to register as an investment company under the Investment Company Act and to comply with these requirements and restrictions, we may have to make significant changes in our proposed structure and operations to comply with exemption from registration, which could adversely affect our business. We intend to structure the operation of the Company so as not to subject the Company to the provisions of the Investment Company Act. In particular, the Company expects to rely on, among other things, the exemption from registration afforded by compliance with Section 3(c)(5) of the Investment Company Act. Section 3(c)(5) excludes from the definition of “investment company” issuers of non-redeemable securities primarily engaged in “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” The Manager has not sought a no-action letter from the SEC to confirm that the Company is eligible for this exemption. However, the Manager will rely on guidance issued by the SEC stating that so long as (1) qualifying percentages of the Company’s assets consist of mortgages and other liens on or interests in real estate; and (2) the remaining percentage of the Company’s assets consist primarily of real estate-related assets, the Company will remain exempt from the Investment Company Act registration requirements.
Lending Regulations. The Company is a lender with respect to its Portfolio Loans, and the Company will be deemed a borrower and the Senior Noteholders deemed lenders with respect to the Senior Notes. Oregon and other states have numerous laws and regulations, which apply to the activities of lenders and the rights of borrowers. The applicability of these laws and regulations, and their exemptions and exclusions, are frequently complex and highly fact-centric, and they vary by jurisdiction and are subject to change. In addition, litigation in a number of states has imposed liability upon lenders, or otherwise adversely impacted lenders, in a manner that Senior Noteholders may not be accustomed to as a result of other investment activities. For example, a number of states have adopted usury laws, which generally prohibit the charging of interest in certain circumstances in excess of a statutorily defined rate. The Company relies on qualified advisors and uses commercially reasonable efforts to comply with laws and regulations applying to lenders and borrowers, and seeks exemptions and exclusions as advisable from such laws where appropriate to meet the investment objectives of the Company and this offering.
In addition, the Company makes its Portfolio Loans pursuant to state finance lender licensing exceptions for commercial loans. However, the Company or the Manager may obtain a finance lender’s license in specific states or retain the services of third parties to comply with such licensing, should it be deemed advisable. The Company relies on qualified advisors and uses commercially reasonable efforts to comply with laws and regulations applying to lenders and borrowers, and seeks exemptions and exclusions as advisable from such laws where appropriate to meet the investment objectives of the Company and this offering. The Company believes that such efforts are sufficient to avoid issues of noncompliance. However, investors should be aware that, under certain circumstances, a failure to comply with applicable regulations by the Company or a Senior Noteholder could result in civil or criminal penalties.
Lender Liability. As an additional consideration, legal decisions in many jurisdictions have imposed liability upon lenders for actions such as declaring defaults with respect to loans and refusing to meet company loan commitments under certain circumstances. In addition, some courts have permitted litigants to pursue claims against lenders for environmental torts of a borrower and other liability as a result of their association with the borrower. Such so-called “lender liability” is a developing and uncertain area of the law, and there can be no assurance that such a claim could not be brought against the Company or, by extension, an investor. In addition, in some cases, courts have re-characterized loans or debt securities as equity instruments, such that lenders or debt security holders have been subject to “equitable subordination” and thus not entitled to the preferred status of a creditor in a bankruptcy or other adversarial proceeding. Such decisions have been highly fact specific, and there can be no assurance that a court would not follow a similar approach with respect to the Senior Noteholders’ loans to the Company, or the Company’s loans to its Portfolio Borrowers. Investors are encouraged to consult with their legal counsel regarding the lender-related issues discussed above.
Environmental Regulations. Federal, state and local laws and regulations impose environmental controls, disclosure rules and zoning restrictions that directly impact the management, development, use, or sale of real estate. Such laws and regulations tend to discourage sales and lending activities with respect to some properties, and may therefore adversely affect us specifically, and the real estate industry in general. The Company’s failure to uncover and adequately protect against environmental issues in connection with a Project investment may subject us to liability. Environmental laws and regulations impose liability on current or previous real property owners or operators for the cost of investigation, cleaning up or removing contamination caused by hazardous or toxic substances at the property. Liability can be imposed even if the original actions were legal and the owner had no knowledge of, or was not responsible for, the presence of the hazardous or toxic substances. Such liabilities may interfere with the Company’s ability to realize on its lending activities.
Property
The Manager leases office space for its principal executive offices in Portland, Oregon pursuant to a multi-year lease. We believe that these facilities are adequate for our current operations.
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Table of Contents |
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of the Company’s results of operation, financial condition, and liquidity.
Overview
We are a private lender formed in 2009 as an Oregon limited liability company. The Company makes commercial purpose loans by lending funds to real estate investors to finance the ownership, entitlement, development and redevelopment of residential and commercial real estate throughout the United States. We generate most of our revenue from interest on loans and loan fees. Our loan portfolio consists of a mix of single-family and multi-family redevelopment and new construction projects. Our primary source of funding is private debt and Bank Borrowings. Our largest expenses are management fees paid to the Manager, Iron Bridge Management Group LLC, and interest paid on private debt and Bank Borrowings. We measure our performance through various metrics, including our net income, net margin, net interest rate spread, net interest margin, ratio of interest-earning assets to interest-bearing liabilities, non-performing loans to total loans, late fee and default interest from non-performing loans, charge-offs on non-performing loans, estimated active portfolio loan-to-value compared to actual paid-off portfolio loan-to-sale price, and interest coverage ratios.
The following selected financial data as of and for the fiscal years ended December 31, 2019, 2018 and 2017 is derived from audited financial statements of the Company and should be read in conjunction with such financial statements and notes which are included in this Form 1-K beginning on Page 48.
|
| As of or for the Year Ended December 31, |
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| 2019 |
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| 2018 |
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| 2017 |
| |||
Selected income statement data |
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| |||
Interest income |
| $ | 10,273,630 |
|
| $ | 10,180,734 |
|
| $ | 10,838,524 |
|
Interest expense |
|
| 4,215,198 |
|
|
| 3,966,099 |
|
|
| 4,171,237 |
|
Net interest income |
|
| 6,058,432 |
|
|
| 6,214,635 |
|
|
| 6,667,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
| 776,382 |
|
|
| 90,275 |
|
|
| 56,753 |
|
Net interest income after provision for loan losses |
|
| 5,282,050 |
|
|
| 6,124,360 |
|
|
| 6,610,534 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
| 1,288,849 |
|
|
| 748,341 |
|
|
| 770,173 |
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Non-interest expense |
|
| 4,717,527 |
|
|
| 4,061,313 |
|
|
| 4,326,498 |
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Income tax expense (benefit) |
|
| 9,854 |
|
|
| 8,517 |
|
|
| 7,557 |
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Net income (loss) |
|
| 2,501,774 |
|
|
| 2,880,986 |
|
|
| 2,899,112 |
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Net margin |
|
| 21.6 | % |
|
| 26.4 | % |
|
| 25.0 | % |
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Selected balance sheet data |
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Total assets |
| $ | 98,702,602 |
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| $ | 73,340,802 |
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| $ | 73,828,400 |
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Net loans |
|
| 88,122,933 |
|
|
| 67,316,102 |
|
|
| 67,090,684 |
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Rental property |
|
| 7,111,371 |
|
|
| 6,414,813 |
|
|
| - |
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Real estate owned |
|
| 1,776,281 |
|
|
| 3,315,361 |
|
|
| 4,795,566 |
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Allowance for loan losses |
|
| 1,045,668 |
|
|
| 815,947 |
|
|
| 890,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Borrowings |
|
| 30,548,052 |
|
|
| 20,778,689 |
|
|
| 19,014,051 |
|
Senior Notes |
|
| 20,914,989 |
|
|
| 8,066,007 |
|
|
| - |
|
Junior Notes |
|
| 24,924,078 |
|
|
| 28,386,836 |
|
|
| 33,805,946 |
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Equity |
|
| 21,181,026 |
|
|
| 20,324,112 |
|
|
| 20,205,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected performance ratios |
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|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread |
|
| 6.757 | % |
|
| 7.492 | % |
|
| 7.647 | % |
Net interest margin |
|
| 7.800 | % |
|
| 8.873 | % |
|
| 9.481 | % |
Ratio of interest-earning assets to interest-bearing liabilities |
|
| 1.19 |
|
|
| 1.24 |
|
|
| 1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans (percentage of UPB) |
|
| 3.2 | % |
|
| 4.5 | % |
|
| 11.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan to value – active loans, end of period |
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance |
| $ | 89,805,878 |
|
| $ | 68,590,539 |
|
| $ | 68,410,996 |
|
Unfunded loan balance (1) |
|
| 9,902,260 |
|
|
| 9,491,811 |
|
|
| 7,647,593 |
|
Estimated “after-repair” value (2) |
|
| 155,001,000 |
|
|
| 118,625,000 |
|
|
| 112,062,500 |
|
Estimated “after-repair” loan-to-value (3) |
|
| 64 | % |
|
| 66 | % |
|
| 68 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan to value – paid off loans, during period |
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance |
|
| 81,916,818 |
|
|
| 85,119,195 |
|
|
| 68,297,135 |
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Actual sale price |
|
| 129,823,381 |
|
|
| 134,685,603 |
|
|
| 114,128,955 |
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Actual loan-to-sale price (4) |
|
| 63 | % |
|
| 63 | % |
|
| 60 | % |
Original “after-repair” loan-to-value estimate |
|
| 67 | % |
|
| 66 | % |
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| 66 | % |
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|
|
|
|
|
|
|
|
|
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|
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Interest coverage ratios |
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|
|
|
|
|
|
|
|
|
|
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Interest coverage – Bank Borrowings (5) |
|
| 8.8 | x |
|
| 7.5 | x |
|
| 10.8 | x |
Cumulative interest coverage – Senior Notes (6) |
|
| 5.2 | x |
|
| 6.4 | x |
|
| - |
|
Cumulative interest coverage – Junior Notes (7) |
|
| 2.7 | x |
|
| 2.8 | x |
|
| 2.8 | x |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average portfolio leverage, during period |
|
| 75.8 | % |
|
| 73.3 | % |
|
| 73.1 | % |
16 |
Table of Contents |
(1) | Unfunded loan balance is comprised of construction funds that have been approved but not yet disbursed. |
(2) | The Company prepares an estimate of the “after-repair” value of the collateral for each Portfolio Loan. The Company’s “after-repair” value estimate for each property assumes that all planned capital improvements to the real estate collateral have been completed and that the Company has disbursed all construction loan proceeds, and represents the Company’s estimate of the market value of the project after completion of all repairs based on information about comparable properties available at the time. See “Portfolio Loan Criteria and Policies – Underwriting” on Page 11 for additional details regarding estimation of “after-repair” value. |
(3) | Estimated “after-repair” loan-to-value is calculated by dividing the sum of the unpaid principal balance and the unfunded loan balance by the estimated “after-repair” value. Real estate values are based on the Company’s “after-repair” value estimates and loans are weighted by the principal balance of each loan. |
(4) | Actual loan-to-sale price represents the amount of the fully funded loan divided by the actual sale price of the real estate collateral. The principal balance of each loan was used to calculate the weighted average. Loans that were refinanced or secured by real estate collateral that was sold wholesale (prior to planned improvements being completed) to other investors were excluded from the calculation. |
(5) | Bank Borrowings have a first priority security interest in all of the Company’s assets, including Portfolio Loans. Interest coverage equals gross income divided by the interest expense related to Bank Borrowings. |
(6) | Senior Notes have a second priority interest in all of the Company’s assets, including its Portfolio Loans. Cumulative interest coverage of Senior Notes equals gross income divided by the total interest expense related to Senior Notes and Bank Borrowings combined. The Company began issuing Senior Notes on March 1, 2018. |
(7) | Junior Notes have a third priority security interest in all of the Company’s assets, including Portfolio Loans. Cumulative interest coverage of Junior Notes equals gross income divided by the total interest expense related to Junior Notes, Senior Notes and Bank Borrowings combined. |
Critical Accounting Policies and Accounting Estimates
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and which could potentially result in materially different results under different assumptions and conditions. The Company believes that the most critical accounting policies upon which its financial condition depends, and which involve the most complex or subjective decisions or assessments, are set forth below.
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense, which affects our earnings directly. Loans are charged against the allowance for loan losses when the Company believes that the collectability of all or some of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that reflects the Company’s estimate of the level of probable incurred losses in the loan portfolio. Factors considered by the Company in determining the adequacy of the allowance include, but are not limited to, detailed reviews of individual loans, historical and current trends in loan charge-offs for the various portfolio segments evaluated, the level of the allowance in relation to total loans and to historical loss levels, levels and trends in non-performing and past due loans, external factors including regulatory, competition, and the Company’s assessment of economic conditions.
The provision for loan losses is the charge to operating earnings necessary to maintain an adequate allowance for loan losses. We have developed policies and procedures for evaluating the overall quality of our loan portfolio and the timely identification of problem loans. The Company continuously reviews these policies and procedures and makes further improvements as needed. However, the Company’s methodology may not accurately estimate inherent loss or external factors and changing economic conditions may impact the loan portfolio and the level of reserves in ways currently unforeseen.
17 |
Table of Contents |
The following table sets forth the beginning and ending balance of allowance for loan losses, the provision for loan losses taken during that period, and the amount of loan charge-offs taken during that period:
|
| As of or for the Year |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Unpaid principal balance, end of period |
| $ | 89,805,878 |
|
| $ | 68,590,539 |
|
| $ | 68,410,996 |
|
Allowance for loan losses, beginning balance |
|
| 815,947 |
|
|
| 890,272 |
|
|
| 1,150,469 |
|
Provision for loan losses, during period |
|
| 776,382 |
|
|
| 90,275 |
|
|
| 56,753 |
|
Charge-offs, during period |
|
| (546,661 | ) |
|
| (164,598 | ) |
|
| (316,950 | ) |
Allowance for loan losses, ending balance |
|
| 1,045,668 |
|
|
| 815,947 |
|
|
| 890,272 |
|
Percent of unpaid principal balance, end of period |
|
| 1.2 | % |
|
| 1.2 | % |
|
| 1.3 | % |
As of December 31, 2019, the Company’s allowance for loan losses balance was $1,045,668, or 1.2%, of UPB. During the preceding 12 months, the Company recognized provisions for loan losses of $776,382 and $546,661 in loan charge-offs.
This compares to December 31, 2018 when the Company’s allowance for loan losses balance was $815,947, or 1.2%, of UPB. During the preceding 12 months, the Company recognized provisions for loan losses of $90,275 and $164,598 in loan charge-offs.
This compares to December 31, 2017 when the Company’s allowance for loan losses balance was $890,272, or 1.3%, of UPB. During the preceding 12 months, the Company recognized provisions for loan losses of $56,753 and $316,950 in loan charge-offs.
Based on the low amount of historical charge-offs, and the Company’s expectation of stable portfolio performance in the near term, the Company expects to accrue a provision for loan losses at a rate of between 0% and 1.0% annualized. See “Comparison of Financial Condition at December 31, 2019, 2018 and 2017 – Non-Performing Loans and REO Assets” on Page 25 for additional disclosures.
REO and Foreclosed Assets. Assets acquired through or in lieu of loan foreclosure are initially recorded at lower of cost or fair value less estimated costs to sell, establishing a new cost basis. Subsequent to foreclosure, valuations are performed annually and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other non-interest income or expense. Costs related to the development and improvement of REO assets are capitalized.
18 |
Table of Contents |
Due to the subjective nature of establishing the asset’s fair value when it is acquired, the actual fair value of the REO or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through non-interest expense. Gains and losses on the disposition of REO and foreclosed assets are netted and posted to other non-interest income or expenses. See “Comparison of Financial Condition at December 31, 2019, 2018 and 2017 – Non-Performing Loans and REO Assets” on Page 25 for additional disclosures.
Fair Value of Mortgage Loans Receivable. The Company has the intent and ability to hold its mortgage loans to maturity. Therefore, mortgage loans are stated at their outstanding unpaid principal balance with interest thereon being accrued as earned. Mortgage loans receivable make up the only class of financing receivables within the Company’s lending portfolio.
If the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement and the shortfall in the amounts due are not insignificant, the carrying amount of the loan will be reduced to the present value of estimated future cash flows discounted at the loan’s effective interest rate. If a loan is collateral-dependent, it is valued at the estimated fair value of the related collateral. If events and or changes in circumstances cause the Company to have serious doubts about the further collectability of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances including accrued interest and advances. See “Comparison of Financial Condition at December 31, 2019, 2018 and 2017 – Non-Performing Loans and REO Assets” on Page 25 for additional disclosures.
Deferred Loan Origination Fees. The Company will capitalize loan origination fees and recognize the fees as an adjustment of the yield on the related loan. Deferred loan origination fees are accreted to income over the life of the loan under the effective interest method.
The following table sets forth the deferred loan origination fee balances and associated accretion into income for the time periods indicated:
|
| As of or for the Year |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Deferred loan origination fees, end of period |
| $ | 637,277 |
|
| $ | 458,490 |
|
| $ | 430,040 |
|
Accreted to income, during period |
|
| 1,856,751 |
|
|
| 1,942,449 |
|
|
| 1,530,373 |
|
As of December 31, 2019, deferred loan origination fees were $637,277, and the Company accreted into income $1,856,751 of deferred loan origination fees during the year ended December 31, 2019.
By comparison, as of December 31, 2018 deferred loan origination fees were $458,490, and the Company accreted into income $1,942,449 of deferred loan origination fees during the year ended December 31, 2018.
By comparison, as of 2017 deferred loan origination fees were $430,040, and the Company accreted into income $1,530,373 of deferred loan origination fees during the year ended December 31, 2017.
The higher amount of income accretion during 2018 compared to 2017 reflected a higher percentage of Portfolio Loans that carried high loan origination fees and low interest rates. The Company offers its borrowers loan options with a combination of low origination fees and high interest rates or loans with high origination fees and low interest rates. While the yield earned by the Company on these loan options is similar, changes in the percentage of Portfolio Loans with high origination fees can affect the amount of interest income derived from deferred loan origination fees. The increase in Deferred loan origination fees at December 31, 2019 compared to December 31, 2018, reflected an increase in loan portfolio size during the fourth quarter of 2019.
19 |
Table of Contents |
Income Taxes. The Company is a limited liability company for federal and state income tax purposes. Under the laws pertaining to income taxation of limited liability companies, the Company as an entity pays no federal income tax. Accordingly, no provision for income taxes besides the minimum state franchise taxes and the LLC gross receipts fees are reflected in the Company’s financial statements. The Company has evaluated its current tax positions and has concluded that as of December 31, 2019, the Company does not have any significant uncertain tax positions for which a reserve would be necessary.
Comparison of Operating Results for the Years Ended December 31, 2019, 2018 and 2017
Net Income. Net income was $2,501,774 for the year ended December 31, 2019, compared to $2,880,986 for the year ended December 31, 2018, a decrease of $379,212, or 13.2%. The decline in net income year over year was primarily attributable to the Company’s decision to increase its provision-for-loan-losses expense and associated allowance-for-loan losses on the balance sheet, as a result of continued loan portfolio growth during the second half of 2019. Based on an analysis of the allowance for loan losses, growth in the loan portfolio and associated loan performance, the Company recorded a provision for losses on loans of $776,382 for the 12 months ended December 31, 2019. See “Provision for Loan Losses” on Page 23 for additional details.
By comparison, net income was $2,880,986 for the year ended December 31, 2018, compared to $2,899,112 for the year ended December 31, 2017, a decrease of $18,126, or 0.6%. Net income was relatively unchanged year over year, primarily reflecting stabilization in the net interest rate spread when compared to the prior year and an increase in rental property income. Based on an analysis of the allowance for loan losses, growth in the loan portfolio and associated loan performance, the Company recorded a provision for losses on loans of $90,275 for the 12 months ended December 31, 2018.
For the years ended December 31, 2019, 2018 and 2017, the net interest margin was 7.800%, 8.873% and 9.481%, respectively, and net interest rate spread was 6.757%, 7.492% and 7.647%, respectively. The decline in these performance metrics during 2018 and 2019 reflects increased pricing pressure in the private lending industry. See “Net Interest Income” on Page 21 for additional details.
Interest Income. Total interest income increased $92,896, or 0.9%, to $10,273,630 for the year ended December 31, 2019 compared to $10,180,734 during the year ended December 31, 2018. The increase in interest income was primarily the result of a $7.6 million, or 10.9%, increase in average interest-earning assets more than offsetting a 131 basis point decline in the average yield earned on interest earning assets.
By comparison, total interest income decreased $657,790, or 6.1%, to $10,180,734 for the year ended December 31, 2018 compared to $10,838,524 during the year ended December 31, 2017. The decrease in interest income was primarily the result of an 88 basis point decline in the average yield earned on interest earning assets, and a $278,496 million, or 0.4%, decrease in average interest-earning assets.
The average daily balance of cash during the years ended December 2019, 2018 and 2017 was $640,097, $665,303 and $646,417, respectively. Interest income earned on those cash balances during that time was immaterial.
Interest Expense. Total interest expense increased $249,099, or 6.3%, to $4,215,198 for the year ended December 31, 2019 from $3,966,099 for the year ended December 31, 2018.
