<PAGE> 1
As filed with the Securities and Exchange Commission on December 21, 2000
Registration No. 333-_________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
VESTIN FUND II, LLC
(Exact name of registrant as specified in governing instruments)
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
(Address of Principal executive offices)
Michael V. Shustek
Director
VESTIN MORTGAGE, INC.
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
(Name and address of agent for service)
The Commission is requested to send
copies of all communications to:
Hillel T. Cohn, Esq.
Squire, Sanders & Dempsey LLP
801 South Figueroa Street
Los Angeles, CA 90017
Approximate date of commencement of proposed sale to the public. As soon as
practicable following effectiveness of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, check the following box and
list the Securities Act registration statement number of the earlier
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Amount Being Offering Price Aggregate Amount of
Securities Being Registered Registered (1) Per Unit Offering Price Registration Fee
--------------------------- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Unit of Limited Liability
Company Interest 50,000,000 $10.00 $500,000,000 $132,000
---------- ------ ------------ --------
</TABLE>
(1) The number of units being registered includes units offered under our
distribution reinvestment plan.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
______________, 200_
<PAGE> 3
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED , 2000
PROSPECTUS
50,000,000 Units
of Limited Liability Company Interest
VESTIN FUND II, LLC
Vestin Fund II, LLC is a Nevada limited liability company (the "Fund"). We
invest in mortgage loans, which are loans where our collateral is real property.
The loans will be selected for us by our Manager, Vestin Mortgage, Inc.
(formerly Capsource, Inc.).
We are offering and selling to the public a minimum of 150,000 and up to a
maximum of 50,000,000 units for $10.00 per unit. This offering includes units to
be issued under our distribution reinvestment plan.
<TABLE>
<CAPTION>
Price to Selling Commissions/ Proceeds to
Public Expense Reimbursement(2) the Fund
------------------ ------------------------ ------------------
<S> <C> <C> <C>
Per Unit........................... $ 10.00 -- $ 10.00
------------------ ------------------------ ------------------
Total Minimum...................... $ 1,500,000.00(1) $ 1,500,000.00(1)
Total Maximum...................... $500,000,000.00(1) -- $500,000,000.00(1)
================== ======================== ==================
</TABLE>
(1) Includes units purchased under our distribution reinvestment plan.
(2) All selling commissions and expenses related to this offering will be
paid by Vestin Mortgage. To the extent that such expenses consist of
payments to non-affiliated third parties, such payments will be deemed a
capital contribution to us, up to a maximum of $2,000,000.
The most significant risks to your investment include:
- Restricted right to sell or transfer your units
- Investment in unspecified mortgage loans
- Restricted distributions and increased risk due to leveraging
- Total reliance on Vestin Mortgage
- Conflicts of interest for Vestin Mortgage
- Recent organization and lack of significant assets, operating
history and financing sources.
- Tax risks of the offering and membership in the Fund
You should read the complete discussion of the risk factors beginning on
page 7.
Units will be sold by Vestin Capital, Inc. (formerly DM Financial Services,
Inc.) , the lead dealer selling our units in this offering, as well as by Vestin
Mortgage, where permitted. As our "lead dealer," Vestin Capital will be the
primary seller of units and may also engage other dealers to sell units. Vestin
Capital and Vestin Mortgage are both owned by the same company, Vestin Group,
Inc. (formerly known as Sunderland Corporation).
You must purchase at least 200 units for $2,000. To purchase units, you must
first sign the enclosed subscription agreement and make the representations and
warranties included in that agreement. Initially, your money will be placed in
an escrow account with _________________. The escrow will end upon the earlier
of our sale of a minimum of 150,000 units or December 31, 2001. If we fail to
sell 150,000 units and receive proceeds of $1,500,000 on or before December 31,
2001, BankWest will promptly return your money without interest. If we sell the
minimum on or before December 31, 2001, we will continue to sell up to
50,000,000 units. We will terminate the offering on ____________, 2003.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE UNITS OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. NO ONE IS PERMITTED TO MAKE
ANY ORAL OR WRITTEN PREDICTIONS ABOUT THE CASH BENEFITS OR TAX CONSEQUENCES YOU
WILL RECEIVE FROM YOUR INVESTMENT.