20 |
Table of Contents |
Interest expense on Junior Notes decreased $255,294, or 11.3%, to $2,001,380 for the year ended December 31, 2019, from $2,256,674 for the year ended December 31, 2018. The decrease in interest expense was primarily attributable to a decrease in the average interest rate paid on Junior Notes to 7.581% from 7.997%, and a $1.8 million, or 6.4%, decrease in the average balance of Junior Notes outstanding, which averaged $26.4 million during 2019 versus an average of $28.2 million during 2018.
Interest expense on Senior Notes increased $641,505, or 251.7%, to $896,366 for the year ended December 31, 2019, from $254,861 for the year ended December 31, 2018. The increase in interest expense was primarily attributable to a $10.7 million, or 251.9%, increase in the average balance of Senior Notes outstanding, which averaged $14.9 million during 2019 versus an average of $4.2 million during 2018. The Company began issuing Senior Notes on March 1, 2018.
Interest expense on Bank Borrowings decreased $137,112, or 9.4%, to $1,317,452 for the year ended December 31, 2019 from $1,454,564 for the year ended December 31, 2018. This decrease was attributable to the average interest rate paid on Bank Borrowings decreasing 57 basis points to 5.533% from 6.100% between 2019 and 2018, respectively.
By comparison, total interest expense decreased $205,138, or 4.9%, to $3,966,099 for the year ended December 31, 2018 from $4,171,237 for the year ended December 31, 2017.
Interest expense on Junior Notes decreased $838,572, or 27.1%, to $2,256,674 for the year ended December 31, 2018, from $3,095,246 for the year ended December 31, 2017. The decrease in interest expense was primarily attributable to a decrease in the average interest rate paid on Junior Notes to 7.997% from 8.898%, and a $6.6 million, or 18.9%, decrease in the average balance of Junior Notes outstanding, which averaged $28.2 million during 2018 versus an average of $34.8 million during 2017.
Interest expense on Bank Borrowings increased $378,573, or 35.2%, to $1,454,564 for the year ended December 31, 2018 from $1,075,991 for the year ended December 31, 2017. This increase was attributable to an increase in average Bank Borrowings to $23.8 million during 2018 from $18.9 million during 2017, an increase of $4.9 million or 26.0%. In addition, the average interest rate paid on those Bank Borrowings increased 42 basis points to 6.100% from 5.685% between 2018 and 2017, respectively.
Net Interest Income. Net interest income decreased $156,203, or 2.5%, to $6,058,432 for the year ended December 31, 2019 from $6,214,635 for the year ended December 31, 2018. The decrease resulted primarily from a $249,099 increase in interest expense more than offsetting a $92,896 increase in interest income, as explained above. Our average interest-earning assets increased $7.6 million, or 10.9%, to $77.7 million for the year ended December 31, 2019 from $70.0 million for the year ended December 31, 2018, and our net interest rate spread decreased 74 basis points to 6.757% for the year ended December 31, 2019 from 7.492% for the year ended December 31, 2018. Our net interest margin decreased 107 basis points to 7.800% for the year ended December 31, 2019 from 8.873% for the year ended December 31, 2018. The modest decrease in our interest rate spread and net interest margin during 2019 reflected yields on interest-earning assets falling faster than yields on interest-bearing liabilities. The 131 basis point reduction in average yield earned on interest-earning assets was the result of industry pricing pressure, which the Company partially offset with a 57 basis point reduction in average yield paid on interest-bearing liabilities. The reduction in yield paid was primarily due to the Company refinancing its Junior Notes from 8% to 7% during 2019, and renegotiating a lower interest rate on its Bank Borrowings.
21 |
Table of Contents |
By comparison, net interest income decreased $452,652, or 6.8%, to $6,214,635 for the year ended December 31, 2018 from $6,667,287 for the year ended December 31, 2017. The decrease resulted primarily from a $657,790 decrease in interest income more than offsetting a $205,138 decrease in interest expense, as explained above. Our average interest-earning assets decreased $278,496, or 0.4%, to $70.0 million for the year ended December 31, 2018 from $70.3 million for the year ended December 31, 2017, and our net interest rate spread decreased 16 basis points to 7.492% for the year ended December 31, 2018 from 7.647% for the year ended December 31, 2017. Our net interest margin decreased 61basis points to 8.873% for the year ended December 31, 2018 from 9.481% for the year ended December 31, 2017. The modest decrease in our interest rate spread and net interest margin during 2018 reflected yields on interest-earning assets falling faster than yields on interest-bearing liabilities. The 88 basis point reduction in average yield earned on interest-earning assets was the result of industry pricing pressure, which the Company partially offset with a 72 basis point reduction in average yield paid on interest-bearing liabilities. The reduction in yield paid was primarily due to the Company refinancing its Junior Notes from 10% to 8% during 2018, and renegotiating a lower interest rate on its Bank Borrowings.
Rental Property Income. Rental property income increased $440,033, or 356.8%, to $563,366 during the year ended December 31, 2019 from $123,333, for the year ended December 31, 2018. The Company had no rental income during 2017. The Company owns four multifamily rental properties located in Chicago, Illinois, which were acquired through a deed in lieu of foreclosure. See “Rental Property” on page 24 for additional details.
Non-Interest Income. Other income increased $100,475, or 16.1%, to $725,483 for the year ended December 31, 2019 from $625,008 for the year ended December 31, 2018.
By comparison, other income decreased $145,165, or 18.8%, to $625,008 for the year ended December 31, 2018 from $770,170 for the year ended December 31, 2017.
Other income generally includes late payment fees and default interest related to non-performing loans, income from REO Assets, and reversals in the allowance for loan losses used to offset losses on the sale of REO Assets. We expect this income to vary between periods driven by the number of non-performing loans, timing of non-performing loan payoffs, collectability of default interest and late fees on non-performing loans, and the profitability of REO Asset sales.
Non-Interest Expense. Non-interest expense increased $656,214, or 16.2%, to $4,717,527 for the year ended December 31, 2019 from $4,061,313 for the year ended December 31, 2018. The largest change in non-interest expense was a $686,107, or 760.0%, increase in provision for loan losses, which was partially offset by gains in non-interest income. See “Provision for Loan Losses” on Page 23 for additional details. The second and third largest changes were a $233,701 increase in loan servicing fees related to overall portfolio growth, and a $214,959 increase in real estate holding costs related to stabilizing the Company’s rental properties.
By comparison, non-interest expense decreased $265,185, or 6.1%, to $4,061,313 for the year ended December 31, 2018 from $4,326,498 for the year ended December 31, 2017. The largest change in non-interest expense was a $168,252, or 5.5%, decrease in other expenses primarily attributable to lower bank fees and marketing expense. The second and third largest changes were a $112,386 decrease in real estate holding costs related to the Company’s redevelopment of rental properties, and a $103,628 decrease in management incentive fees as a result of lower yields earned on interest-earning assets.
22 |
Table of Contents |
Provision for Loan Losses. Based on our analysis of loan portfolio performance, as outlined above in “Critical Accounting Policies and Accounting Estimates – Allowance for Loan Losses,” we recorded a $776,382 provision for loan losses for the year ended December 31, 2019, compared to a provision of $90,275 for the year ended December 31, 2018, and a provision of $56,753 for the year ended December 31, 2017. The allowance for loan losses was $1,045,668, or 1.2%, of total unpaid principal balance at December 31, 2019, compared to $815,947, or 1.2%, of total unpaid principal balance at December 31, 2018, and $890,272, or 1.3%, of total unpaid principal balance at December 31, 2017. Total delinquent loans were $2,873,793, or 3.2%, of the total unpaid principal balance at December 31, 2019 compared to $3,091,874, or 4.5%, at December 31, 2018, and $8,054,475, or 11.8%, of unpaid principal balance at December 31, 2017. The allowance for loan losses reflects the estimate we believe to be appropriate to cover probable incurred losses inherent in the loan portfolio at December 31, 2019, 2018 and 2017.
It is important to point out that the Company’s policy is to categorize a loan as both a Delinquent Loan and Non-Performing Loan and to begin the foreclosure process if the Company has not received payment from the borrower within 30 days of the due date. Industry standard is to categorize a loan as Delinquent for the first 90 days and then to categorize the loan as Non-Performing after 90 days. We believe that our more aggressive policy is appropriate given that our loans have shorter maturities relative to traditional loans. This policy enables the Company to get an earlier start on the foreclosure process should the loan continue to remain delinquent (the time to foreclose on a property can range from 75 to 180 days or longer in a judicial foreclosure or bankruptcy). However, this more conservative policy does tend to generate more Non-Performing Loans that are ultimately cured. See “Non-Performing Loans and REO Assets”, Page 25, for additional details.
Income Taxes. Income tax expense for the year ended December 31, 2019, 2018 and 2017 were $9,854, $8,517 and $7,557, respectively. This tax expense is related to municipal franchise taxes. Under the laws pertaining to income taxation of limited liability companies, the Company as an entity pays no federal income tax. See “Critical Accounting Policies and Accounting Estimates” for additional disclosures regarding income taxation.
Comparison of Financial Condition at December 31, 2019, 2018 and 2017
Total Assets. The following table sets forth the balance of total assets at the dates indicated:
|
| As of or for the Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Cash |
| $ | 880,205 |
|
| $ | 588,576 |
|
| $ | 684,316 |
|
Interest receivable |
|
| 811,812 |
|
|
| 705,950 |
|
|
| 1,257,834 |
|
Net loans |
|
| 88,122,933 |
|
|
| 67,316,102 |
|
|
| 67,090,684 |
|
Rental property |
|
| 7,111,371 |
|
|
| 6,414,813 |
|
|
| - |
|
Real estate owned held for sale |
|
| 1,776,281 |
|
|
| 3,315,361 |
|
|
| 4,795,566 |
|
Total assets |
| $ | 98,702,602 |
|
| $ | 78,340,802 |
|
| $ | 73,828,400 |
|
23 |
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Total assets increased $20.4 million, or 26.0%, to $98.7 million at December 31, 2019 from $78.3 million at December 31, 2018, driven primarily by a $20.8 million, or 30.9%, increase in net loans, which was partially offset by a $1.5 million reduction in real estate owned assets held for sale.
By comparison, total assets increased $4.5 million, or 6.1%, to $78.3 million at December 31, 2018 from $73.8 million at December 31, 2017, driven primarily by a $6.4 million increase in rental property, which was partially offset by a $1.5 million reduction in real estate owned assets held for sale.
Net Loans. Net loans are the unpaid principal balance of Portfolio Loans, net of deferred loan origination fees, allowance for loan losses and fair value adjustments related to impairment. See “Critical Accounting Policies and Accounting Estimates – Deferred Loan Origination Fees” and “– Fair Value of Mortgage Loans Receivable” Page 19 for additional details.
The following table sets forth the net balance of Portfolio Loans at the dates indicated:
|
| As of the Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Unpaid principal balance |
| $ | 89,805,878 |
|
| $ | 68,590,539 |
|
| $ | 68,410,996 |
|
Deferred loan origination fees |
|
| (637,277 | ) |
|
| (458,490 | ) |
|
| (430,040 | ) |
Allowance for loan losses |
|
| (1,045,668 | ) |
|
| (815,947 | ) |
|
| (890,272 | ) |
Net loans |
|
| 88,122,933 |
|
|
| 67,316,102 |
|
|
| 67,090,684 |
|
Total assets |
| $ | 98,702,602 |
|
| $ | 78,340,802 |
|
| $ | 73,828,400 |
|
Percentage of total assets |
|
| 89.3 | % |
|
| 85.9 | % |
|
| 90.9 | % |
Net loans increased by $20.8 million, or 30.9%, to $88.1 million at December 31, 2019 from $67.3 million at December 31, 2018. Net loans increased during 2019 as the Company lowered its loan pricing and increased its targeted borrower marketing in an effort to gain and retain the highest quality borrowers.
By comparison, net loans increased by $225,418, or 0.3%, to $67.3 million at December 31, 2018 from $67.1 million at December 31, 2017. While the net loans showed no material change year over year, the Company made significant changes in exposure between states. See “Portfolio Loan Characteristics” Page 5 for additional details.
Rental Property. As of December 31, 2019, the Company had rental property of $7.1 million (7.2% of total assets) comprised of four properties including one 30-unit apartment building (redevelopment completed during 2018), one 33-unit apartment building (redevelopment completed during 2019) and two 3-unit apartment buildings (redevelopment completed during 2019). A majority of the redevelopment costs for these projects have been capitalized.
24 |
Table of Contents |
Assets acquired through or in lieu of foreclosure are initially recorded at the lower of cost or fair value less estimated costs to sell, establishing a new cost basis. After foreclosure, valuations are performed at least annually, and the real estate assets are carried at the lower of cost or fair value less estimated costs to sell. REO Asset revenue and expenses from operations and changes in the valuation allowance are included in other non-interest income or expense. Costs related to the development and improvement of REO assets are capitalized.
Non-Performing Loans and REO Assets. The following definitions are used when categorizing the Company’s Delinquent, Non-Performing, Non-Accruing, Impaired and Real Estate Owned assets:
| · | Delinquent Loan: A loan with a monthly payment that is 30 days or more past due. |
| · | Non-Performing Loan: A Delinquent Loan that is in the foreclosure process but still accruing interest. |
| · | Non-Accruing Loan: A Delinquent Loan that is in the foreclosure process but no longer accruing interest. The accrual of interest on a loan is discontinued when, in management’s judgment, the future collectability of principal or interest is in doubt. Loans placed on nonaccrual status may or may not be contractually past due at the time of such determination. |
| · | Impaired Loan: A Delinquent Loan in which the estimated net proceeds from the disposition of the collateral (from auction sale or otherwise) is insufficient to cover the total principal, unpaid accrued interest and foreclosure fees due. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, or the fair market value of the collateral if the loan is collateral dependent. Impaired loans are currently measured at lower of cost or fair value. Impaired loans are charged to the allowance for loan losses when management believes, after considering economic and business conditions, collection efforts and collateral position that collection of principal is not probable. |
| · | Real Estate Owned: Real estate that becomes an asset of the Company following a foreclosure sale or through a deed in lieu of foreclosure that is held for sale. |
|
|
|
| · | Rental Property: Real estate that the Company holds for use. |
The Company’s policy is to categorize a loan as both a Delinquent Loan and Non-Performing Loan and to begin the foreclosure process if the Company has not received payment from the borrower within 30 days of the due date. Industry standard is to categorize a loan as Delinquent for the first 90 days and then to categorize the loan as Non-Performing after 90 days. We believe that our more aggressive policy is appropriate given that our loans have shorter maturities relative to traditional loans. This policy enables the Company to get an earlier start on the foreclosure process should the loan continue to remain delinquent (the time to foreclose on a property can range from 75 to 180 days or longer if the borrower files bankruptcy). However, this more conservative policy does tend to generate more Non-Performing Loans that are ultimately cured.
When a loan becomes Non-Performing and the foreclosure process is initiated, accounting rules require the Company to continue to accrue interest monthly on the Non-Performing Loan, as long as the Manager believes in good faith that the net proceeds from the disposition of the collateral, through foreclosure sale or otherwise, will be sufficient to recover the principal, unpaid accrued interest and foreclosure fees due. In contrast, if the Manager, at any time, believes that the net proceeds from the disposition of the collateral may not be sufficient to recover the principal, unpaid accrued interest and foreclosure fees due, then accounting rules require the Manager to stop accruing interest on the loan. Only this type of loan will be classified as a Non-Accruing Loan. Finally, if for whatever reason, the net proceeds from the disposition of the collateral are estimated to be insufficient to pay the principal, unpaid accrued interest and foreclosure fees due, then the loan will be classified as an Impaired Loan. Accounting rules require that the shortfall related to an Impaired Loan be booked against the Company’s allowance for loan losses.
25 |
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The following table provides information associated with the Company’s Delinquent, Non-Performing, Non-Accruing and Impaired assets:
|
| As of or for the Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Performing loans, end of period |
|
| 246 |
|
|
| 183 |
|
|
| 216 |
|
New delinquent loans, during period |
|
| 8 |
|
|
| 10 |
|
|
| 17 |
|
Total delinquent loans, end of period |
|
| 5 |
|
|
| 4 |
|
|
| 16 |
|
Total delinquent loans (UPB), end of period |
| $ | 2,873,793 |
|
| $ | 3,091,874 |
|
| $ | 8,054,475 |
|
Allowance for loan losses, end of period |
|
| 1,045,668 |
|
|
| 815,947 |
|
|
| 890,272 |
|
Bad debt charge off, during period |
|
| (546,661 | ) |
|
| (164,598 | ) |
|
| (316,825 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loan detail |
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans, end of period |
|
| 2 |
|
|
| 2 |
|
|
| 10 |
|
Total non-accruing loans, end of period |
|
| 3 |
|
|
| 2 |
|
|
| 6 |
|
Total impaired loans, end of period |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total historical delinquent loans, cumulative |
|
| 146 |
|
|
| 138 |
|
|
| 128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of number of loans |
|
|
|
|
|
|
|
|
|
|
|
|
Performing, end of period |
|
| 98.0 | % |
|
| 97.9 | % |
|
| 93.1 | % |
Delinquent, end of period |
|
| 2.0 | % |
|
| 2.1 | % |
|
| 6.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of unpaid principal balance |
|
|
|
|
|
|
|
|
|
|
|
|
Performing, end of period |
|
| 96.8 | % |
|
| 95.5 | % |
|
| 88.2 | % |
Delinquent, end of period |
|
| 3.2 | % |
|
| 4.5 | % |
|
| 11.8 | % |
During the year ended December 31, 2019, the Company had 8 loans become delinquent and ended the period with 5 delinquent loans, totaling $2.9 million, or 3.2%, of the total unpaid principal balance (“UPB”).
By comparison, during the year ended December 31, 2018, the Company had 10 loans become delinquent and ended the period with 4 delinquent loans, totaling $3.1 million, or 4.5%, of UPB.
By comparison, during the year ended December 31, 2017 the Company had 17 loans become delinquent and ended the period with 16 delinquent loans, totaling $8.1 million, or 11.8%, of UPB.
While we are not concerned about the financial impact of these delinquent loans on portfolio performance and do not view these loans as indicative of systemic issues, we continue to analyze them as part of our ongoing process to improve our internal policies and procedures.
26 |
Table of Contents |
The following table provides information associated with the Company’s REO assets held for sale:
|
| As of or for the Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
New REO properties, during period |
|
| 2 |
|
|
| 8 |
|
|
| 7 |
|
Sold REO properties, during period |
|
| 6 |
|
|
| 6 |
|
|
| 7 |
|
Total REO properties, end of period |
|
| 1 |
|
|
| 6 |
|
|
| 7 |
|
Total REO properties ($), end of period |
| $ | 1,776,281 |
|
| $ | 3,315,361 |
|
| $ | 4,795,566 |
|
Historical foreclosures reverted to lender, cumulative |
|
| 29 |
|
|
| 27 |
|
|
| 22 |
|
Historical deeds-in-lieu of foreclosure, cumulative |
|
| 13 |
|
|
| 13 |
|
|
| 10 |
|
Total historical REOs, cumulative |
|
| 42 |
|
|
| 40 |
|
|
| 32 |
|
During the year ended December 31, 2019, the Company foreclosed 2 loans that became REO assets, sold 6 REO assets and ended the period with 1 REO asset, with a combined cost basis of $1.8 million.
By comparison, during the year ended December 31, 2018, the Company foreclosed 8 loans that became REO assets, sold 6 REO assets and ended the period with 6 REO assets, with a combined cost basis of $3.3 million.
By comparison, during the year ended December 31, 2017 the Company foreclosed 7 loans that became REO assets, sold 7 REO assets and ended the period with 7 REO assets, with a combined cost basis of $4.8 million.
The decline in REO assets from 2017 to 2019 partially reflects the Company’s decision to lower its loan pricing to gain and retain higher quality borrowers.
The following table provides information associated with the Company’s allowance for loan losses and associated charge offs and gains from non-performing loans and real estate owned assets:
|
| As of or for the Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Unpaid principal balance, end of period |
| $ | 89,805,878 |
|
| $ | 68,590,539 |
|
| $ | 68,410,996 |
|
Provision for loan losses, during period |
|
| 776,382 |
|
|
| 90,275 |
|
|
| 56,753 |
|
Allowance for loan losses, end of period |
|
| 1,045,668 |
|
|
| 815,947 |
|
|
| 890,272 |
|
Percent of unpaid principal balance, end of period |
|
| 1.2 | % |
|
| 1.2 | % |
|
| 1.3 | % |
Charge-offs |
|
| (546,661 | ) |
|
| (164,600 | ) |
|
| (316,900 | ) |
Late fees and default interest from non-performing loans, during period |
|
| 118,805 |
|
|
| 322,280 |
|
|
| 157,119 |
|
Short term capital gain (loss) from REO sales, during period |
|
| (118,126 | ) |
|
| (12,160 | ) |
|
| (204,293 | ) |
As of December 31, 2019, the Company’s allowance for loan losses was $1,045,668, or 1.2%, of UPB. During the preceding 12 months, the Company recognized $776,382 in provisions for loan losses, $546,661 in loan charge-offs, $118,805 in late fees and default interest related to nonperforming loans, and $118,126 in short term capital losses from the sale of REO assets.
By comparison, as of December 31, 2018 the Company’s allowance for loan losses was $815,947, or 1.2%, of UPB. During the preceding 12 months, the Company recognized $90,275 in provisions for loan losses, $164,600 in loan charge-offs, $322,280 in late fees and default interest related to nonperforming loans, and $12,160 in short term capital losses from the sale of REO assets.
By comparison, as of December 31, 2017 the Company’s allowance for loan losses was $890,272, or 1.3%, of UPB. During the preceding 12 months, the Company recognized $56,753 in provisions for loan losses, $316,950 in loan charge-offs, $157,119 in late fees and default interest related to nonperforming loans, and $204,293 in short term capital losses from the sale of REO assets.
27 |
Table of Contents |
The Company anticipates that its provision-for-loan-losses accrual rate will fluctuate on a monthly basis between 0.0% and 1.0% annualized. These adjustments will increase or decrease distributable income to equity investors, accordingly. However, the provision-for-loan-losses accrual rate and the associated allowance-for-loan-loss balance are subject to adjustments based on the rate of historical charge-offs and the Company’s assessment of near-term portfolio performance.
While the Company’s objective is to minimize the number of non-performing loans in its loan portfolio, on average non-performing loans and related REO properties have generated additional profits for the Company.
Liquidity and Capital Resources
The Company’s primary sources of funds include Portfolio Loan payoffs, monthly interest payments received on Portfolio Loans, and Bank Borrowings. Other sources of funds may include proceeds from equity investors, Junior Notes and Senior Notes as well as the disposition of non-performing assets.
The following table sets forth the Company’s capitalization structure at the dates indicated:
|
| As of the Year Ended December 31, |
| |||||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||
Equity |
| $ | 21,183,026 |
|
|
| 21.5 | % |
| $ | 20,324,112 |
|
|
| 26.0 | % |
| $ | 20,205,127 |
|
|
| 27.4 | % |
Junior Notes |
|
| 24,924,078 |
|
|
| 25.3 | % |
|
| 28,386,836 |
|
|
| 36.3 | % |
|
| 33,805,946 |
|
|
| 45.9 | % |
Senior Notes |
|
| 20,914,989 |
|
|
| 21.3 | % |
|
| 8,066,007 |
|
|
| 10.3 | % |
|
| - |
|
|
| - |
|
Bank Borrowings, net |
|
| 30,548,052 |
|
|
| 31.0 | % |
|
| 20,778,689 |
|
|
| 26.6 | % |
|
| 19,014,051 |
|
|
| 25.8 | % |
Cash |
|
| 880,205 |
|
|
| 0.9 | % |
|
| 588,576 |
|
|
| 0.8 | % |
|
| 684,316 |
|
|
| 0.9 | % |
Total |
| $ | 98,450,350 |
|
|
| 100.0 | % |
| $ | 78,144,200 |
|
|
| 100.0 | % |
| $ | 73,709,440 |
|
|
| 100.0 | % |
Equity. On April 1, 2009, the Company commenced a private placement equity offering of 10% Preferred, Participating LLC ownership interests. The private placement offering represents all of the Company’s equity and is a continuous offering that allows the Company to raise additional equity as needed. Equity investors are able to redeem equity units, subject to certain restrictions.
The Company’s equity balance at December 31, 2019 was $21.2 million, an increase of $858,914, or 4.2%, from $20.3 million at December 31, 2018. The increase in total equity during this period was due to undistributed net income recorded for the period of $2,501,776, and net equity withdrawals of $1,642,862.
By comparison, the Company’s equity balance at December 31, 2018 was $20.3 million, an increase of $118,985, or 0.6%, from $20.2 million at December 31, 2017. The increase in total equity during this period was due to undistributed net income recorded for the period of $2,880,985, and net equity withdrawals of $2,762,000.
28 |
Table of Contents |
Bank Borrowings. The Company has a $40 million line of credit from Western Alliance Bank. This revolving line of credit is collateralized by all of the Company’s assets, including all of its Portfolio Loans, and is senior in priority to the Senior Notes and the Junior Notes. While the line of credit does provide leverage and a source of low cost capital to make loans, the primary benefit to the Company is cash management. Because the revolving line of credit allows the Company to draw on and pay down the line of credit daily, the Company can use the line of credit to efficiently manage the ebbs and flows of Portfolio Loan funding and payoffs while keeping investor capital fully utilized. The revolving line of credit can also provide the Company with liquidity to meet investor withdrawal requests.
The line of credit is subject to a “borrowing base” limitation. The borrowing base is an amount equal to the lesser of (i) 60 percent of the outstanding balance of the Company’s Portfolio Loans or, (ii) 45 percent of the appraised value of the collateral securing a defined segment of the Company’s Portfolio Loans; subject to certain adjustments and exclusions and subject to a cap of $40 million. At December 31, 2019, the borrowing base was $40 million. Under the line of credit, the Company is also required to maintain compliance with certain financial covenants, including maintenance at the end of each calendar quarter of (a) a debt to equity ratio that does not exceed 0.50 to 1.00 (calculated as the outstanding line of credit balance divided by the sum of equity, Junior Notes and Senior Notes); (b) a minimum tangible net worth of $20,000,000; (c) compensating average balances of $750,000 in account at Western Alliance Bank; (d) minimum annual profitability of not less than $1 million recorded on a trailing 12 month basis; (e) minimum adjusted equity of $40 million; and (f) a debt service coverage ratio of not less than 2.00 to 1.00. As of December 31, 2019, the Company was in compliance with all of the foregoing financial covenants.
The following table sets forth the Company’s Bank Borrowings at the dates indicated:
|
| As of or for the Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Loan portfolio unpaid principal balance (UPB), end of period |
| $ | 89,805,878 |
|
| $ | 68,590,539 |
|
| $ | 68,410,996 |
|
Line of credit commitment, end of period (1) |
|
| 40,000,000 |
|
|
| 40,000,000 |
|
|
| 25,000,000 |
|
Percentage of UPB, end of period |
|
| 45 | % |
|
| 58 | % |
|
| 37 | % |
Line of credit outstanding balance, end of period |
|
| 30,548,052 |
|
|
| 20,778,689 |
|
|
| 19,014,051 |
|
Percentage of UPB, end of period |
|
| 34 | % |
|
| 30 | % |
|
| 28 | % |
Average loan portfolio UPB, during period |
|
| 77,033,289 |
|
|
| 69,376,129 |
|
|
| 69,673,511 |
|
Average line of credit UPB, during period |
|
| 23,809,846 |
|
|
| 23,725,310 |
|
|
| 18,851,999 |
|
Percentage of UPB, during period |
|
| 31 | % |
|
| 34 | % |
|
| 27 | % |
Average line of credit utilization, during period |
|
| 60 | % |
|
| 68 | % |
|
| 79 | % |
(1) As of December 31, 2019, 2018 and 2017, $40 million, $40 million and $25 million, respectively, were available under the Company’s line of credit agreement. The Company obtained a $5 million line of credit with Sunwest Bank during the first quarter of 2013. During the first quarter of 2014, Sunwest Bank increased the line of credit from $5 million to $10 million. During the fourth quarter of 2015, Sunwest Bank increased the line of credit from $10 million to $12 million. During the first quarter of 2016, the Company replaced the Sunwest Bank line of credit with a $20 million line of credit with Western Alliance Bank. During the first quarter of 2017, Western Alliance Bank increased the line of credit from $20 million to $25 million. Effective as of January 1, 2018, Western Alliance Bank increased the line of credit from $25 million to $40 million. Effective February 24, 2020, Western Alliance Bank extended the maturity to March 1, 2022.
For the years ending December 31, 2019, 2018 and 2017, average line of credit utilization during these periods was 60%, 68% and 79%, respectively. The maximum available commitment under the line of credit as a percentage of the Company’s unpaid principal balance at end of period was 45%, 58% and 37%, respectively. However, the average line of credit utilization during these periods as a percentage of the average unpaid principal balance during the same period was 31%, 34% and 27%, respectively.
29 |
Table of Contents |
The Company targets a line of credit utilization rate of 50-80%, which allows the Company to meet unanticipated loan requests from borrowers or unanticipated withdrawal requests from investors. Similarly, if the Company’s Portfolio Loans pay off faster than anticipated or if new loan originations do not match the rate of loan payoffs, the line of credit can be paid down while keeping investor capital fully utilized.
Senior Notes. The Securities and Exchange Commission qualified the Senior Secured Demand Notes offering effective February 23, 2018, and the Company began issuing Senior Notes on March 1, 2018.
The following table sets forth the Company’s Senior Notes at the dates indicated:
|
| As of or for the Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Total assets |
| $ | 98,702,602 |
|
| $ | 78,340,802 |
|
| $ | 73,828,400 |
|
Senior Notes |
|
| 20,914,989 |
|
|
| 8,066,007 |
|
|
| - |
|
Percentage of total assets |
|
| 21.2 | % |
|
| 10.3 | % |
|
| 0 | % |
As of December 31, 2019 and 2018, Senior Notes were $20.9 million (21.2% of total assets) and $8.1 million (10.3% of total assets), respectively. The Company began issuing Senior Notes on March 1, 2018.
Junior Notes. On May 1, 2010, the Company commenced a private placement offering of secured promissory notes with six-month maturities offering an interest rate of 12% per annum. On April 1, 2015, the Company amended the offering, reducing the interest rate to 10% per annum. On April 1, 2017, the Company amended the offering again, reducing the interest rate to 8% per annum. On May 1, 2019, the Company amended the offering again, reducing the interest rate to 7% per annum. Junior Notes are subordinate to the Senior Notes and Bank Borrowings.
The following table sets forth the Company’s Junior Notes at the dates indicated:
|
| As of or for the Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Total assets |
| $ | 98,702,602 |
|
| $ | 78,340,802 |
|
| $ | 73,828,400 |
|
Junior Notes |
|
| 24,924,078 |
|
|
| 28,386,836 |
|
|
| 33,805,946 |
|
Percentage of total assets |
|
| 25.3 | % |
|
| 36.3 | % |
|
| 45.9 | % |
At December 31, 2019, 2018 and 2017, Junior Notes were $24.9 million (25.3% of total assets), $28.4 million (36.3% of total assets), $33.8 million (45.9% of total assets), respectively.
The decline in Junior Notes from 2017 to 2019 reflects the Company’s decision to close the Junior Note offering to new capital and to grow the Senior Note offering. Between April and September 2017, the Company refinanced all Junior Notes from an interest rate of 10% to 8%. Between May and October 2019, the Company refinanced all Junior Notes from an interest rate of 8% to 7%.
30 |
Table of Contents |
Off-Balance Sheet Arrangements. In the normal course of operations, the Company engages in financial transactions that, in accordance with generally accepted accounting principles, are not recorded in its financial statements. Specifically, the Company does not charge interest to borrowers on loan proceeds held back for construction until the funds are disbursed. Upon disbursement, the incremental loan proceeds are added to the existing unpaid principal balance of the loan. This practice requires the Company to categorize these held back loan proceeds as an unfunded loan balance.
The following table sets forth the Company’s off balance sheet commitments at the dates indicated:
|
| As of the Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Unpaid principal balance |
| $ | 89,805,878 |
|
| $ | 68,590,539 |
|
| $ | 68,410,996 |
|
Unfunded loan balance |
|
| 9,902,260 |
|
|
| 9,491,811 |
|
|
| 7,647,593 |
|
Percentage of unpaid principal balance |
|
| 11 | % |
|
| 14 | % |
|
| 11 | % |
As of December 31, 2019, 2018 and 2017, the unfunded loan balance as a percentage of the unpaid principal balance (“UPB”) of the Company’s loan portfolio was $9.9 million (11% of UPB), $9.5 million (14% of UPB) and $7.6 million (11% of UPB), respectively.
The unfunded loan balance as a percentage of UPB has remained consistent between 10% and 14% during 2019, 2018 and 2017. The Company expects the unfunded loan balance as a percentage of UPB to range between 10% and 20%.
Portfolio Roll Forward Analysis. The Company makes short term loans with maturities of 12 months or less. These Portfolio Loan payoffs provide a primary source of cash flow to the Company. To help analyze the velocity of this cash flow the Company performs a monthly loan portfolio roll forward analysis. This analysis evaluates the number of active loans and the principal balance of those loans at the beginning of each month, and the dollar volume of principal advances made and principal payment received by the Company during each month. With this information the Company is able to analyze historical monthly cash flows related to loan portfolio funding and payoffs, and calculate the number of days required for the loan portfolio to turn over or to pay off in full, assuming the Company stopped making new loans and the historical principal payment velocity remained constant.
31 |
Table of Contents |
The following table sets forth the portfolio roll forward analysis.
Month |
| Number of Loans |
|
| Principal Beginning Balance |
|
| Principal Advances |
|
| Principal Payments |
|
| Principal Ending Balance |
|
| Days to Turnover (1) |
| ||||||
Jan-17 |
|
| 246 |
|
|
| 66,754,985 |
|
|
| 9,640,864 |
|
|
| (9,239,782 | ) |
|
| 67,156,067 |
|
|
| 217 |
|
Feb-17 |
|
| 248 |
|
|
| 67,156,067 |
|
|
| 7,429,508 |
|
|
| (5,425,096 | ) |
|
| 69,160,478 |
|
|
| 371 |
|
Mar-17 |
|
| 254 |
|
|
| 69,160,478 |
|
|
| 9,289,042 |
|
|
| (7,066,300 | ) |
|
| 71,383,220 |
|
|
| 294 |
|
Apr-17 |
|
| 250 |
|
|
| 71,383,220 |
|
|
| 6,445,553 |
|
|
| (9,340,595 | ) |
|
| 68,488,178 |
|
|
| 229 |
|
May-17 |
|
| 247 |
|
|
| 68,488,178 |
|
|
| 7,920,151 |
|
|
| (8,161,569 | ) |
|
| 68,246,761 |
|
|
| 252 |
|
Jun-17 |
|
| 249 |
|
|
| 68,246,761 |
|
|
| 10,619,223 |
|
|
| (8,895,665 | ) |
|
| 69,970,319 |
|
|
| 230 |
|
Jul-17 |
|
| 258 |
|
|
| 69,970,319 |
|
|
| 7,128,195 |
|
|
| (4,128,404 | ) |
|
| 72,970,110 |
|
|
| 508 |
|
Aug-17 |
|
| 247 |
|
|
| 72,970,110 |
|
|
| 6,523,035 |
|
|
| (8,285,157 | ) |
|
| 71,207,988 |
|
|
| 264 |
|
Sep-17 |
|
| 247 |
|
|
| 71,207,988 |
|
|
| 7,352,497 |
|
|
| (5,216,881 | ) |
|
| 73,343,604 |
|
|
| 409 |
|
Oct-17 |
|
| 238 |
|
|
| 73,343,604 |
|
|
| 6,295,076 |
|
|
| (9,319,403 | ) |
|
| 70,319,277 |
|
|
| 236 |
|
Nov-17 |
|
| 228 |
|
|
| 70,319,277 |
|
|
| 4,755,973 |
|
|
| (7,290,421 | ) |
|
| 67,784,829 |
|
|
| 289 |
|
Dec-17 |
|
| 232 |
|
|
| 67,784,829 |
|
|
| 8,496,164 |
|
|
| (7,869,997 | ) |
|
| 68,410,996 |
|
|
| 258 |
|
Total |
|
|
|
|
|
| 836,785,817 |
|
|
| 91,895,281 |
|
|
| (90,239,270 | ) |
| Average |
|
|
| 278 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan-18 |
|
| 235 |
|
|
| 68,410,996 |
|
|
| 8,992,596 |
|
|
| (8,330,393 | ) |
|
| 69,073,199 |
|
|
| 246 |
|
Feb-18 |
|
| 218 |
|
|
| 69,073,199 |
|
|
| 4,826,963 |
|
|
| (10,671,798 | ) |
|
| 63,228,364 |
|
|
| 194 |
|
Mar-18 |
|
| 215 |
|
|
| 63,228,364 |
|
|
| 9,286,505 |
|
|
| (9,542,233 | ) |
|
| 62,972,637 |
|
|
| 199 |
|
Apr-18 |
|
| 222 |
|
|
| 62,972,637 |
|
|
| 8,883,321 |
|
|
| (8,262,626 | ) |
|
| 63,593,331 |
|
|
| 229 |
|
May-18 |
|
| 217 |
|
|
| 63,593,331 |
|
|
| 14,632,653 |
|
|
| (10,005,087 | ) |
|
| 68,220,897 |
|
|
| 191 |
|
Jun-18 |
|
| 219 |
|
|
| 68,220,897 |
|
|
| 12,169,765 |
|
|
| (12,136,508 | ) |
|
| 68,254,153 |
|
|
| 169 |
|
Jul-18 |
|
| 221 |
|
|
| 68,254,153 |
|
|
| 12,073,975 |
|
|
| (6,616,944 | ) |
|
| 73,711,184 |
|
|
| 309 |
|
Aug-18 |
|
| 224 |
|
|
| 73,711,184 |
|
|
| 9,592,011 |
|
|
| (9,383,156 | ) |
|
| 73,920,039 |
|
|
| 236 |
|
Sep-18 |
|
| 222 |
|
|
| 73,920,039 |
|
|
| 6,205,262 |
|
|
| (3,845,607 | ) |
|
| 76,279,694 |
|
|
| 577 |
|
Oct-18 |
|
| 211 |
|
|
| 76,279,694 |
|
|
| 11,048,166 |
|
|
| (12,069,861 | ) |
|
| 75,257,998 |
|
|
| 190 |
|
Nov-18 |
|
| 204 |
|
|
| 75,257,998 |
|
|
| 5,378,256 |
|
|
| (9,043,524 | ) |
|
| 71,592,729 |
|
|
| 250 |
|
Dec-18 |
|
| 187 |
|
|
| 71,592,729 |
|
|
| 6,769,242 |
|
|
| (9,771,432 | ) |
|
| 68,590,539 |
|
|
| 220 |
|
Total |
|
|
|
|
|
| 834,515,221 |
|
|
| 109,858,712 |
|
|
| (109,679,170 | ) |
| Average |
|
|
| 228 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan-19 |
|
| 191 |
|
|
| 68,590,539 |
|
|
| 6,080,321 |
|
|
| (4,320,400 | ) |
|
| 70,350,460 |
|
|
| 476 |
|
Feb-19 |
|
| 191 |
|
|
| 70,350,460 |
|
|
| 10,040,486 |
|
|
| (11,136,555 | ) |
|
| 69,254,391 |
|
|
| 190 |
|
Mar-18 |
|
| 191 |
|
|
| 69,254,391 |
|
|
| 8,983,361 |
|
|
| (9,983,533 | ) |
|
| 68,254,220 |
|
|
| 208 |
|
Apr-19 |
|
| 191 |
|
|
| 68,254,220 |
|
|
| 6,846,469 |
|
|
| (9,443,946 | ) |
|
| 65,656,743 |
|
|
| 217 |
|
May-19 |
|
| 199 |
|
|
| 65,656,743 |
|
|
| 11,138,381 |
|
|
| (8,405,752 | ) |
|
| 68,389,372 |
|
|
| 234 |
|
Jun-19 |
|
| 205 |
|
|
| 68,389,372 |
|
|
| 11,813,492 |
|
|
| (7,659,232 | ) |
|
| 72,543,633 |
|
|
| 268 |
|
Jul-19 |
|
| 229 |
|
|
| 72,543,633 |
|
|
| 15,158,077 |
|
|
| (5,849,558 | ) |
|
| 81,852,152 |
|
|
| 372 |
|
Aug-19 |
|
| 237 |
|
|
| 81,852,152 |
|
|
| 10,651,305 |
|
|
| (8,345,992 | ) |
|
| 84,157,464 |
|
|
| 294 |
|
Sep-19 |
|
| 246 |
|
|
| 84,157,464 |
|
|
| 13,296,197 |
|
|
| (8,969,111 | ) |
|
| 88,484,550 |
|
|
| 281 |
|
Oct-19 |
|
| 247 |
|
|
| 88,484,550 |
|
|
| 10,280,040 |
|
|
| (9,378,481 | ) |
|
| 89,386,110 |
|
|
| 283 |
|
Nov-19 |
|
| 251 |
|
|
| 89,386,110 |
|
|
| 8,883,185 |
|
|
| (8,631,263 | ) |
|
| 89,638,032 |
|
|
| 311 |
|
Dec-19 |
|
| 251 |
|
|
| 89,638,032 |
|
|
| 13,115,768 |
|
|
| (12,947,922 | ) |
|
| 89,805,878 |
|
|
| 208 |
|
Total |
|
|
|
|
|
| 916,557,665 |
|
|
| 126,287,083 |
|
|
| (105,071,744 | ) |
| Average |
|
|
| 262 |
|
____________
(1) | Days to turnover is calculated by dividing the monthly beginning principal balance by the monthly principal payments received and then multiplying by 30 days. |
32 |
Table of Contents |
During the year ended December 31, 2019, the principal balance of the Company’s loan portfolio ranged from $65.7 million to $89.8.0 million, and the Company made $126.3 million in principal advances related to new or existing Portfolio Loans and received $105.1 million in principal payments related to loan payoffs. Based on the average monthly principal balance and principal payments received, on average it would have taken approximately 262 days for the Company’s Portfolio Loans to pay off in full, assuming the Company stopped making new loans, and the average volume of principal payments remained constant.