Prospectus dated ______________, 2000.
<PAGE> 4
NOTICE TO CALIFORNIA RESIDENTS
All certificates representing units resulting from any offers or sales of units
to California residents will bear the following legend restricting transfer:
It is unlawful to consummate a sale or transfer of this security, or any
interest therein, or to receive any consideration therefore, without the
prior written consent of the Commissioner of the Corporation of the
State of California, except as permitted in the Commissioner's Rules.
A copy of the applicable rule of the California Commissioner of
Corporations will be furnished to each California investor by Vestin
Mortgage.
NOTICE TO PENNSYLVANIA RESIDENTS
Because the minimum closing amount is less than $10,000,000, you are cautioned
to carefully evaluate our ability to fully accomplish our stated objectives and
to inquire as to the current dollar volume of program subscriptions.
<PAGE> 5
CROSS REFERENCE SHEET
--------------------------------------------------------------------------------
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY FORM S-11
<TABLE>
<CAPTION>
Item number and Caption Location in Prospectus
<S> <C>
1. Forepart of Registration Statement Outside Front Cover Page of Prospectus
and Outside Front Cover Page
2. Inside Front and Outside Back Cover Inside Front Cover Page of Prospectus
Pages of Prospectus
3. Summary Information, Risk Factors Summary; Risk Factors
and Ratio of Earnings to Fixed Charges
4. Determination of Offering Price *
5. Dilution *
6. Selling Security Holders *
7. Plan of Distribution Plan of Distribution
8. Use of Proceeds Use of Proceeds
9. Selected Financial Data Selected Financial Data
10. Management's Discussion and Analysis of Management's Discussion and Analysis
Financial Condition and Results of Operations of Financial Condition and Results
of Operations
11. General Information as to Registrant Front Cover Page; Summary; Management;
Summary of Operating Agreement; Rights
of Members; and Description of Units
12. Policy with Respect to Certain Activities Business; Compensation of Manager; Summary
of Operating Agreement; Rights of Members
and Description of Units; Reports to Members
13. Investment Policies of Registrant Business; How the Company Protects Its Rights
as a Lender; Summary of Operating Agreement,
Rights of Members and Description of Units
14. Description of Real Estate *
15. Operating Data *
16. Tax Treatment of Registrant and Its Security Risk Factors; Federal Income Tax Consequences
Holders
17. Market Price of and Dividends on the Registrant's *
Common Equity and Related Stockholder Matters
18. Description and Executive Officers Summary of Operating Agreement; Rights of
Members and Description of Units
19. Legal Proceedings *
20. Security Ownership of Certain Beneficial Owners Management
and Management
21. Directors and Executive Officers Management
22. Executive Compensation Management; Compensation of the Manager
23. Certain Relationship and Related Transactions Conflicts of Interest; Management; Business
24. Selection, Management and Custody of Registrant's Compensation of Manager; Business
Investments
25. Policies with Respect to Certain Transactions Risk Factors; Conflicts of Interest; Business;
Summary of Operating Agreement; Rights of
Members and Description of Units
26. Limitation of Liability Fiduciary Responsibility; Summary of Operating
Agreement; Rights of Members and Description
of Units
27. Financial Statements and Information Financial Statements
28. Interest of Named Experts and Counsel Legal Matters
29. Disclosure of Commission Position on Fiduciary Responsibility
Indemnification for Securities Act Liabilities
</TABLE>
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY...................................................................................................... 1
RISK FACTORS................................................................................................. 7
Investment Risks............................................................................................. 7
You will not have the benefit of reviewing the past performance of the Fund.................................. 7
Your units lack liquidity and marketability.................................................................. 7
You have a limited ability to have your units redeemed....................................................... 7
Depending upon the number of units we sell, we may be unable to diversify our loan
portfolio adequately or meet investment objectives........................................................... 7
We must rely on Vestin Mortgage to manage our operations and select our loans for investment................. 8
We depend on key personnel of Vestin Mortgage................................................................ 8
You may face a delay before distributions begin.............................................................. 8
Any borrowing by us will increase your risk and reduce the amount we have available
to distribute to members..................................................................................... 8
Risks of the Mortgage Lending Business....................................................................... 8
Defaults on our mortgage loans will decrease our revenues and your distributions............................. 8