The Company saw no material change to the rate of principal payments during 2019. Principal advances increased during the second half of the year, as a result of increased borrower marketing and corresponding new loan origination. The monthly and yearly change in the average number of days for the Company’s Portfolio Loans to pay off in full reflects the normal ebbs and flows of portfolio loan funding and payoffs with no discernable trends.
By comparison, during the year ended December 31, 2018, the principal balance of the Company’s loan portfolio ranged from $63.0 million to $76.0 million, and the Company made $109.9 million in principal advances related to new or existing Portfolio Loans and received $109.7 million in principal payments related to loan payoffs. Based on the average monthly principal balance and principal payments received, on average it would have taken approximately 228 days for the Company’s Portfolio Loans to pay off in full, assuming the Company stopped making new loans, and the average volume of principal payments remained constant.
By comparison, during the year ended December 31, 2017, the principal balance of the Company’s loan portfolio ranged from $66.8 million to $73.3 million, and the Company made $91.9 million in principal advances related to new or existing Portfolio Loans and received $90.2 million in principal payments related to loan payoffs. Based on the average monthly principal balance and principal payments received, on average it would have taken approximately 278 days for the Company’s Portfolio Loans to pay off in full, assuming the Company stopped making new loans, and the average volume of principal payments remained constant.
The decline in the number of days to pay off the Portfolio Loans during the year ended December 31, 2018 compared to 2017 reflected an increase in smaller projects that required less time to complete and sell.
Cash Utilization. The Company considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents. Cash on deposit occasionally exceeds federally insured limits. The Company believes that it mitigates this risk by maintaining deposits with major financial institutions.
The following table sets forth the average cash balances and utilization during the periods indicated:
|
| For the Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Average daily unpaid principal balance (UPB) |
| $ | 77,033,289 |
|
| $ | 69,376,129 |
|
| $ | 69,673,511 |
|
Average daily cash balance |
|
| 640,097 |
|
|
| 665,303 |
|
|
| 646,417 |
|
Average daily cash balance as percentage of UPB |
|
| 0.8 | % |
|
| 1.0 | % |
|
| 0.9 | % |
Average cash utilization |
|
| 99.2 | % |
|
| 99.0 | % |
|
| 99.1 | % |
Average cash utilization during the year ended 2019, 2018 and 2017 was 99.2%, 99.0% and 99.1%, respectively. The high level of average cash utilization reflects the Company’s use of a revolving line of credit provided by Bank Borrowings. The revolving line of credit is an important cash management tool, which allows the Company to fully utilize investor capital while managing the ebbs and flows of Portfolio Loan originations and payoffs. See “Bank Borrowings” Page 29 for additional details.
We generally maintain liquidity to make Portfolio Loans, pay monthly investor distributions and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on the balance sheet is significantly less important than our potential liquidity available under our Portfolio Loan payoff schedule and revolving line of credit. We currently believe that the Company has sufficient liquidity and capital resources available to make additional Portfolio Loans, repay Junior Notes and Senior Notes and Bank Borrowings, and make monthly cash distributions to investors.
Inflation
The effect of changing prices on financial institutions is typically different than on non-banking companies since a substantial portion of a lender’s assets and liabilities are monetary in nature. In particular, interest rates are significantly affected by inflation, but neither the timing nor magnitude of the changes to interest rates can be directly correlated to price level indices; therefore, the Company can best counter inflation over the long term by managing sensitivity to interest rates of its net interest income and controlling levels of noninterest income and expenses. In addition, the short-term duration of the Company’s Portfolio Loans minimizes interest rate risk compared to loan portfolios with longer durations.
33 |
Table of Contents |
Leveraging the Portfolio
The Company intends to continue to leverage its loan portfolio. The Company anticipates borrowing funds from bank lenders and the offer and sale of additional Senior Notes and Junior Notes in order to fund additional mortgage loans. The aggregate amount of debt provided by the Company’s debt securities and Bank Borrowings may not exceed eighty percent (80%) of total assets (the “Maximum Debt Covenant”). See “Financial Statements” beginning on Page 48 for information regarding debt and Bank Borrowings.
The following table sets forth the Maximum Debt Covenant calculation at the dates indicated:
|
| As of the Year |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Total assets |
| $ | 98,702,602 |
|
| $ | 78,340,802 |
|
| $ | 73,828,400 |
|
Junior Notes |
|
| 24,924,078 |
|
|
| 28,386,836 |
|
|
| 33,805,946 |
|
Senior Notes |
|
| 20,914,989 |
|
|
| 8,066,007 |
|
|
| - |
|
Bank Borrowings, net |
|
| 30,548,052 |
|
|
| 20,778,689 |
|
|
| 19,014,051 |
|
Total debt |
| $ | 76,387,119 |
|
| $ | 57,231,532 |
|
| $ | 52,819,997 |
|
Total debt as % of total assets |
|
| 77 | % |
|
| 73 | % |
|
| 72 | % |
As of December 31, 2019, 2018 and 2017, the Company was in compliance with the Maximum Debt Covenant.
Sources of Income
While the Company’s revenues come primarily from monthly interest payments on Portfolio Loans, other sources of income include gains from asset sales, discount points, origination fees, late fees and recapture of loan amounts on discounted note purchases.
Monthly Interest Payments. The Company’s newly originated loans average an interest rate of 8% to 16%. Payments are typically interest-only, due monthly and paid in arrears.
Short Term Capital Gains or Losses. The Company may generate a profit or loss when the disposition value of a foreclosed property exceeds or falls short of the principal amount owed plus accrued interest. The disposition value is defined as the liquidation price minus costs specifically incurred due to the foreclosure process (e.g., legal fees, filing fees, reparation expenses).
Discount Points and Origination Fees. Discount points are pre-paid interest that Portfolio Borrowers purchase to lower the rate of interest the Portfolio Borrowers pay on subsequent monthly interest payments. These points are typically paid as a percentage of the loan’s value. The income generated from discount points range from 0% to 4% of the principal value of the loan. Similarly, origination fees are paid by the Portfolio Borrower at the time the loan is originated to cover the Company’s cost of originating the loan and can range from $0.00 to $2,000. All discount points and origination fees are paid directly to the Company and are accreted to income over the life of the loan.
Late Fees or Default Rate. The Company is entitled but not required to collect late fees if any installment is not received within five days of the due date. The borrower may be charged a late payment fee equal to five percent (5%) of the monthly installment. A similar fee is charged again if late by 10 days and again if late by 15 days. Any dishonored checks are treated as an unpaid installment and are subject to the same late payment penalties plus a $250.00 special handling fee. In the event any installment is past due more than 15 days, the interest rate on the note may be increased to 24% per annum and remain in effect until all defaults have been cured.
34 |
Table of Contents |
Analysis of Net Interest Income
Net interest income represents the difference between the income we earn on our interest-earning assets, such as Portfolio Loans and bank deposits, and the expense we pay on interest-bearing liabilities, such as private debt and Bank Borrowings. Net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned on such assets and paid on such liabilities.
Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the years indicated. All average balances are daily average balances. Non-Accruing Loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred loan origination fees and discounts that are accreted to interest income. However, loan origination fees related to Bank Borrowings have been excluded from interest and the average yield calculation, in accordance with generally accepted accounting principles.
|
| For the Year Ended December 31, |
| |||||||||||||||||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||||||||||||||
|
| Average Balance (1) |
|
| Interest (2) |
|
| Average Yield |
|
| Average Balance (1) |
|
| Interest (2) |
|
| Average Yield |
|
| Average Balance (1) |
|
| Interest (2) |
|
| Average Yield |
| |||||||||
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Bank deposits |
| $ | 640,097 |
|
|
| - |
|
|
| - |
|
| $ | 665,303 |
|
|
| - |
|
|
| - |
|
| $ | 646,417 |
|
|
| - |
|
|
| - |
|
Portfolio loans |
|
| 77,033,289 |
|
|
| 10,273,630 |
|
|
| 13.337 | % |
|
| 69,376,129 |
|
| $ | 10,180,734 |
|
|
| 14.672 | % |
|
| 69,673,511 |
|
| $ | 10,838,524 |
|
|
| 15.556 | % |
Total interest-earning assets: |
|
| 77,673,387 |
|
|
| 10,273,630 |
|
|
| 13.227 | % |
|
| 70,041,432 |
|
|
| 10,180,734 |
|
|
| 14.535 | % |
|
| 70,319,928 |
|
|
| 10,838,524 |
|
|
| 15.413 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
| (850,511 | ) |
|
|
|
|
|
|
|
|
|
| (897,700 | ) |
|
|
|
|
|
|
|
|
|
| (1,054,438 | ) |
|
|
|
|
|
|
|
|
Non-interest earning assets (3) |
|
| 9,083,522 |
|
|
|
|
|
|
|
|
|
|
| 7,645,683 |
|
|
|
|
|
|
|
|
|
|
| 4,193,467 |
|
|
|
|
|
|
|
|
|
Total assets |
|
| 85,906,399 |
|
|
|
|
|
|
|
|
|
|
| 76,789,414 |
|
|
|
|
|
|
|
|
|
|
| 73,458,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Notes |
|
| 26,400,002 |
|
|
| 2,001,380 |
|
|
| 7.581 | % |
|
| 28,220,069 |
|
|
| 2,256,674 |
|
|
| 7.997 | % |
|
| 34,786,028 |
|
|
| 3,095,246 |
|
|
| 8.898 | % |
Senior Notes |
|
| 14,944,286 |
|
|
| 896,366 |
|
|
| 5.998 | % |
|
| 4,246,277 |
|
|
| 254,861 |
|
|
| 6.002 | % |
|
| - |
|
|
| - |
|
|
| - |
|
Bank Borrowings |
|
| 23,809,846 |
|
|
| 1,317,452 |
|
|
| 5.533 | % |
|
| 23,845,661 |
|
|
| 1,454,564 |
|
|
| 6.100 | % |
|
| 18,927,295 |
|
|
| 1,075,991 |
|
|
| 5.685 | % |
Total interest-bearing liabilities: |
|
| 65,154,134 |
|
|
| 4,215,198 |
|
|
| 6.470 | % |
|
| 56,312,007 |
|
|
| 3,966,099 |
|
|
| 7.043 | % |
|
| 53,713,323 |
|
|
| 4,171,237 |
|
|
| 7.766 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities (4) |
|
| 460,390 |
|
|
|
|
|
|
|
|
|
|
| 455,585 |
|
|
|
|
|
|
|
|
|
|
| 496,103 |
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
| 20,291,875 |
|
|
|
|
|
|
|
|
|
|
| 20,021,822 |
|
|
|
|
|
|
|
|
|
|
| 19,249,531 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
| $ | 85,906,399 |
|
|
|
|
|
|
|
|
|
| $ | 76,789,414 |
|
|
|
|
|
|
|
|
|
| $ | 73,458,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
| 6,058,432 |
|
|
|
|
|
|
|
|
|
| $ | 6,214,635 |
|
|
|
|
|
|
|
|
|
| $ | 6,667,287 |
|
|
|
|
|
Net Interest rate spread (5) |
|
|
|
|
|
|
|
|
|
| 6.757 | % |
|
|
|
|
|
|
|
|
|
| 7.492 | % |
|
|
|
|
|
|
|
|
|
| 7.647 | % |
Net interest margin (6) |
|
|
|
|
|
|
|
|
|
| 7.800 | % |
|
|
|
|
|
|
|
|
|
| 8.873 | % |
|
|
|
|
|
|
|
|
|
| 9.481 | % |
Ratio of interest-earning assets to interest bearing liabilities |
|
|
|
|
|
|
|
|
|
| 1.19 |
|
|
|
|
|
|
|
|
|
|
| 1.24 |
|
|
|
|
|
|
|
|
|
|
| 1.31 |
|
____________
(1) | Average balances are the unpaid principal balance of interest-earning assets and interest-bearing liabilities and include non-accruing loan balances. |
(2) | Interest includes all Portfolio Loan fee income and interest received on such loans, including late fees and default interest, and discount points and origination fees that are accreted to income over the life of the loan. Bank Borrowings exclude loan origination fees in accordance with generally accepted accounting principles. |
(3) | Non-interest-earning assets include interest receivable, line of credit origination fees, unamortized loan origination discount and real estate held for sale. |
(4) | Non-interest-bearing liabilities include loan servicing fees payable, interest payable, management incentive fees payable, accounting fees payable, and refunds due borrower. |
(5) | Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
(6) | Net interest margin represents net interest income divided by average total interest-earning assets. |
35 |
Table of Contents |
During the year ended December 31, 2019, the Company saw continued pricing pressure in certain geographic markets, which resulted in a weighted average gross yield on interest-earning assets of 13.227, a decline of 131 basis points compared to the prior year. To help offset this pricing pressure during 2019, the Company increased the average balance of its lower cost Senior Notes to $14.9 million, or 22.9% of total interest-bearing liabilities, from $4.2 million, or 7.5% of total interest-bearing liabilities, during the prior year.
The increase in Senior Notes and refinance of Junior Notes from 8% to 7% were primarily responsible for lowering the Company’s cost of average interest-bearing liabilities to 6.470% for the year ended December 31, 2019, a decline of 57 basis points compared to the year ended December 31, 2018. The net result was a net interest rate spread of 6.757% and a net interest margin of 7.800%, a decrease of 74 basis points and 107 basis points, respectively, when compared to the same period ended December 31, 2018.
In comparison, during the year ended December 31, 2018 the Company saw continued pricing pressure in certain geographic markets, which resulted in a weighted average gross yield on interest-earning assets of 14.535%, a decline of 88 basis points compared to the prior year. To help offset this pricing pressure during 2018, the Company increased the average balance of its lower cost Bank Borrowings to $23.8 million, or 42.3% of total interest-bearing liabilities, from $18.9 million, or 35.2% of total interest-bearing liabilities, during the prior year. However, as a result of four interest rate increases by the Federal Reserve during 2018, the average interest rate paid on the Bank Borrowings increased by 42 basis points during this same time.
The increase in Bank Borrowings and refinance of Junior Notes from 10% to 8% were primarily responsible for lowering the Company’s cost of average interest-bearing liabilities to 7.043% for the year ended December 31, 2018, a decline of 72 basis points compared to the year ended December 31, 2017. The net result was a net interest rate spread of 7.492% and a net interest margin of 8.873%, a decrease of 16 basis points and 61 basis points, respectively, when compared to the same period ended December 31, 2017.
In comparison, during the year ended December 31, 2017, the Company saw continued pricing pressure in certain geographic markets, which resulted in a weighted average gross yield on interest-earning assets of 15.413%, a decline of 212 basis points compared to the prior year. To help offset this pricing pressure during 2017, the Company increased the average balance of its lower cost Bank Borrowings to $18.9 million, or 35.2% of total interest-bearing liabilities, from $16.2 million, or 32.5% of total interest-bearing liabilities, during the prior year. In addition, the Company reduced the interest rate paid on Junior Notes from 10% to 8% by refinancing all maturing Junior Notes, which began in April 2017 and was completed in September 30, 2017.
Between 2009 and 2011, the Company saw very little pricing pressure and was able to maintain its gross yield on interest-bearing assets between 20 and 21%. During 2012 and 2013, while industry pricing pressure increased, the Company was able to maintain its yield on interest-earning assets between 20 and 21% by providing superior service to its borrowers and by opportunistically expanding its loan origination into those markets that the Company believed were less price competitive and offered the best return per unit of risk. However, starting in 2013, the Company began gradually lowering it loan pricing in response to increasing competitive pricing pressure. Due to continuing industry pricing pressure, we anticipate that the yield on our interest-earning assets may continue to decline as we adjust our loan programs to remain price competitive. We believe that the lower yield on interest-earning assets can be offset by lowering the Company’s cost of capital.
36 |
Table of Contents |
Analysis of Interest Coverage
The interest coverage ratio is the ratio of total income to interest expenses. The following table provides information as to the Company’s interest coverage ratios considering the Company’s two existing components of debt for the periods shown.
|
| As of or for the Year |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Interest income |
| $ | 10,273,630 |
|
| $ | 10,180,734 |
|
| $ | 10,838,524 |
|
Rental property income |
|
| 563,366 |
|
|
| 123,333 |
|
|
| - |
|
Non-interest income |
|
| 725,483 |
|
|
| 625,008 |
|
|
| 770,173 |
|
Total income |
|
| 11,562,479 |
|
|
| 10,929,075 |
|
|
| 11,608,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense – Bank Borrowings (1) |
|
| 1,317,452 |
|
|
| 1,454,564 |
|
|
| 1,075,991 |
|
Interest expense – Senior Notes (2) |
|
| 896,366 |
|
|
| 254,861 |
|
|
| - |
|
Interest expense – Junior Notes (3) |
|
| 2,001,380 |
|
|
| 2,256,674 |
|
|
| 3,095,246 |
|
Total interest expense |
| $ | 4,215,198 |
|
| $ | 3,966,099 |
|
| $ | 4,171,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest coverage ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Interest coverage – Bank Borrowings (1) |
|
| 8.8 | x |
|
| 7.5 | x |
|
| 10.8 | x |
Cumulative interest coverage – Senior Notes (2) |
|
| 5.2 | x |
|
| 6.4 | x |
|
| - |
|
Cumulative interest coverage – Junior Notes (3) |
|
| 2.7 | x |
|
| 2.8 | x |
|
| 2.8 | x |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average portfolio leverage, during period |
|
| 75.8 | % |
|
| 73.3 | % |
|
| 73.1 | % |
___________
(1) | Bank Borrowings have a first priority security interest in all of the Company’s assets, including Portfolio Loans. Interest coverage equals total income divided by the interest expense related to Bank Borrowings. |
(2) | Senior Notes have a second priority security interest in all of the Company’s assets, including its Portfolio Loans. Cumulative interest coverage of Senior Notes equals total income divided by the total interest expense related to Senior Notes and Bank Borrowings combined. The Company began issuing Senior Notes on March 1, 2018. |
(3) | Junior Notes have a third priority security interest in all of the Company’s assets, including Portfolio Loans. Cumulative interest coverage of Junior Notes equals gross income divided by the total interest expense related to Junior Notes, Senior Notes and Bank Borrowings combined. |
During the year ended December 31, 2019, the Company generated $11,562,479 in total income available to pay interest expense. With average portfolio leverage of 75.8%, the Company paid interest expense of $1,317,452 related to Bank Borrowings, $896,366 related to Senior Notes and $2,001,380 related to Junior Notes. Total income was 8.8 times the amount necessary to pay interest expense related to Bank Borrowings, 5.2 times the amount necessary to pay the interest expense related to Bank Borrowings and Senior Notes combined, and 2.7 times the amount necessary to pay the interest expense related to Bank Borrowings, Senior Notes and Junior Notes combined.
Interest coverage for Bank Borrowings increased year-over-year due to both a decrease in average Bank Borrowings relative to average total assets and a decrease in the interest rate paid on Bank Borrowings. Cumulative interest coverage for Senior Notes decreased year-over-year due primarily to the decrease in interest expense related to Bank Borrowings being more than offset by an increase in interest expense related to the issuance of additional Senior Notes. Cumulative interest coverage for Junior Notes saw no material change year-over-year due to the reduction in average interest expense being offset by a modest increase in average portfolio leverage between periods.
37 |
Table of Contents |
By comparison, during the year ended December 31, 2018, the Company generated $10,929,075 in total income available to pay interest expense. With average portfolio leverage of 73.3%, the Company paid interest expense of $1,454,564 related to Bank Borrowings, $254,861 related to Senior Notes and $2,256,674 related to Junior Notes. Total income was 7.5 times the amount necessary to pay interest expense related to Bank Borrowings, 6.4 times the amount necessary to pay the interest expense related to Bank Borrowings and Senior Notes combined, and 2.8 times the amount necessary to pay the interest expense related to Bank Borrowings, Senior Notes and Junior Notes combined.
Interest coverage for Bank Borrowings increased year-over-year due to both a decrease in average Bank Borrowings relative to average total assets and a decrease in the interest rate paid on Bank Borrowings. Cumulative interest coverage for Junior Notes saw no material change year-over-year due to the reduction in average interest expense being offset by a modest increase in average portfolio leverage between periods. The Company began issuing Senior Notes on March 1, 2018.
By comparison, during the year ended December 31, 2017, the Company generated $11,608,697 in total income available to pay interest expense. With average portfolio leverage of 73.1%, the Company paid interest expense of $1,075,991 related to Bank Borrowings and $3,095,246 related to Junior Notes. Total income was 10.8 times the amount necessary to pay interest expense related to Bank Borrowings and 2.8 times the amount necessary to pay the interest expense related to Bank Borrowings and Junior Notes combined.
The Company anticipates portfolio leverage will remain between 65% and 80% going forward.
Portfolio Loan-to-Value and Asset Coverage
Portfolio Loan-to-Value based on “After-Repair” Value. The Company is an asset-based lender and its underwriting guidelines are heavily weighted toward real estate valuation, liquidity and loan-to-value coverage. In determining real estate collateral value, the Company inspects the properties and evaluates comparable property values in the area through the use of Multiple Listing Service (MLS) data. Based on this information, the Company prepares an estimate of the “after-repair” value for each property. The Company’s “after-repair” value estimates assume that all planned capital improvements to the real estate collateral have been completed and that the Company has disbursed all construction loan proceeds, and represents the Company’s estimate of the market value of the collateral after completion of the project based on information about comparable properties available at that time. In more complex transactions or for properties with limited comparable data, the Company may seek a formal valuation report such as an appraisal or broker price opinion. However, appraisals are recognized in the mortgage banking industry to represent estimates of value, but should not be relied upon as the only measure of true worth or realizable value. Collateral value is determined solely in the judgment of the Company. Please see “Portfolio Loan Criteria and Policies” on Page 11 for additional details regarding the Company’s loan underwriting methodology.
The Company believes that performing in-house real estate valuations provides it with a competitive advantage. By performing hundreds of in-house valuations per year in multiple geographies, the Company is able to continually refine its appraisal process and analyze real estate market trends within different geographies. This internal valuation analysis enables the Company to make faster and more informed lending decisions, which we believe help mitigate risk while providing Portfolio Borrowers with a higher quality of service.
The Company reports to investors on a quarterly basis the results of its valuation methodology testing. These tests compare the actual loan to sale-price for those loans that paid off during a given month against the Company’s estimated valuation for those same properties at the time the loans were made. This quarterly analysis helps the Company to analyze and improve its in-house valuation methodology on an ongoing basis.
38 |
Table of Contents |
The following table sets forth the average loan-to-value for Portfolio Loans at the dates indicated, based on “after-repair” value:
|
| As of or for the Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Loan to value – active loans, end of period |
|
|
|
|
|
|
|
|
| |||
Unpaid principal balance |
| $ | 89,805,878 |
|
| $ | 68,590,539 |
|
| $ | 68,410,996 |
|
Unfunded loan balance (1) |
|
| 9,902,260 |
|
|
| 9,491,811 |
|
|
| 7,647,593 |
|
Estimated “after-repair” value (2) |
|
| 155,001,000 |
|
|
| 118,625,000 |
|
|
| 112,062,500 |
|
Estimated “after-repair” loan-to- value (3) |
|
| 64 | % |
|
| 66 | % |
|
| 68 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan to value – paid off loans, during period |
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance |
| $ | 81,916,818 |
|
| $ | 85,119,195 |
|
| $ | 68,297,135 |
|
Actual sale price |
|
| 129,823,381 |
|
|
| 134,685,603 |
|
|
| 114,128,955 |
|
Actual loan-to-sale price (4) |
|
| 63 | % |
|
| 63 | % |
|
| 60 | % |
Original “after-repair” loan-to-value estimate |
|
| 67 | % |
|
| 66 | % |
|
| 66 | % |
Number of loans |
|
| 255 |
|
|
| 284 |
|
|
| 263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinanced loans & wholesaled properties |
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance |
| $ | 20,922,051 |
|
| $ | 16,035,210 |
|
| $ | 18,596,987 |
|
Number of loans |
|
| 71 |
|
|
| 61 |
|
|
| 75 |
|
_____________
(1) | Unfunded loan balance is comprised of construction funds that have been approved but not yet disbursed. |
(2) | Estimated “after repair” value assumes all loans are fully funded and improvements to real estate have been completed. Real estate values are based on the Company’s “after-repair” value estimates. See “Portfolio Loan Criteria and Policies” on Page 11 for additional details regarding the estimation of “after-repair” value. |
(3) | Estimated “after-repair” loan-to-value is calculated by dividing the sum of the unpaid principal balance and the unfunded loan balance by the estimated “after-repair” value, and loans are weighted by the principal balance of each loan. |
(4) | Actual loan-to-sale price is calculated by dividing the fully funded loan amount by the actual sale price of the real estate collateral. The principal balance of each loan was used to calculate the weighted average. Loans that were refinanced or secured by real estate collateral that was sold wholesale (prior to planned improvements being completed) to other investors were excluded from the calculation. |
As of December 31, 2019, the estimated weighted average “after-repair” loan-to-value for active Portfolio Loans was 64%. By comparison, during the year ended December 31, 2019 the weighted average loan-to-sales price of paid off Portfolio Loans was 63%, compared to our estimated weighted average “after-repair” loan-to-value of 67% for those same properties that sold during the year. This suggests that the Manager’s valuation methodology for estimating “after-repair” value for those loans that paid off during the year was 4 percentage points more conservative than the actual sale prices, on average.
This compares to December 31, 2018 when the estimated weighted average “after-repair” loan-to-value for active Portfolio Loans was 66%. By comparison, during the year ended December 31, 2018 the weighted average loan-to-sales price of paid off Portfolio Loans was 63%, compared to our estimated weighted average “after-repair” loan-to-value of 66% for those same properties that sold during the year. This suggests that the Manager’s valuation methodology for estimating “after-repair” value for those loans that paid off during the year was 3 percentage points more conservative than the actual sale prices, on average.
This compares to December 31, 2017 when the estimated weighted average “after-repair” loan-to-value for active Portfolio Loans was 68%. By comparison, the weighted average loan-to-sales price of paid off Portfolio Loans during 2017 was 60%, compared to our estimated weighted average “after-repair” loan-to-value of 66% for those same properties that sold during 2017. This suggests that the Manager’s valuation methodology for estimating the “after-repair” value for those loans that paid off during the year was 6 percentage points more conservative than the actual sale prices on average.
“As-Is” Loan-to-Value and Asset Coverage Based on Percentage Completion. In order to provide an estimate of the “as-is” real estate collateral value at end of period, and to account for projects that are in process of construction or redevelopment, the Company uses a straight line percentage completion method to estimate the “as-is” real estate value. Specifically, the Company estimates the percentage completion of all real estate projects based on the percentage of construction funds disbursed as of a particular date and then multiplies this percentage completion by the total estimated value creation (estimated “after-repair” value of real estate minus purchase price) to determine the current value added through capital improvements. The current value added through capital improvements is then added to the original purchase price to calculate the “as-is” value of the real estate collateral as of a particular date. This estimated “as-is” value is then used to analyze the cumulative loan-to-value and real estate asset coverage of each investment program. It is important to note that the “as-is” loan-to-value and asset coverage ratios improve as the percentage completion increases. As a result, the following “as-is” loan-to-value and asset coverage analysis (based on percentage completion) will be lower than the “after-repair” values and “after-repair” loan-to-values provided above, which assume 100% project completion and associated value creation.
39 |
Table of Contents |
The following table provides the cumulative “as-is” loan-to-value and cumulative “as-is” asset coverage ratios for all four tiers of the Company’s capital structure at the dates indicated, based on the estimated “as-is” valuation of real estate collateral.
|
| As of the Year |
| ||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| ||||||||
Estimated value added through construction improvements |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Estimated “after-repair” value |
| $ | 155,001,000 |
| $ | 118,625,000 |
| $ | 112,062,500 |
| |||||||
Real estate purchase price |
| 94,713,728 |
| 69,906,529 |
| 60,578,984 |
| ||||||||||
Total estimated value added |
| 60,287,272 |
| 48,718,471 |
| 51,483,516 | |||||||||||
| |||||||||||||||||
Estimated percentage completion of capital improvements |
| ||||||||||||||||
Construction loan commitments |
| 20,149,903 |
| 18,414,620 |
| 21,983,628 |
| ||||||||||
Undisbursed construction loan balance |
| 9,902,260 |
| 9,491,811 |
| 7,647,593 |
| ||||||||||
Disbursed construction loan funds |
| 10,247,643 |
| 8,922,809 |
| 14,336,035 |
| ||||||||||
Percentage completion |
| 51 | % |
| 48 | % |
| 65 | % | ||||||||
| |||||||||||||||||
Real estate value added based on percentage completion |
| 30,660,318 |
| 23,606,548 |
| 33,573,598 |
| ||||||||||
Real estate purchase price |
| 94,713,728 |
| 69,906,529 |
| 60,578,984 |
| ||||||||||
Estimated “as-is” real estate value of loan portfolio |
| 125,374,046 |
| 93,513,077 |
| 94,152,582 | |||||||||||
| |||||||||||||||||
Book value of rental property |
| 7,111,371 |
| 6,414,813 |
| - |
| ||||||||||
Book value of real estate owned held for sale |
| 1,776,281 |
| 3,315,361 |
| 4,795,566 |
| ||||||||||
Estimated “as-is” real estate collateral value | 134,261,698 | 103,243,251 | 98,948,148 | ||||||||||||||
| |||||||||||||||||
Capital structure and investment programs |
| ||||||||||||||||
Bank Borrowings, net |
| 30,548,052 |
| 20,858,384 |
| 19,020,350 | |||||||||||
| |||||||||||||||||
Senior Notes |
| 20,914,989 |
| 8,066,007 |
| - |
| ||||||||||
Senior Notes, cumulative |
| 51,463,041 |
| 28,924,391 |
| - | |||||||||||
| |||||||||||||||||
Junior Notes |
| 24,924,078 |
| 28,386,836 |
| 33,805,946 |
| ||||||||||
Junior Notes, cumulative |
| 76,387,119 |
| 57,311,227 |
| 52,826,296 | |||||||||||
| |||||||||||||||||
Equity |
| 21,183,026 |
| 20,234,112 |
| 20,205,127 |
| ||||||||||
Equity, cumulative |
| $ | 97,570,145 |
| $ | 77,635,339 |
| $ | 73,031,423 | ||||||||
| |||||||||||||||||
Capital structure loan-to-value based on “as-is” valuation |
| ||||||||||||||||
Bank Borrowings |
| 23 | % |
| 20 | % |
| 19 | % | ||||||||
Senior Notes, cumulative |
| 38 | % |
| 28 | % |
| - |
| ||||||||
Junior Notes, cumulative |
| 57 | % |
| 56 | % |
| 53 | % | ||||||||
Equity, cumulative |
| 73 | % |
| 75 | % |
| 74 | % | ||||||||
| |||||||||||||||||
Capital structure asset coverage based on “as-is” valuation |
| ||||||||||||||||
Bank Borrowings |
| 4.4 | x |
| 4.9 | x |
| 5.2 | x | ||||||||
Senior Notes, cumulative |
| 2.6 | x |
| 3.6 | x |
| - |
| ||||||||
Junior Notes, cumulative |
| 1.8 | x |
| 1.8 | x |
| 1.9 | x | ||||||||
Equity, cumulative |
| 1.4 | x |
| 1.3 | x |
| 1.4 | x |
40 |
Table of Contents |
As of December 31, 2019 the estimated “after-repair” value of the real estate collateral securing the loan portfolio was $155.0 million, and the real estate purchase price was $94.7 million, resulting in an estimated $60.3 million in total value add to the real estate projects. Total construction loan commitments were $20.1 million and construction funds disbursed were $10.2 million, resulting in an estimated percentage completion of 51%. Multiplying the estimated total value add of $60.3 million by the estimated project completion of 51% equaled an estimated $30.7 million of incremental real estate value added based on percentage completion. Adding $30.7 million of incremental real estate value added to the real estate purchase price of $94.7 million provided an estimated “as-is” loan portfolio real estate collateral value of $125.4 million. When combined with an estimated $7.1 million of rental property assets and $1.8 million of real estate owned assets, the total estimated “as-is” real estate collateral value securing the Company’s investment programs was $134.3 million as of December 31, 2019.
Cumulative loan-to-value is the value of the debt or equity investment plus any senior debt divided by the estimated “as-is” real estate collateral value ($134.3 million as of December 31, 2019). As of December 31, 2019, the loan-to-value of Bank Borrowings equaled 23% or $30.6 million in Bank Borrowings divided by the estimated “as-is” real estate collateral value of $134.3 million; Cumulative loan-to-value of Senior Notes equaled 38% or $51.5 million (the sum of $20.9 million in Senior Notes, plus $30.6 million in Bank Borrowings) divided by the estimated “as-is” real estate collateral value of $134.3 million, and; Cumulative loan-to-value of Junior Notes equaled 57% or $76.4 million (the sum of $24.9 million in Junior Notes, plus $20.9 million in Senior Notes, plus $30.6 million in Bank Borrowings) divided by the estimated “as-is” real estate collateral value of $134.3 million, and; Cumulative loan-to-value of equity equaled 73% or $97.6 million (the sum of $21.2 million in equity, plus $24.9 million in Junior Notes, plus $20.9 million in Senior Notes, plus $30.6 million in Bank Borrowings) divided by the estimated “as-is” real estate collateral value of $134.3 million.
Loan-to-value for Bank Borrowings saw a modest increase year-over-year, reflecting an increase in Bank Borrowings from 26.5% to 30.9% of total assets, as the Company borrowed on its line of credit to meet an increase in loan demand. Cumulative loan-to-value for Senior Notes increased year-over-year, reflecting the increase in Bank Borrowings and an increase in Senior Notes from 10.3% to 21.2% of total assets, as the Company continued to add new Senior Note investors. Cumulative loan-to-value for Junior Notes saw almost no change year-over-year primarily reflecting the growth in Senior Notes more than offsetting the reduction in Junior Notes from 36.2% to 25.3% of total assets.
Cumulative asset coverage is the estimated “as-is” real estate collateral value ($134.3 million as of December 30, 2019) divided by the debt or equity and any senior debt. As of December 31, 2019, Bank Borrowings equaled 4.4 times or $134.3 million in estimated “as-is” real estate collateral value divided by $30.6 million in Bank Borrowings; Senior Notes equaled 2.6 times or $134.31 million in estimated “as-is” real estate collateral value divided by $51.5 million (the sum of $20.9 million in Senior Notes, plus $30.6 million in Bank Borrowings); Junior Notes equaled 1.8 times or $134.3 million in estimated “as-is” real estate collateral value divided by $76.4 million (the sum of $24.9 million in Junior Notes, plus $20.9 million in Senior Notes, plus $30.6 million in Bank Borrowings), and; Equity equaled 1.4 times or $134.3 million in estimated “as-is” real estate collateral value divided by $97.6 million (the sum of $21.2 million in equity, plus $24.9 million in Junior Notes, plus $20.9 million in Senior Notes, plus $30.6 million in Bank Borrowings).
Asset coverage for Bank Borrowings saw a modest decrease year-over-year, reflecting an increase in Bank Borrowings from 26.5% to 30.9% of total assets, as the Company borrowed on its line of credit to meet an increase in loan demand. Cumulative asset coverage for Senior Notes decreased year-over-year, reflecting the increase in Bank Borrowings and an increase in Senior Notes from 10.3% to 21.2% of total assets, as the Company continued to add new Senior Note investors. Cumulative asset coverage for Junior Notes saw almost no change year-over-year primarily reflecting the growth in Senior Notes more than offsetting the reduction in Junior Notes from 36.2% to 25.3% of total assets.
By comparison, as of December 31, 2018 the estimated “after-repair” value of the real estate collateral securing the loan portfolio was $118.6 million, and the real estate purchase price was $69.9 million, resulting in an estimated $48.7 million in total value add to the real estate projects. Total construction loan commitments were $18.4 million and construction funds disbursed were $8.9 million, resulting in an estimated percentage completion of 48%. Multiplying the estimated total value add of $48.7 million by the estimated project completion of 48% equaled an estimated $23.6 million of incremental real estate value added based on percentage completion. Adding $23.6 million of incremental real estate value added to the real estate purchase price of $69.9 million provides an estimated “as-is” loan portfolio real estate collateral value of $93.5 million. When combined with an estimated $6.4 million in rental property and $3.3 million of real estate owned assets, the total estimated “as-is” real estate collateral value securing the Company’s investment programs was $103.2 million as of December 31, 2018.
41 |
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Cumulative loan-to-value is the value of the debt or equity investment plus any senior debt divided by the estimated “as-is” real estate collateral value ($103.2 million as of December 31, 2018). As of December 31, 2018, the loan-to-value of Bank Borrowings equaled 20% or $20.9 million in Bank Borrowings divided by the estimated “as-is” real estate collateral value of $103.2 million; Cumulative loan-to-value of Senior Notes equaled 28% or $28.9 million (the sum of $8.1 million in Senior Notes, plus $20.8 million in Bank Borrowings) divided by the estimated “as-is” real estate collateral value of $103.2 million, and; Cumulative loan-to-value of Junior Notes equaled 56% or $57.3 million (the sum of $28.4 million in Junior Notes, plus $8.1 million in Senior Notes, plus $20.8 million in Bank Borrowings) divided by the estimated “as-is” real estate collateral value of $103.2 million, and; Cumulative loan-to-value of equity equaled 75% or $77.6 million (the sum of $20.3 million in equity, plus $28.4 million in Junior Notes, plus $8.1 million in Senior Notes, plus $20.8 million in Bank Borrowings) divided by the estimated “as-is” real estate collateral value of $103.2 million.
Cumulative asset coverage is the estimated “as-is” real estate collateral value ($103.2 million as of December 31, 2018) divided by the debt or equity and any senior debt. As of December 31, 2018, Bank Borrowings equaled 4.9 times or $103.2 million in estimated “as-is” real estate collateral value divided by $20.8 million in Bank Borrowings; Senior Notes equaled 3.6 times or $103.2 million in estimated “as-is” real estate collateral value divided by $28.9 million (the sum of $8.1 million in Senior Notes, plus $20.8 million in Bank Borrowings); Junior Notes equaled 1.8 times or $103.2 million in estimated “as-is” real estate collateral value divided by $57.3 million (the sum of $28.4 million in Junior Notes, plus $8.1 million in Senior Notes, plus $20.8 million in Bank Borrowings), and; Equity equaled 1.3 times or $103.2 million in estimated “as-is” real estate collateral value divided by $77.6 million (the sum of $20.3 million in equity, plus $28.4 million in Junior Notes, plus $8.1 million in Senior Notes, plus $20.8 million in Bank Borrowings).
By comparison, as of December 31, 2017, the estimated “after-repair” value of the real estate collateral securing the loan portfolio was $112.1 million, and the real estate purchase price was $60.6 million, resulting in an estimated $51.5 million in total value creation of the real estate projects. Total construction loan commitments were $22.0 million and construction funds disbursed were $14.3 million, resulting in an estimated percentage completion of 65%. Multiplying the estimated total value creation of $51.5 million by the estimated project completion of 65% equaled an estimated $33.6 million of incremental real estate value added based on percentage completion. Adding $33.6 million of incremental real estate value added to the real estate purchase price of $60.6 million provides an estimated “as-is” loan portfolio real estate collateral value of $94.2 million. When combined with an estimated $4.8 million of real estate owned assets, the total estimated “as-is” real estate collateral value securing the Company’s investment programs was $98.9 million as of December 31, 2017.
Cumulative loan-to-value is the value of the debt or equity investment plus any senior debt divided by the estimated “as-is” real estate value ($98.9 million as of December 31, 2017). As of December 31, 2017, the loan-to-value of Bank Borrowings equaled 19% or $19.0 million in Bank Borrowings divided by the estimated “as-is” real estate collateral value of $98.9 million; Cumulative loan-to-value of Junior Notes equaled 53% or $52.8 million (the sum of $33.8 million in Junior Notes plus $19.0 million in Bank Borrowings) divided by the estimated “as-is” real estate collateral value of $98.9 million, and; Cumulative loan-to-value of equity equaled 74% or $73.0 million (the sum of $20.2 million in equity plus $33.8 million in Junior Notes plus $19.0 million in Bank Borrowings) divided by the estimated “as-is” real estate collateral value of $98.9 million.
Cumulative Asset Coverage is the estimated “as-is” real estate value ($98.9 million as of December 31, 2016) divided by the debt or equity and any senior debt. As of December 31, 2017, the asset coverage of Bank Borrowings equaled 5.2 times or $98.9 million in estimated “as-is” real estate collateral value divided by $19.0 million in Bank Borrowings; Cumulative asset coverage of Junior Notes equaled 1.9 times or $98.9 million in estimated “as-is” real estate collateral value divided by $52.8 million (the sum of $33.8 million in Junior Notes plus $19.0 million in Bank Borrowings), and; Cumulative asset coverage of equity equaled 1.4 times or $98.9 million in estimated “as-is” real estate collateral value divided by $73.0 million (the sum of $20.2 million in equity plus $33.8 million in Junior Notes plus $19.0 million in Bank Borrowings).
As of December 31, 2017 and 2016, the Company had not issued Senior Notes.
42 |
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The Company is managed by its Manager, Iron Bridge Management Group, LLC, an entity owned by Gerard Stascausky and operated by its Managing Directors, Gerard Stascausky and Sarah Gragg Stascausky. The Managing Directors are responsible for and have complete control over the Company’s operations, lending policies and decisions with respect to the Portfolio Loans. The Manager was organized in May 2008. Gerard Stascausky and Sarah Gragg Stascausky are married to each other.
Name |
| Position |
| Age |
| Term of Office |
Gerard Stascausky |
| Managing Director of Manager |
| 50 |
| May 2008 |
Sarah Gragg Stascausky |
| Managing Director of Manager |
| 47 |
| June 2008 |
Gerard Stascausky
Mr. Stascausky, co-founder of the Manager, has been investing in the real estate foreclosure and pre-foreclosure market since 2004. Prior to launching the Manager, he ran Bridgeport Home Solutions LLC, which specialized in the research, acquisition and management of foreclosure and pre-foreclosure properties in the Portland metro market.
Mr. Stascausky brings to the Manager over 15 years of investment banking experience. In 1993, he joined Sutter Securities as an investment banking analyst, structuring municipal debt offerings. In 1996, he left to join the equity research department at Montgomery Securities, where he conducted securities research on the payment processing and networking equipment industries. With his background in technology research, he joined Credit Suisse in 1999 as one of the industry’s first technology specialist equity salesmen. Finally, in 2003, he was recruited to join Pacific Crest Securities, where he served as a senior equity salesman, research product manager and member of the management team.
Mr. Stascausky graduated with honors from the University of California, Davis in 1993. He earned a B.A. in Economics and minors in Psychology and Political Science. In 1996, he earned his Chartered Financial Analyst designation from the CFA Institute.
Sarah Gragg Stascausky
Sarah Gragg Stascausky, co-founder of the Manager, has over nine years of experience in the real estate foreclosure and pre-foreclosure market and currently provides both operational and strategic services to the Company. From 1995 through 2002, Ms. Stascausky worked as an equity research analyst for Robertson Stephens LLP, conducting securities research on the retail industry, with primary focus on the home improvement sector. Ms. Stascausky was responsible for company specific research as well as analysis of regional and national retail and real estate industry trends.
Ms. Stascausky graduated from the University of Oregon in 1994 with a major in Political Science and minor in Business Administration. She earned her Master’s in Business Administration from the Stanford Graduate School of Business in 2001.
Employees
In addition to its two Managing Directors, the Manager has ten employees, including one in accounting, one in marketing, five in loan underwriting and three in loan servicing.
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Table of Contents |
Company Expenses
The Company will be responsible for all of its operating expenses including, without limitation, (i) all costs and expenses incurred in connection with identifying, evaluating, structuring, negotiating, developing, closing and servicing investments consummated by the Company (including, without limitation, any due diligence, travel, legal and accounting expenses, any deposits and commitment fees and other fees and out-of-pocket costs related thereto); (ii) taxes of the Company; (iii) all costs and expenses associated with obtaining and maintaining insurance for the Company and its assets, if any; (iv) all costs related to litigation (including threatened litigation) involving the Company, and indemnification expenses; (v) expenses and fees associated with third party auditors, accountants, attorneys and tax advisors and other professionals with respect to the Company and its activities; (vi) fees incurred in connection with the maintenance of bank or custodian accounts; (vii) brokerage points and commissions, referral and finder fees, and other investment costs incurred by or on behalf of the Company and paid to third parties; (viii) all expenses incurred in connection with the registration of the Company’s securities under applicable securities laws or regulations; (ix) all expenses of liquidating the Company or its investments; and (x) other general ordinary Company administration and overhead expenses.
The Manager will be responsible for costs of its own personnel (including compensation and benefits), office space and general overhead expenses incurred in performing duties to the Company, provided, however, that, for administrative convenience, the Company may lease certain employees from the Manager and, in such event, the Company will reimburse the Manager for all W-2 wages, deferred compensation and employee benefits paid to the employees leased by the Company. To the extent that the Company reimburses the Manager for W-2 wages paid to the employees leased by the Company (the “Company Employee Expense”), the Company (and not the Manager) will be entitled to claim the Company Employee Expense for income tax purposes.
Management Fees
The Company does not have any employees, officers, or directors. The Manager is responsible for managing the Company. The Manager receives compensation for its services to the Company, in the form of a base management fee and a management incentive fee, described in the following paragraphs. During the year ended December 31, 2019, the Manager received the following compensation (all of which was received in cash):
Name |
| Capacity in which compensation was received (e.g. Chief Executive Officer, director, etc.) |
| Base Management Fee ($) |
|
| Management Incentive Fee ($) |
|
| Total compensation ($) |
| |||
Iron Bridge Management Group, LLC |
| Manager |
| $ | 2,351,619 |
|
| $ | 396,734 |
|
| $ | 2,748,353 |
|
The base management fee relates to servicing investment loans and is equal to 3% per annum of the principal amount of each investment, payable monthly, provided that the base management fee will be reduced by the amount of any Company Employee Expense for which the Manager is reimbursed by the Company. The Manager is solely responsible for its own operating costs, including the cost of its own personnel, office space and general overhead. The base management fee for a particular month is paid to the Manager no later than the last day of the immediately succeeding month.
The management incentive fee is equal to one-half (1/2) of all distributable cash in excess of the 10% annual preferred return payable to the Company’s equity owners. ”Distributable cash” is the excess of the sum of all cash receipts of all kinds (other than capital contributions) over cash disbursements, including interest expense paid to Senior Noteholders, Junior Noteholders and Bank Borrowings. The management incentive fee, if any, is paid to the Manager no later than the last day of the immediately succeeding month.
Gerard Stascausky and Sarah Gragg Stascausky may also receive distributions from the Company in their capacities as equity owners, as discussed below.
Investment by Managing Directors
The Managing Directors, Gerard Stascausky and Sarah Gragg Stascausky, will maintain at all times a minimum combined equity investment in the Company of $500,000. As of December 31, 2019, Gerard Stascausky and Sarah Stascausky owned approximately $4,860,842, or 23.0%, of the equity interests in the Company.
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Fiduciary Duties of the Manager
Under Oregon law, a manager is accountable to a limited liability company’s equity owners as a fiduciary, which means that a manager is required to exercise good faith with respect to a company’s affairs. The Senior Noteholders do not have an equity owner’s interest in the Company and are solely creditors of the Company. Accordingly, the Manager does not have a direct fiduciary obligation to the Senior Noteholders. The Company, however, will enter into certain contractual operating covenants and commitments to the Senior Noteholders pursuant to the Senior Note Purchase Agreement, the Senior Note, and the Security Agreement, the breach of which by the Company may give the Senior Noteholders a cause of action against the Company.
Indemnification and Exculpation
To the fullest extent not prohibited by law, the Manager will not be liable to the Company or its equity owners for any act or omission performed or omitted by the Manager in good faith pursuant to the authority granted to it by the Operating Agreement, including the management or conduct of the business and affairs of the Company, the offer and sale of securities, the management of affiliates insofar as such business relates to the Company (including activities that may involve a conflict of interest) or the winding up of the business of the Company.
The Company must indemnify the Manager and each agent of the Manager for any loss or damage arising out of its activities on behalf of the Company or in furtherance of the Company’s interests, without relieving the Manager and its agents of liability for a breach of the Manager’s fiduciary duties. A successful indemnification of the Manager or any litigation that may arise in connection with its indemnification could deplete the assets of the Company, thereby reducing funds available to pay the Senior Notes. Therefore, Senior Noteholders may have a more limited opportunity of recovery than they would have absent these provisions in the Operating Agreement.
To the extent that the indemnification provisions permit indemnification for liabilities arising under the Securities Act, in the opinion of the SEC, such indemnification is contrary to public policy and therefore unenforceable.
ITEM 4 SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS
The following table presents information regarding the ownership of the Company’s equity interests as of December 31, 2019 by:
| · | our Manager; |
| · | each of our Manager’s Managing Directors; |
| · | each equity owner known by us to beneficially hold 10% or more of the Company’s equity interests; and |
| · | all of our Manager’s Managing Directors as a group. |
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Beneficial ownership is generally determined under the rules of the SEC and generally includes voting or investment power with respect to securities. Unless otherwise noted, the address for each beneficial owner listed below is 9755 SW Barnes Road, Suite 420, Portland, OR 97225.
Name |
| Number of Units of Company Equity Interests |
|
| Percent of Class (1) |
| ||
Manager: |
|
|
|
|
|
| ||
Iron Bridge Management Group, LLC |
|
| 0 |
|
|
| 0 | % |
Managing Directors of Manager: |
|
|
|
|
|
|
|
|
Gerard Stascausky |
|
| 4,358,896 |
|
|
| 20.6 | % |
Sarah Gragg Stascausky |
|
| 501,929 |
|
|
| 2.4 | % |
TOTAL |
|
| 4,860,825 |
|
|
| 23.0 | % |
Other holders of 10% or more of the Company’s equity interests: |
|
|
|
|
|
|
|
|
Susanne Baumann Trust (2) |
|
| 4,092,263 |
|
|
| 19.3 | % |
Howard Bubb |
|
| 2,092,839 |
|
|
| 9.9 | % |
__________
(1) | Percentages are based on 21,183,026 units of equity interests outstanding as of December 31, 2019. |
(2) | Susanne Baumann exercises voting and dispositive authority over all securities held by the Susanne Baumann Trust. |
ITEM 5 INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Other than the Manager’s relationship to the Company as Manager, the Company has not engaged in, nor currently proposes to engage in, any transaction in which any of the Manager, any affiliates of the Manager, any other person holding more than a 10% interest in the Company, or any immediate family member of such persons, had or is to have a direct or indirect material interest.
The following describes some of the important areas in which the interests of the Manager may conflict with those of the Company.
Manager’s Affiliation with Other Companies
The Manager’s primary business activity during the life of the Company will be the management of the Company. However, the Manager may be affiliated with other investment entities and not manage the Company as its sole and exclusive business function. In the future, the Manager may act as a manager to other affiliated entities in similar capacities, potentially diluting the Manager’s focus on the Company. The Manager will have conflicts of interest in allocating management time, services and functions between various existing entities and any future mortgage lending entities that it may organize.
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The Manager may be the owner or manager of other entities that have investment objectives that are similar to but are not directly competitive with the Company, potentially creating a conflict of interest. The Operating Agreement expressly provides that neither the Manager nor any owner of the Manager will be obligated to present to the Company any particular investment opportunity that comes to its attention, even if such opportunity is of a character that might be suitable for purchasing by the Company.
The Manager, and its affiliates and principals, may invest in but not manage or own a controlling interest in other entities that compete directly with the business of the Company.
The member of the Manager, Gerard Stascausky, invests in real estate for his own accounts, and expects to continue to invest in real estate for his own accounts, including investment in other business ventures, public or private limited partnerships or limited liability companies, and neither the Company, any equity owner of the Company, nor any Senior Noteholder or Junior Noteholder is entitled to an interest therein.
Conflict with Related Programs
The Company will not loan money to any entity in which the Manager has a direct financial interest. However, the Manager and its affiliates may cause the Company to join with other entities organized by the Manager for similar or related purposes as partners, joint ventures or co-owners under some form of ownership in certain loans, or in the ownership of repossessed real property. Such arrangements would be formed because the Manager believed such arrangement is in the best interest of the Company. For example, bank loan covenants applied to the Company’s portfolio of loans may require the Manager to form a separate entity to purchase from the Company at par any loan that is 60 days or more delinquent. Such covenants are designed to protect investor interests; however, the interests of the Company and those of such other entities may conflict, and the Manager controlling or influencing all such entities may not be able to resolve such conflicts in a manner that serves the best interests of the Company.
Lack of Independent Legal Representation
The Company has not been represented by independent legal counsel to date. The use of the Manager’s counsel in the preparation of this document and the organization of the Company may result in a lack of independent review. Investors should consult their own legal counsel with respect to an investment in Senior Notes.
Management Fees
The Manager will act as servicer for the compensation described in this document. The Manager has reserved the right to retain the services of other firms, in addition to, or in lieu of, the Manager, to perform the brokerage services, loan servicing and other activities in connection with the Company’s loan portfolio. Any such other firms may also be affiliated with the Manager. Loan servicing firms not affiliated with the Manager might provide comparable services on terms more favorable to the Company.
The Company will pay management fees to the Manager. The management fees were not determined through arms-length negotiation. The structure of the management fees may provide an incentive to the Manager to seek out higher risk opportunities to earn returns greater than the preferred return.
Not Applicable.
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Iron Bridge Mortgage Fund, LLC
(An Oregon Limited Liability Company)
Financial Statements
December 31, 2019, 2018, and 2017
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To the Members
Iron Bridge Mortgage Fund, LLC
Portland, Oregon
We have audited the accompanying financial statements of Iron Bridge Mortgage Fund, LLC (an Oregon limited liability company) (the "Fund"), which comprise the balance sheets as of December 31, 2019, 2018 and 2017, and the related statements of income and changes in members' equity, and cash flows for the years then ended, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Iron Bridge Mortgage Fund, LLC as of December 31, 2019, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As described in Note 2 to the financial statements, the Fund has adopted ASU 2014-09, Revenues from Contracts with Customers (Topic 606). Our opinion is not modified with respect to that matter.
| ArmaninoLLP |
| San Ramon, California |
March 6, 2020 |
|
50 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
(An Oregon Limited Liability Company)
Balance Sheets
December 31, 2019, 2018, and 2017
ASSETS | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||
|
| 2019 | 2018 | 2017 |
| |||||||
|
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents |
| $ | 880,205 |
|
| $ | 588,576 |
|
| $ | 684,316 |
|
Mortgage interest receivable |
|
| 811,812 |
|
|
| 705,950 |
|
|
| 1,257,834 |
|
Mortgage loans receivable, net |
|
| 88,122,933 |
|
|
| 67,316,102 |
|
|
| 67,090,684 |
|
Real estate held for sale |
|
| 1,776,281 |
|
|
| 3,315,361 |
|
|
| 4,795,566 |
|
Rental property, net |
|
| 7,111,371 |
|
|
| 6,414,813 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 98,702,602 |
|
| $ | 78,340,802 |
|
| $ | 73,828,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS' EQUITY | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued liabilities |
| $ | 76,918 |
|
| $ | 34,196 |
|
| $ | 23,925 |
|
Servicer fees payable |
|
| 230,750 |
|
|
| 181,531 |
|
|
| 176,575 |
|
Incentive fees payable |
|
| 39,684 |
|
|
| 40,630 |
|
|
| 62,101 |
|
Interest payable |
|
| 377,506 |
|
|
| 350,453 |
|
|
| 325,809 |
|
Notes payable - junior notes |
|
| 24,924,078 |
|
|
| 28,386,836 |
|
|
| 33,805,946 |
|
Notes payable - senior notes |
|
| 20,914,989 |
|
|
| 8,066,007 |
|
|
| - |
|
Line of credit, net |
|
| 30,548,052 |
|
|
| 20,778,689 |
|
|
| 19,014,051 |
|
Deferred interest |
|
| 407,599 |
|
|
| 178,348 |
|
|
| 214,866 |
|
Total liabilities |
|
| 77,519,576 |
|
|
| 58,016,690 |
|
|
| 53,623,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members' equity |
|
| 21,183,026 |
|
|
| 20,324,112 |
|
|
| 20,205,127 |
|
Total liabilities and members' equity |
| $ | 98,702,602 |
|
| $ | 78,340,802 |
|
| $ | 73,828,400 |
|
The accompanying notes are an integral part of these financial statements.
51 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
(An Oregon Limited Liability Company)
Statements of Income and Changes in Members' Equity
For the Years Ended December 31, 2019, 2018, and 2017
|
| 2019 | 2018 | 2017 |
| |||||||
Revenues |
|
|
|
|
|
|
|
|
| |||
Mortgage interest income |
| $ | 10,273,630 |
|
| $ | 10,180,734 |
|
| $ | 10,838,524 |
|
Rental property income |
|
| 563,366 |
|
|
| 123,333 |
|
|
| - |
|
Other income |
|
| 725,483 |
|
|
| 625,008 |
|
|
| 770,173 |
|
Total revenues |
|
| 11,562,479 |
|
|
| 10,929,075 |
|
|
| 11,608,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 4,215,198 |
|
|
| 3,966,099 |
|
|
| 4,171,237 |
|
Servicer fees |
|
| 2,351,619 |
|
|
| 2,117,918 |
|
|
| 2,126,956 |
|
Incentive fees |
|
| 396,734 |
|
|
| 805,848 |
|
|
| 909,476 |
|
Provision for losses on loans |
|
| 776,382 |
|
|
| 90,275 |
|
|
| 56,753 |
|
Professional fees |
|
| 268,354 |
|
|
| 405,165 |
|
|
| 310,568 |
|
Real estate holding costs |
|
| 436,737 |
|
|
| 221,778 |
|
|
| 334,164 |
|
Other |
|
| 487,701 |
|
|
| 420,329 |
|
|
| 588,581 |
|
Total operating expenses |
|
| 8,932,725 |
|
|
| 8,027,412 |
|
|
| 8,497,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense |
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of real estate held for sale |
|
| (118,126 | ) |
|
| (12,160 | ) |
|
| (204,293 | ) |
Total other expense |
|
| (118,126 | ) |
|
| (12,160 | ) |
|
| (204,293 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax and LLC fees |
|
| 2,511,628 |
|
|
| 2,889,503 |
|
|
| 2,906,669 |
|
Income tax and LLC fees |
|
| 9,854 |
|
|
| 8,517 |
|
|
| 7,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| 2,501,774 |
|
|
| 2,880,986 |
|
|
| 2,899,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members' equity, beginning of year |
|
| 20,324,112 |
|
|
| 20,205,127 |
|
|
| 19,006,249 |
|
Members' contributions |
|
| 4,650,984 |
|
|
| 3,262,891 |
|
|
| 6,316,979 |
|
Members' earning distributions |
|
| (1,088,804 | ) |
|
| (76,634 | ) |
|
| (391,887 | ) |
Members' capital withdrawals |
|
| (5,205,040 | ) |
|
| (5,948,258 | ) |
|
| (7,625,326 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Members' equity, end of year |
| $ | 21,183,026 |
|
| $ | 20,324,112 |
|
| $ | 20,205,127 |
|
The accompanying notes are an integral part of these financial statements.
52 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
(An Oregon Limited Liability Company)
Statements of Cash Flows
For the Years Ended December 31, 2019, 2018, and 2017
|
| 2019 | 2018 | 2017 |
| |||||||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
| |||
Net income |
| $ | 2,501,774 |
|
| $ | 2,880,986 |
|
| $ | 2,899,112 |
|
Adjustments to reconcile net income to |
|
|
|
|
|
|
|
|
|
|
|
|
net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for losses on loans |
|
| 776,382 |
|
|
| 90,275 |
|
|
| 56,753 |
|
Amortization of deferred loan origination fees |
|
| (1,856,751 | ) |
|
| (1,942,449 | ) |
|
| (1,530,373 | ) |
Depreciation |
|
| 65,069 |
|
|
| - |
|
|
| - |
|
Loss on sales of real estate held for sale |
|
| 118,126 |
|
|
| 12,160 |
|
|
| 204,293 |
|
Junior notes interest expense converted to debt |
|
| 1,504,004 |
|
|
| 1,542,040 |
|
|
| 1,865,904 |
|
Senior notes interest expense converted to debt |
|
| 444,058 |
|
|
| 119,820 |
|
|
| - |
|
Change in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage interest receivable |
|
| (105,862 | ) |
|
| 8,875 |
|
|
| (490,453 | ) |
Accounts payable and other accrued liabilities |
|
| 42,722 |
|
|
| 10,271 |
|
|
| (10,018 | ) |
Servicer fees payable |
|
| 49,219 |
|
|
| 4,956 |
|
|
| 1,486 |
|
Incentive fees payable |
|
| (946 | ) |
|
| (21,471 | ) |
|
| (4,654 | ) |
Interest payable |
|
| 27,053 |
|
|
| 24,644 |
|
|
| (46,184 | ) |
Deferred interest |
|
| 229,251 |
|
|
| (36,518 | ) |
|
| (3,541 | ) |
Net cash provided by operating activities |
|
| 3,794,099 |
|
|
| 2,693,589 |
|
|
| 2,942,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Loans funded |
|
| (126,287,083 | ) |
|
| (109,858,712 | ) |
|
| (91,436,310 | ) |
Principal collected on loans |
|
| 106,560,621 |
|
|
| 106,926,010 |
|
|
| 90,414,283 |
|
Improvement costs on real estate held for sale |
|
| (574,298 | ) |
|
| (2,543,844 | ) |
|
| (2,084,631 | ) |
Improvement costs on rental property |
|
| (452,297 | ) |
|
| - |
|
|
| - |
|
Proceeds from sales of real estate held for sale |
|
| 1,685,922 |
|
|
| 2,699,543 |
|
|
| 1,083,222 |
|
Net cash used in investing activities |
|
| (19,067,135 | ) |
|
| (2,777,003 | ) |
|
| (2,023,436 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on notes payable - junior notes |
|
| 435,584 |
|
|
| 3,818,808 |
|
|
| 3,054,095 |
|
Repayments on notes payable - junior notes |
|
| (6,638,997 | ) |
|
| (12,376,682 | ) |
|
| (8,170,061 | ) |
Borrowings on notes payable - senior notes |
|
| 15,624,286 |
|
|
| 7,614,294 |
|
|
| - |
|
Repayments on notes payable - senior notes |
|
| (3,219,362 | ) |
|
| 316,618 |
|
|
| - |
|
Net borrowings on line of credit |
|
| 9,769,363 |
|
|
| 1,764,638 |
|
|
| 5,719,541 |
|
Members' contributions |
|
| 4,650,984 |
|
|
| 3,262,891 |
|
|
| 5,441,979 |
|
Members' earnings distributions |
|
| (1,088,804 | ) |
|
| (76,634 | ) |
|
| (391,887 | ) |
Members' capital withdrawals |
|
| (3,968,389 | ) |
|
| (4,336,259 | ) |
|
| (6,092,781 | ) |
Net cash provided by (used in) financing activities |
|
| 15,564,665 |
|
|
| (12,326 | ) |
|
| (439,114 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| 291,629 |
|
|
| (95,740 | ) |
|
| 479,775 |
|
Cash and cash equivalents, at beginning of year |
|
| 588,576 |
|
|
| 684,316 |
|
|
| 204,541 |
|
Cash and cash equivalents, at end of year |
| $ | 880,205 |
|
| $ | 588,576 |
|
| $ | 684,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 4,188,144 |
|
| $ | 3,941,456 |
|
| $ | 4,217,421 |
|
Cash paid for income tax and LLC fees |
| $ | 9,854 |
|
| $ | 8,517 |
|
| $ | 7,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing transactions |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans receivable converted to real estate held for sale |
| $ | - |
|
| $ | 4,724,057 |
|
| $ | 1,458,795 |
|
Mortgage interest receivable transferred to real estate held for sale |
| $ | - |
|
| $ | 378,410 |
|
| $ | 73,442 |
|
Sale of real estate financed with mortgage loan receivable |
| $ | - |
|
| $ | - |
|
| $ | 458,971 |
|
Real estate held for sale converted to rental property |
| $ | 309,327 |
|
| $ | - |
|
| $ | - |
|
Notes payable - converted to members' equity |
| $ | - |
|
| $ | - |
|
| $ | 875,000 |
|
Members' equity converted to notes payable |
| $ | 1,236,651 |
|
| $ | 1,611,999 |
|
| $ | 1,532,545 |
|
The accompanying notes are an integral part of these financial statements.
53 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
1. Organization
Iron Bridge Mortgage Fund, LLC (the "Fund") is an Oregon limited liability company that was organized to engage in business as a mortgage lender for the purpose of making and arranging various types of loans to the general public and businesses, acquiring existing loans and selling loans, all of which are or will be secured, in whole or in part, by real or personal property throughout the United States. The Fund is managed by Iron Bridge Management Group, LLC, an Oregon limited liability company (the "Manager"). The Fund receives certain operating and administrative services from the Manager, some of which are not reimbursed to the Manager. The Fund's financial position and results of operations would likely be different absent this relationship with the Manager.
Term of the Fund
The Fund will continue in perpetuity, at the sole discretion of the Manager, unless dissolved under provisions of the operating agreement at an earlier date.
2. Summary of Significant Accounting Policies
Management estimates and related risks
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Such estimates relate principally to the determination of the allowance for loan losses and fair value of real estate owned. Although these estimates reflect management's best estimates, it is at least reasonably possible that a material change to these estimates could occur.
The fair value of real estate, in general, is impacted by current real estate and financial market conditions. The real estate and mortgage lending financial markets have stabilized with many of the markets for which the Fund has loans and related loan collateral showing signs of appreciating fair values for the years presented. However, should these markets experience significant declines, the resulting collateral values of the Fund's loans will likely be negatively impacted. The impact to such values could be significant and as a result, the Fund's actual loan losses and proceeds from the sales of real estate held could differ significantly from management's current estimates.
54 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
2. Summary of Significant Accounting Policies (continued)
Cash and cash equivalents
The Fund considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents. Cash on deposit occasionally exceeds federally insured limits. The Fund believes that it mitigates this risk by maintaining deposits with major financial institutions.
Mortgage loans receivable
Mortgage loans, which the Fund has the intent and ability to hold to maturity, generally are stated at their outstanding unpaid principal balance with interest thereon being accrued as earned. Mortgage loans receivable make up the only class of financing receivables within the Fund's lending portfolio. As a result, further segmentation of the loan portfolio is not considered necessary.
If the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement and the shortfall in the amounts due are not insignificant, the carrying amount of the investment shall be reduced to the present value of estimated future cash flows discounted at the loan's effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral.
Interest is accrued daily based on the principal of the loans. If events and or changes in circumstances cause management to have serious doubts about the further collectability of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances including accrued interest and advances.
Allowance for loan losses
Loans and the related accrued interest are analyzed on a periodic basis for recoverability. Delinquencies are identified and followed as part of the loan system. A provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral value, to provide for unrecoverable loans and receivables, including impaired loans, accrued interest and advances on loans. As a collateral-based lender, the Fund does not consider credit risks which may be inherent in a further segmented loan portfolio as a basis for determining the adequacy of its allowance for loan losses but rather focuses solely on the underlying collateral value of the loans in its portfolio to do so. As a result, the Fund does not consider further segmentation of its loan portfolio and related disclosures necessary. The Fund writes off uncollectible loans and related receivables directly to the allowance for loan losses once it is determined that the full amount is not collectible.
55 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
2. Summary of Significant Accounting Policies (continued)
Rental property
Rental property is recorded at cost and allocated between land and building based upon their relative fair values at acquisition. Improvements and replacements are capitalized when they extend the useful life, increase capacity or improve the efficiency of the asset. Investment costs are capitalized while activities are ongoing to prepare an asset for its intended use. Expenditures for repairs and maintenance are charged to expense when incurred.
Depreciation begins once the asset is ready to be placed into service and is recorded on a straight-line basis over the estimated useful lives of the assets. Buildings and improvements are depreciated over periods ranging from 15 to 27.5 years.
Impairment of long-lived assets
The Fund continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances occur, the Fund assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total future cash flows is less than the carrying amount of those assets, the Fund records an impairment charge based on the excess of the carrying amount over the fair value, less selling costs, of the asset.
Fair value measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Fund determines the fair values of its assets and liabilities based on a fair value hierarchy that includes three levels of inputs that may be used to measure fair value (Level 1, Level 2 and Level 3).
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Fund has the ability to access at the measurement date. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs reflect the Fund's own assumptions about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk). Unobservable inputs are developed based on the best information available in the circumstances and may include the Fund's own data.
56 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
2. Summary of Significant Accounting Policies (continued)
Fair value measurements (continued)
The Fund does not record loans at fair value on a recurring basis but uses fair value measurements of collateral security in the determination of its allowance for loan losses. The fair value for real estate owned and impaired secured loans is determined using the sales comparison, income and other commonly used valuation approaches.
The following table reflects the Fund's assets measured at fair value on a non-recurring basis during the year ended December 31, 2019:
Item | Level 1 | Level 2 | Level 3 | Total |
| |||||||||||
Real estate held for sale |
| $ | - |
|
| $ | - |
|
| $ | 1,776,281 |
|
| $ | 1,776,281 |
|
The following table reflects the Fund's assets measured at fair value on a non-recurring basis during the year ended December 31, 2018:
Item |
| Level 1 | Level 2 | Level 3 | Total |
| ||||||||||
Real estate held for sale |
| $ | - |
|
| $ | - |
|
| $ | 3,315,361 |
|
| $ | 3,315,361 |
|
The following table reflects the Fund's assets measured at fair value on a non-recurring basis during the year ended December 31, 2017:
Item |
| Level 1 | Level 2 | Level 3 | Total |
| ||||||||||
Real estate held for sale |
| $ | - |
|
| $ | - |
|
| $ | 4,795,566 |
|
| $ | 4,795,566 |
|
The following methods and assumptions were used to estimate the fair value of assets and liabilities:
| (a) | Secured loans (Level 2 and Level 3). For loans in which a specific allowance is established based on the fair value of the collateral, the Fund records the loan as nonrecurring Level 2 if the fair value of the collateral is based on an observable market price or a current appraised value. If an appraised value is not available or the fair value of the collateral is considered impaired below the appraised value and there is no observable market price, the Fund records the loan as nonrecurring Level 3. |
57 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
2. Summary of Significant Accounting Policies (continued)
| Fair value measurements (continued) | ||
|
|
|
|
|
| (b) | Real estate held for sale (Level 2 and Level 3). At the time of foreclosure, real estate held for sale is recorded at the lower of the recorded investment in the loan, plus any senior indebtedness, or at the property's estimated fair value, less estimated costs to sell, as applicable. The Fund periodically compares the carrying value of real estate held for use to expected undiscounted future cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated fair value. If the future undiscounted cash flows of real estate held for use exceed the carrying value or the fair value less estimated costs to sell for other than held for use real estate exceeds the carrying value, the asset value is recaptured to the estimated fair value, but not to exceed the original basis in the property after reversion. The Fund records real estate held for sale as nonrecurring Level 2 if the fair value of the real estate held for sale is based on an observable market price or a current appraised value. If an appraised value is not available and there is no observable market price, the Fund records real estate held for sale as nonrecurring Level 3. |
|
|
|
|
| Real estate held for sale
Real estate acquired through or in lieu of loan foreclosure that is to be held for any purpose other than use in operations, is initially recorded at the lower of the recorded investment in the loan, plus any senior indebtedness, or at fair value less estimated selling cost at the date of foreclosure if the plan of disposition is by way of sale. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, real estate held for sale is carried at the lower of the new cost basis or fair value less estimated costs to sell.
Costs of real estate improvements are capitalized, whereas costs relating to holding real estate are expensed. The portion of interest costs relating to development of real estate is capitalized.
Impairment losses of real estate held and held for sale are measured as the amount by which the carrying amount of a property exceeds its fair value less estimated costs to sell. Impairment losses of real estate held for use are determined by comparing the expected future undiscounted cash flows of the property, including any costs that must be incurred to achieve those cash flows, to the carrying amount of the property. If those net cash flows are less than the carrying amount of the property, impairment is measured as the amount by which the carrying amount of the asset exceeds its fair value. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations. |
58 |
Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
2. Summary of Significant Accounting Policies (continued)
Deferred loan origination fees
The Fund will capitalize loan origination fees and recognize the fees as an adjustment of the yield on the related loan. Deferred loan origination fees are amortized to income over the life of the loan under the effective interest method. Deferred loan origination fees of $637,277, $458,490, and $430,040 at December 31, 2019, 2018, and 2017, respectively, have been included in mortgage loans receivable, net, on the accompanying balance sheets. Deferred loan origination fees of $1,856,751, $1,942,449, and $1,530,373 in 2019, 2018, and 2017, respectively, were amortized into income during each applicable year.
Line of credit origination fees
The Fund has capitalized the related costs incurred in connection with its borrowings under the line of credit. These costs are being amortized using the straight-line method through maturity of the line of credit. The prepaid loan fees related to the line of credit are presented in the balance sheets as a direct deduction from the carrying amount of the line of credit.
Subscription liability
The Fund accepts subscription agreements and funds from prospective investors who wish to become members of the Fund. If approved for admittance into the Fund, the subscription funds are maintained in a separate subscription account until such time as the funds are needed in the normal course of the Fund's operations. Due to the calculation of the incentive fee, the Fund does not allow mid-month contributions or withdrawals. If the subscription funds are needed in the normal course of the Fund's operations on any day other than the first day of the month, the subscription funds will be borrowed at an annual rate of 6% for the odd days within the month the borrowing took place. After the monthly distribution is processed, the subscription fund borrowings, plus any interest accrued thereon, will be recognized as member contributions on behalf of the subscribing member. There were no subscription fund borrowings as of December 31, 2019, 2018, and 2017.
Income taxes
The Fund is a limited liability company for federal and state income tax purposes. Under the laws pertaining to income taxation of limited liability companies, no federal income tax is paid by the Fund as an entity. Individual members report on their federal and state income tax returns their share of Fund income, gains, losses, deductions and credits, whether or not any actual distribution is made to such member during a taxable year. Accordingly, no provision for income taxes besides the applicable minimum state tax or fees would be reflected in the accompanying financial statements.
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
2. Summary of Significant Accounting Policies (continued)
Income taxes (continued)
The Fund has evaluated its current tax positions and has concluded that as of December 31, 2019, 2018, and 2017 the Fund does not have any significant uncertain tax positions for which a reserve would be necessary.
Change in accounting principle
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenues from Contracts with Customers (Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In effect, companies are required to exercise further judgment and make more estimates prospectively. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU No. 2014-09 was effective January 1, 2019 for the Fund. The Fund has evaluated the new guidance and determined that interest income and income from servicing mortgage loans are outside the scope of ASC No. 606. The Fund also determined that fee income on residential mortgage loan originations is outside the scope of ASC No. 606 as it continues to be accounted for in accordance with ASC No. 948. As a result, the adoption of ASU No. 2014-09 did not have a material impact on its financial statements.
Subsequent events
The Fund has evaluated subsequent events through March 6, 2020, the date the financial statements were available to be issued. No subsequent events have occurred that would have a material impact on the presentation of the Fund's financial statements.
3. Fund Provisions
The Fund is an Oregon limited liability company. The rights, duties and powers of the members of the Fund are governed by the operating agreement. The following description of the Fund's operating agreement provides only general information. Members should refer to the Fund's operating agreement and offering circular for a more complete description of the provisions.
The Manager is in complete control of the Fund business, subject to the voting rights of the members on specified matters. The Manager acting alone has the power and authority to act for and bind the Fund.
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
3. Fund Provisions (continued)
Members may remove the Manager if: (i) the Manager commits an act of willful misconduct which materially adversely damages the Fund; or (ii) holders of at least seventy five percent of the outstanding membership interests, excluding the membership interests held by the Manager, vote in favor of such removal.
Profits and losses
Profits and losses accrued during any accounting period shall be allocated among the members in accordance with their respective membership interests maintained throughout that accounting period.
Election to receive distributions and incentive fees
Members are entitled, on a non-compounding basis, payable monthly in arrears, to 10% per annum non-guaranteed priority return ("Priority Return") on their invested capital. The Manager will share in any such distribution to the extent it acquires and holds membership interests.
Once all accrued Priority Return distributions have been made, remaining net income from operations generally shall be distributed 50% to the Fund's members, including the Manager to the extent it holds memberships interests, and 50% to the Manager as an incentive fee. The Manager earned $396,734, $805,848, and $909,476 in incentive fees during 2019, 2018, and 2017, respectively, as the Fund's return exceeded the Priority Return in every month in 2019, 2018, and 2017.
Reinvestment
Members have the option to compound their proportionate share of the Fund's monthly earnings.
Liquidity, capital withdrawals and early withdrawals
There is no public market for units of the Fund and none is expected to develop in the foreseeable future. There are substantial restrictions on transferability of membership interests. Any transferee must be a person that would have been qualified to purchase a member unit in the offering and a transferee may not become a substituted member without the consent of the Manager.
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
3. Fund Provisions (continued)
A member may withdraw as a member of the Fund and may receive a return of capital provided that the following conditions have been met: (i) the member has been a member of the Fund for a period of at least six (6) months; (ii) the member provides the Fund with a written request for a return of capital at least 60 days prior to such withdrawal; and (iii) the member requests a full withdrawal of all membership interest if their capital balance is less than 50,000 units or a minimum withdrawal request of 25,000 units, if their capital balance is greater than 50,000 units at the time the withdrawal is honored. The Fund will use its best efforts to honor requests for a return of capital subject to, among other things, the Fund's then cash flow, financial condition, compliance with regulatory and other limitations, such as ERISA thresholds, and prospective loans. If the Manager determines that there is available cash, the Manager shall honor such withdrawal request in accordance with the conditions stated above. Notwithstanding the foregoing, the Manager may, in its sole discretion, waive such withdrawal requirements or penalties if a member is experiencing undue hardship.
4. Mortgage Loans Receivable, Net
Mortgage loans receivable, net, consisted of the following at December 31, 2019:
Outstanding mortgage loans receivable |
| $ | 89,805,878 |
|
Unamortized deferred loan origination fees |
|
| (637,277 | ) |
Allowance for loan losses |
|
| (1,045,668 | ) |
Mortgage loans receivable, net |
| $ | 88,122,933 |
|
Mortgage loans receivable, net, consisted of the following at December 31, 2018:
Outstanding mortgage loans receivable |
| $ | 68,590,539 |
|
Unamortized deferred loan origination fees |
|
| (458,490 | ) |
Allowance for loan losses |
|
| (815,947 | ) |
Mortgage loans receivable, net |
| $ | 67,316,102 |
|
Mortgage loans receivable, net, consisted of the following at December 31, 2017:
Outstanding mortgage loans receivable |
| $ | 68,410,996 |
|
Unamortized deferred loan origination fees |
|
| (430,040 | ) |
Allowance for loan losses |
|
| (890,272 | ) |
Mortgage loans receivable, net |
| $ | 67,090,684 |
|
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
4. Mortgage Loans Receivable, Net (continued)
Activity in the allowance for loan losses was as follows for the years ended December 31, 2017, 2018, and 2019:
2017 Beginning balance |
| $ | 1,150,469 |
|
Provision for loan losses |
|
| 56,753 |
|
Write-offs |
|
| (316,950 | ) |
2017 Ending balance |
|
| 890,272 |
|
|
|
|
|
|
Provision for loan losses |
|
| 90,275 |
|
Write-offs |
|
| (164,600 | ) |
|
|
|
|
|
2018 Ending balance |
| $ | 815,947 |
|
|
|
|
|
|
Provision for loan losses |
|
| 776,382 |
|
Write-offs |
|
| (546,661 | ) |
|
|
|
|
|
2019 Ending balance |
| $ | 1,045,668 |
|
Allocation of the allowance for loan losses by collateral type as of December 31, 2019 consisted of the following (allocation of allowance is not an indication of expected future use):
Single family residential (1 - 4 units) |
| $ | 844,211 |
|
Land/Construction |
|
| 118,259 |
|
Commercial |
|
| 60,852 |
|
Multi-family residential (5 or more units) |
|
| 22,346 |
|
Total |
| $ | 1,045,668 |
|
Allocation of the allowance for loan losses by collateral type as of December 31, 2018 consisted of the following (allocation of allowance is not an indication of expected future use):
Single family residential (1 - 4 units) |
| $ | 686,885 |
|
Land/Construction |
|
| 113,893 |
|
Multi-family residential (5 or more units) |
|
| 15,169 |
|
Total |
| $ | 815,947 |
|
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
4. Mortgage Loans Receivable, Net (continued)
Allocation of the allowance for loan losses by collateral type as of December 31, 2017 consisted of the following (allocation of allowance is not an indication of expected future use):
Single family residential (1 - 4 units) |
| $ | 677,678 |
|
Land/Construction |
|
| 212,279 |
|
Multi-family residential (5 or more units) |
|
| 315 |
|
Total |
| $ | 890,272 |
|
5. Notes Payable - Junior Notes
The junior note program is a private debt offering by the Fund. Between April and September 2017, the Fund refinanced all junior notes from an interest rate of 10% to 8%. Between March and October 2019, the Fund refinanced all junior notes from an interest rate of 8% to 7%. The junior notes are secured by all assets of the Fund and are junior to the senior notes (see Note 6) and the line of credit balance held (see Note 7). The junior noteholders are given the option to reinvest their earned interest back into the note on a monthly basis. All junior notes hold a six-month maturity. Upon maturity, all junior noteholders have the option to renew their notes for another six-month term. As of December 31, 2019, 2018, and 2017, the notes payable within the junior note program held balances of $24,924,078, $28,386,836, and $33,805,946, respectively.
Interest expense on these notes amounted to $2,001,380, $2,256,675, and $3,095,246 for the years ended December 31, 2019, 2018, and 2017, respectively.
6. Notes Payable – Senior Notes
On March 1, 2018, the Company commenced a private debt offering of 6% Senior Secured Demand Notes. The offering was qualified by the Security and Exchange Commission in February 2018.
As of December 31, 2019, and 2018, the notes payable within the senior note program held a balance of $20,914,989 and $8,066,007, respectively.
Interest expense on these notes amounted to $896,365 and $254,860 for the years ended December 31, 2019 and 2018, respectively.
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
7. Line of Credit, Net
On January 31, 2013, the Fund entered into a revolving line of credit agreement with a financial institution that included a maximum borrowing limit of $5,000,000. The agreement was subject to a borrowing base calculation and was secured by substantially all of the Fund's assets. On April 30, 2014, the line of credit was extended and increased to include a maximum borrowing limit of $10,000,000. On December 11, 2015, the line of credit was extended and increased to include a maximum borrowing limit of $12,000,000. The annual interest rate was equal to the greater of 4.75% plus the 90-day LIBOR rate from time to time in effect or 5.75%. The interest rate as of December 31, 2015 was 5.50%.
During December 2015, the Fund entered into a new revolving line of credit agreement with a financial institution that included a maximum borrowing limit of $20,000,000. The credit agreement took effect on January 5, 2016. On March 20, 2017, the line of credit was amended to increase the borrowing limit to $25,000,000. The agreement is subject to a borrowing base calculation and is secured by substantially all of the Fund's assets. The annual interest rate was equal to the greater of 4.50% plus the one-month LIBOR rate from time to time in effect or 4.75%. On January 1, 2018, the line of credit was extended to January 1, 2020, the maximum borrowing limit was increased from $25,000,000 to $40,000,000, and the interest rate was lowered from one-month LIBOR plus 4.50% to one-month LIBOR plus 4.00%. On January 24, 2019, the line of credit was amended to lower the interest rate from one-month LIBOR plus 4.0% to one-month LIBOR plus 3.5%. On April 16, 2019, the line of credit was amended to lower the interest rate from one-month LIBOR plus 3.5% to one-month LIBOR plus 3.125%. On December 5, 2019, the Fund extended the line of credit to March 1, 2020. On February 24, 2020, the Fund extended the line of credit to March 1, 2022.
As of December 31, 2019, 2018, and 2017 the outstanding balance on the line of credit was $30,548,052, $20,858,384, and $19,020,350, respectively. The interest rate as of December 31, 2019, 2018 and 2017 was 4.82%, 6.50% and 6.06%, respectively. Interest expense on the line of credit amounted to $1,317,453, $1,454,564, and $1,075,991, for the years ended December 31, 2019, 2018, and 2017, respectively.
The line of credit agreement contains certain covenants and restrictions. The Fund was in compliance with these covenants and restrictions at December 31, 2019, 2018, and 2017.
Line of credit, net, consisted of the following at December 31, 2019:
Line of credit |
| $ | 30,548,052 |
|
Line of credit unamortized origination fees |
|
| - |
|
Line of credit, net |
| $ | 30,548,052 |
|
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
7. Line of Credit, Net (continued)
Line of credit, net, consisted of the following at December 31, 2018:
Line of credit |
| $ | 20,858,384 |
|
Line of credit unamortized origination fees |
|
| (79,695 | ) |
Line of credit, net |
| $ | 20,778,689 |
|
Line of credit, net, consisted of the following at December 31, 2017:
Line of credit |
| $ | 19,020,350 |
|
Line of credit unamortized origination fees |
|
| (6,299 | ) |
Line of credit, net |
| $ | 19,014,051 |
|
8. Related Party Transactions
Servicing fees
Servicing fees of .25% (3% annually) of the principal amount of each Fund loan are payable monthly to the Manager. Servicing fees earned by the Manager amounted to $2,351,619, $2,117,918, and $2,126,956, for the years ended December 31, 2019, 2018, and 2017, respectively. Servicing fees payable to the Manager amounted to $230,750, $181,531, and $176,575 as of December 31, 2019, 2018, and 2017, respectively.
Incentive fees
As described in Note 3, after payment to members of a Priority Return, the Manager is eligible to receive incentive fees. Incentive fees amounted to $396,734, $805,848, and $909,476 for the years ended December 31, 2019, 2018, and 2017, respectively. The Fund had a payable to the Manager for incentive fees of $39,684, $40,630, and $62,101 at December 31, 2019, 2018, and 2017, respectively.
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
8. Related Party Transactions (continued)
Operating expenses
For the years ended December 31, 2019, 2018, and 2017, the Manager elected to absorb all operating expenses of the Fund besides those which have been recorded in the Fund's statements of income and changes in members' equity.
9. Loan Concentrations and Characteristics
The loans are secured by recorded deeds of trust or mortgages. At December 31, 2019, there were 251 secured loans outstanding with 166 borrowers with the following characteristics:
Number of secured loans outstanding |
|
| 251 |
|
Total secured loans outstanding |
| $ | 89,805,878 |
|
Average secured loan outstanding |
| $ | 357,792 |
|
Average secured loan as percent of total secured loans |
|
| 0.40 | % |
Average secured loan as percent of members' equity |
|
| 1.69 | % |
Largest secured loan outstanding |
| $ | 2,727,400 |
|
Largest secured loan as percent of total secured loans |
|
| 3.04 | % |
Largest secured loan as percent of members' equity |
|
| 12.88 | % |
Number of secured loans over 90 days past due and still accruing interest |
|
| 1 |
|
Approximate investment in secured loans over 90 days past due interest and still accruing interest |
| $ | 1,000,000 |
|
Number of secured loans in foreclosure |
|
| 5 |
|
Approximate principal of secured loans in foreclosure |
| $ | 2,870,000 |
|
Number of secured loans on non-accrual status |
|
| 3 |
|
Approximate investment in secured loans on non-accrual status |
| $ | 1,800,000 |
|
Number of secured loans considered to be impaired |
|
| - |
|
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
9. Loan Concentrations and Characteristics (continued)
Approximate investment in secured loans considered to be impaired |
| $ | - |
|
Average investment in secured loans considered to be impaired |
| $ | - |
|
Approximate amount of foregone interest on loans considered to be impaired |
| $ | - |
|
Estimated amount of impairment on loans considered to be impaired (included in the allowance for loan losses) |
| $ | - |
|
Number of secured loans over 90 days past maturity |
|
| 2 |
|
Approximate principal of secured loans over 90 days past maturity |
| $ | 1,408,000 |
|
Number of states where security is located |
|
| 18 |
|
Number of counties where security is located |
|
| 72 |
|
At December 31, 2019, all of the Fund's loans are secured by recorded deeds of trust or mortgages in a first lien position on real property located throughout the United States. The various states within the United States in which secured property is located are as follows at December 31, 2019:
State |
| Loan Balances | Percentage |
| ||||
California |
| $ | 45,312,626 |
|
|
| 50.46 | % |
Oregon |
|
| 18,699,240 |
|
|
| 20.82 | % |
Other ** |
|
| 25,794,012 |
|
|
| 28.72 | % |
|
|
|
|
|
|
|
|
|
Totals |
| $ | 89,805,878 |
|
|
| 100.00 | % |
The various counties in which secured property is located are as follows at December 31, 2019:
County |
| Loan Balances | Percentage |
| ||||
Multnomah, Oregon |
| $ | 11,189,820 |
|
|
| 12.46 | % |
Alameda, California |
|
| 10,278,961 |
|
|
| 11.45 | % |
Other ** |
|
| 68,337,097 |
|
|
| 76.09 | % |
Totals |
| $ | 89,805,878 |
|
|
| 100.00 | % |
** None of the states or counties included in the "Other" categories above include loan concentrations greater than 10%.
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
9. Loan Concentrations and Characteristics (continued)
Loans by type of property
Single family residential (1 - 4 units) |
| $ | 72,503,981 |
|
Land/Construction |
|
| 10,156,566 |
|
Commercial |
|
| 5,226,176 |
|
Multi-family residential (5 or more units) |
|
| 1,919,155 |
|
|
| $ | 89,805,878 |
|
The schedule below reflects the balances of the Fund's secured loans with regards to the aging of interest payments due at December 31, 2019:
Current (0 to 30 days) |
| $ | 88,011,635 |
|
31 to 90 days |
|
| 386,359 |
|
91 days and greater |
|
| 1,407,884 |
|
|
| $ | 89,805,878 |
|
At December 31, 2019, all of the Fund's loans carry a term of six to twelve months; therefore, the entire loan balance of $89,805,878 is scheduled to mature in 2020. The scheduled maturities for 2019 include 4 loans totaling approximately $2,760,300 which are past maturity at December 31, 2019.
It is the Fund's experience that often times mortgage loans are either extended or repaid before contractual maturity dates, refinanced at maturity or may go into default and not be repaid by the contractual maturity dates. Therefore, the above tabulation is not a forecast of future cash collections.
The loans are secured by recorded deeds of trust or mortgages. At December 31, 2018, there were 187 secured loans outstanding with 135 borrowers with the following characteristics:
Number of secured loans outstanding |
|
| 187 |
|
Total secured loans outstanding |
| $ | 68,590,539 |
|
Average secured loan outstanding |
| $ | 366,794 |
|
Average secured loan as percent of total secured loans |
|
| 0.53 | % |
Average secured loan as percent of members' equity |
|
| 1.80 | % |
Largest secured loan outstanding |
| $ | 2,727,400 |
|
Largest secured loan as percent of total secured loans |
|
| 3.98 | % |
Largest secured loan as percent of members' equity |
|
| 13.42 | % |
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
9. Loan Concentrations and Characteristics (continued)
Number of secured loans over 90 days past due and still accruing interest |
|
| 3 |
|
Approximate investment in secured loans over 90 days past due interest and still accruing interest |
| $ | 1,800,000 |
|
Number of secured loans in foreclosure |
|
| 4 |
|
Approximate principal of secured loans in foreclosure |
| $ | 3,100,000 |
|
Number of secured loans on non-accrual status |
|
| 2 |
|
Approximate investment in secured loans on non-accrual status |
| $ | 1,600,000 |
|
Number of secured loans considered to be impaired |
|
| - |
|
Approximate investment in secured loans considered to be impaired |
| $ | - |
|
Average investment in secured loans considered to be impaired |
| $ | - |
|
Approximate amount of foregone interest on loans considered to be impaired |
| $ | - |
|
Estimated amount of impairment on loans considered to be impaired (included in the allowance for loan losses) |
| $ | - |
|
Number of secured loans over 90 days past maturity |
|
| 2 |
|
Approximate principal of secured loans over 90 days past maturity |
| $ | 1,600,000 |
|
Number of states where security is located |
|
| 18 |
|
Number of counties where security is located |
|
| 55 |
|
At December 31, 2018, all of the Fund's loans are secured by recorded deeds of trust or mortgages in a first lien position on real property located throughout the United States. The various states within the United States in which secured property is located are as follows at December 31, 2018:
State |
| Loan Balances | Percentage |
| ||||
California |
| $ | 36,396,871 |
|
|
| 53.06 | % |
Oregon |
|
| 11,155,240 |
|
|
| 16.27 | % |
Other ** |
|
| 21,038,428 |
|
|
| 30.67 | % |
|
|
|
|
|
|
|
|
|
Totals |
| $ | 68,590,539 |
|
|
| 100.00 | % |
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
9. Loan Concentrations and Characteristics (continued)
The various counties in which secured property is located are as follows at December 31, 2018:
County |
| Loan Balances | Percentage |
| ||||
Alameda, California |
| $ | 14,375,401 |
|
|
| 20.96 | % |
Multnomah, Oregon |
|
| 7,763,739 |
|
|
| 11.32 | % |
Other ** |
|
| 46,451,399 |
|
|
| 67.72 | % |
Totals |
| $ | 68,590,539 |
|
|
| 100.00 | % |
** None of the states or counties included in the "Other" categories above include loan concentrations greater than 10%.
Loans by type of property
Single family residential (1 - 4 units) |
| $ | 57,741,243 |
|
Land/Construction |
|
| 9,574,171 |
|
Multi-family residential (5 or more units) |
|
| 1,275,125 |
|
|
| $ | 68,590,539 |
|
The schedule below reflects the balances of the Fund's secured loans with regards to the aging of interest payments due at December 31, 2018:
Current (0 to 30 days) |
| $ | 65,498,665 |
|
31 to 90 days |
|
| 1,465,532 |
|
91 days and greater |
|
| 1,626,342 |
|
|
| $ | 68,590,539 |
|
At December 31, 2018, all of the Fund's loans carry a term of six to twelve months; therefore, the entire loan balance of $68,590,539 is scheduled to mature in 2019. The scheduled maturities for 2018 include 4 loans totaling approximately $3,100,000 which are past maturity at December 31, 2018.
It is the Fund's experience that often times mortgage loans are either extended or repaid before contractual maturity dates, refinanced at maturity or may go into default and not be repaid by the contractual maturity dates. Therefore, the above tabulation is not a forecast of future cash.
The loans are secured by recorded deeds of trust or mortgages. At December 31, 2017, there were 232 secured loans outstanding with 151 borrowers with the following characteristics:
Number of secured loans outstanding |
|
| 232 |
|
Total secured loans outstanding |
| $ | 68,410,996 |
|
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
9. Loan Concentrations and Characteristics (continued)
Average secured loan outstanding |
| $ | 294,875 |
|
Average secured loan as percent of total secured loans |
|
| 0.43 | % |
Average secured loan as percent of members' equity |
|
| 1.46 | % |
Largest secured loan outstanding |
| $ | 1,523,800 |
|
Largest secured loan as percent of total secured loans |
|
| 2.23 | % |
Largest secured loan as percent of members' equity |
|
| 7.54 | % |
Number of secured loans over 90 days past due and still accruing interest |
|
| 8 |
|
Approximate investment in secured loans over 90 days past due interest and still accruing interest |
| $ | 3,500,000 |
|
Number of secured loans in foreclosure |
|
| 9 |
|
Approximate principal of secured loans in foreclosure |
| $ | 4,500,000 |
|
Number of secured loans on non-accrual status |
|
| 6 |
|
Approximate investment in secured loans on non-accrual status |
| $ | 3,400,000 |
|
Number of secured loans considered to be impaired |
|
| - |
|
Approximate investment in secured loans considered to be impaired |
| $ | - |
|
Average investment in secured loans considered to be impaired |
| $ | - |
|
Approximate amount of foregone interest on loans considered to be impaired |
| $ | - |
|
Estimated amount of impairment on loans considered to be impaired (included in the allowance for loan losses) |
| $ | - |
|
Number of secured loans over 90 days past maturity |
|
| 9 |
|
Approximate principal of secured loans over 90 days past maturity |
| $ | 5,400,000 |
|
Number of states where security is located |
|
| 17 |
|
Number of counties where security is located |
|
| 61 |
|
72 |
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
9. Loan Concentrations and Characteristics (continued)
At December 31, 2017, all of the Fund's loans are secured by recorded deeds of trust or mortgages in a first lien position on real property located throughout the United States. The various states within the United States in which secured property is located are as follows at December 31, 2017:
State | Loan Balances | Percentage |
| |||||
California |
| $ | 26,746,441 |
|
|
| 39.10 | % |
Oregon |
|
| 16,181,682 |
|
|
| 23.65 | % |
Illinois |
|
| 9,050,185 |
|
|
| 13.23 | % |
Other ** |
|
| 16,432,688 |
|
|
| 24.02 | % |
|
|
|
|
|
|
|
|
|
Totals |
| $ | 68,410,996 |
|
|
| 100.00 | % |
The various counties in which secured property is located are as follows at December 31, 2017:
County | Loan Balances | Percentage |
| |||||
Alameda, California |
| $ | 14,858,394 |
|
|
| 21.72 | % |
Multnomah, Oregon |
|
| 8,852,996 |
|
|
| 12.94 | % |
Cook, Illinois |
|
| 6,991,661 |
|
|
| 10.22 | % |
Other ** |
|
| 37,707,945 |
|
|
| 55.12 | % |
Totals |
| $ | 68,410,996 |
|
|
| 100.00 | % |
** None of the states or counties included in the "Other" categories above include loan concentrations greater than 10%.
Loans by type of property |
|
|
| |
Single family residential (1 - 4 units) |
| $ | 52,074,687 |
|
Land/Construction |
|
| 16,312,127 |
|
Multi-family residential (5 or more units) |
|
| 24,182 |
|
|
| $ | 68,410,996 |
|
The schedule below reflects the balances of the Fund's secured loans with regards to the aging of interest payments due at December 31, 2017:
Current (0 to 30 days) |
| $ | 60,471,320 |
|
31 to 90 days |
|
| 1,751,300 |
|
91 days and greater |
|
| 6,188,376 |
|
|
| $ | 68,410,996 |
|
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Table of Contents |
IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
9. Loan Concentrations and Characteristics (continued)
At December 31, 2017, all of the Fund's loans carry a term of six to twelve months; therefore, the entire loan balance of $68,410,996 is scheduled to mature in 2018. The scheduled maturities for 2018 include 19 loans totaling approximately $7,300,000 which are past maturity at December 31, 2017.
It is the Fund's experience that often times mortgage loans are either extended or repaid before contractual maturity dates, refinanced at maturity or may go into default and not be repaid by the contractual maturity dates. Therefore, the above tabulation is not a forecast of future cash collections.
10. Real Estate Held for Sale Concentrations and Characteristics
The following schedule reflects the net costs of real estate properties acquired through or in lieu of foreclosure and held for sale, if any, and the recorded reductions to estimated fair values, including estimated costs to sell when applicable, and other related activity as of and for the year ended December 31, 2019:
Beginning balance |
| $ | 3,315,361 |
|
Improvement costs |
|
| 706,352 |
|
Converted to held for use |
|
| (441,384 | ) |
Sales of real estate |
|
| (1,804,048 | ) |
Ending balance |
| $ | 1,776,281 |
|
The following schedule reflects the net costs of real estate properties acquired through or in lieu of foreclosure and held for sale, if any, and the recorded reductions to estimated fair values, including estimated costs to sell when applicable, and other related activity as of and for the year ended December 31, 2018:
Beginning balance |
| $ | 4,795,566 |
|
Costs of real estate acquired through or in lieu of foreclosure |
|
| 5,102,467 |
|
Improvement costs |
|
| 2,543,844 |
|
Converted to held for use |
|
| (6,414,813 | ) |
Sales of real estate |
|
| (2,711,703 | ) |
Ending balance |
| $ | 3,315,361 |
|
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
10. Real Estate Held for Sale Concentrations and Characteristics (continued)
The following schedule reflects the net costs of real estate properties acquired through or in lieu of foreclosure and held for sale, if any, and the recorded reductions to estimated fair values, including estimated costs to sell when applicable, and other related activity as of and for the year ended December 31, 2017:
Beginning balance |
| $ | 2,925,184 |
|
Costs of real estate acquired through or in lieu of foreclosure |
|
| 1,532,237 |
|
Improvement costs |
|
| 2,084,631 |
|
Sales of real estate |
|
| (1,746,486 | ) |
Ending balance |
| $ | 4,795,566 |
|
At December 31, 2019, the real estate held for sale properties included one single family residential property in Alameda County, California.
At December 31, 2018, the real estate held for sale properties included five single family residential properties in Cook County, Illinois and one single family property in Alameda County, California.
At December 31, 2017, the real estate held for sale properties included two multi-family residential properties in Cook County, Illinois and five single family residential properties in Cook County, Illinois.
11. Rental Property
The Company rented three residential buildings during 2019 and converted one residential building from real estate held for sale to rental property during 2019.
Rental property consisted of the following:
Land |
| $ | 32,461 |
|
Buildings and building improvements |
|
| 7,143,979 |
|
|
|
| 7,176,440 |
|
Accumulated depreciation and amortization |
|
| (65,069 | ) |
|
| $ | 7,111,371 |
|
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
11. Rental Property (continued)
The Company renovated and rented three residential buildings during 2018, which were converted from real estate held for sale to rental property as of December 31, 2018.
Rental property consisted of the following:
Land |
| $ | 29,113 |
|
Buildings |
|
| 6,385,700 |
|
|
|
| 6,414,813 |
|
Accumulated depreciation and amortization |
|
| - |
|
|
| $ | 6,414,813 |
|
At December 31, 2019, the rental properties included two multi-family residential properties and two single family residential properties located in Cook County, Illinois.
At December 31, 2018, the rental properties included two multi-family residential properties and one single family residential property located in Cook County, Illinois.
At December 31, 2017, there were no rental properties.
Depreciation expense for the year ended December 31, 2019 amounted to $65,069.
12. Future Minimum Rent Receivable
The Fund has entered into various lease agreements with tenants that generally do not exceed a lease term of one year. The minimum future cash rents receivable under non-cancelable operating leases are approximately $290,000 as of December 31, 2019.
13. Commitments and Contingencies
Construction loans
At December 31, 2019, the Fund had 140 approved construction loans with a total borrowing limit of approximately $20,149,900. 120 loans had undisbursed construction funds, totaling approximately $9,900,000. Disbursements are made at various completed phases of the construction project. Undistributed amounts will be funded by a combination of new note program borrowings, line of credit draws, member contributions, reinvestments of earnings, and the payoff of principal on current loans.
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IRON BRIDGE MORTGAGE FUND, LLC
Notes to Financial Statements
December 31, 2019, 2018, and 2017
_________________________
13. Commitments and Contingencies (continued)
Construction loans (continued)
At December 31, 2018, the Fund had 107 approved construction loans with a total borrowing limit of approximately $18,400,000. 87 loans had undisbursed construction funds, totaling approximately $9,500,000. Disbursements are made at various completed phases of the construction project. Undistributed amounts will be funded by a combination of new note program borrowings, line of credit draws, member contributions, reinvestments of earnings, and the payoff of principal on current loans.
At December 31, 2017, the Fund had 148 approved construction loans with a total borrowing limit of approximately $22,000,000. 94 loans had undisbursed construction funds, totaling approximately $7,650,000. Disbursements are made at various completed phases of the construction project. Undistributed amounts will be funded by a combination of new note program borrowings, line of credit draws, member contributions, reinvestments of earnings, and the payoff of principal on current loans.
Undistributed amounts will be funded by a combination of new note program borrowings, line of credit draws, member contributions, reinvestments of earnings, and the payoff of principal on current loans.
Legal proceedings
The Fund is involved in various legal actions arising in the normal course of business. In the opinion of management, such matters will not have a significant adverse effect on the results of operations or financial position of the Fund.
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__________
* | Incorporated by reference to Exhibits to Iron Bridge Mortgage, LLC Regulation A Offering Statement on Form 1-A as filed with the Securities and Exchange Commission (File No. 024-10777) |
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SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Portland, State of Oregon, on April 29, 2020.
| IRON BRIDGE MORTGAGE FUND, LLC | ||
| |||
By: | IRON BRIDGE MANAGEMENT GROUP, LLC | ||
| Its: | Manager |
By: | /s/ Gerard Stascausky | ||
| Name: | Gerard Stascausky | |
| Title: | Managing Director |
Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer in the capacities and on the dates indicated.
| IRON BRIDGE MANAGEMENT GROUP, LLC | ||
| |||
By: | /s/ Gerard Stascausky | ||
| Name: | Gerard Stascausky | |
| Title: | Managing Director of Iron Bridge Management Group, LLC (Principal Executive Officer) |
By: | /s/ Sarah Gragg Stascausky | ||
| Name: | Sarah Gragg Stascausky | |
| Title: | Managing Director of Iron Bridge Management Group, LLC (Principal Financial Officer and Principal Accounting Officer) |
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