Our loans are not guaranteed by any government agency........................................................ 9
Our mortgage loans will not be marketable and we expect no secondary market to develop....................... 9
Our loan portfolio may be riskier if it is not diversified geographically.................................... 9
We may have difficulty protecting our rights as a secured lender............................................. 10
By becoming the owner of property, we may become liable for unforeseen environmental obligations............. 10
Our results are subject to fluctuations in interest rates and other economic conditions...................... 10
We face competition for mortgage loans that may reduce available yields and fees available................... 11
Conflicts of Interest Risks.................................................................................. 11
Vestin Mortgage will face conflicts of interest concerning the allocation of its personnel's time............ 11
Vestin Mortgage will face conflicts of interest arising due to our fee structure............................. 12
Vestin Mortgage will face conflicts of interest relating to other investments in mortgage loans.............. 12
We may not have control over joint ventures with affiliates.................................................. 12
Lack of Control by Members................................................................................... 12
Your right to vote is limited and you are bound by majority vote............................................. 12
Your interest in the Fund may be diluted as we sell additional units......................................... 12
The value of your units may decrease below ten dollars per unit.............................................. 13
Risks Related to Vestin Capital.............................................................................. 13
Vestin Capital has a limited operating history and track record in public offerings.......................... 13
Vestin Capital is an Affiliate of Vestin Mortgage............................................................ 13
Federal Income Tax Risks..................................................................................... 13
Your cash flow and distributions will be reduced if we are taxed as a corporation............................ 13
If we are deemed to not be engaged in a trade or business, the tax benefits of partnership
status will be adversely affected............................................................................ 13
An IRS audit of our books and records could result in an audit of your tax returns........................... 13
Inconsistencies between federal, state and local tax rules may adversely affect your return.................. 14
Retirement Plan Risks........................................................................................ 14
An investment in the Fund may not qualify as an appropriate investment under all retirement plans............ 14
USE OF PROCEEDS.............................................................................................. 15
INVESTOR SUITABILITY STANDARDS............................................................................... 16
</TABLE>
i
<PAGE> 7
<TABLE>
<S> <C>
OUR BUSINESS STRATEGY........................................................................................ 19
INVESTMENT OBJECTIVES AND POLICIES........................................................................... 20
Acquisition and Investment Policies.......................................................................... 20
Mortgage Loans to Affiliates................................................................................. 23
Purchase of Loans from Vestin Mortgage and its Affiliates.................................................... 23
Types of Loans We Intend to Invest In........................................................................ 24
Prepayment Penalties and Exit Fees........................................................................... 25
Balloon Payment.............................................................................................. 25
Borrowing.................................................................................................... 25
Repayment of Mortgages on Sales of Properties................................................................ 26
No Trust or Investment Company Activities.................................................................... 26
Various Other Policies and Procedures........................................................................ 26
Competition and General Economic Conditions.................................................................. 26
Regulation................................................................................................... 26
MANAGEMENT................................................................................................... 28
Our Management............................................................................................... 28
Vestin Mortgage.............................................................................................. 28
Removal of Vestin Mortgage as Manager........................................................................ 28
Evaluation and Acquisition by Vestin Mortgage................................................................ 29
Mortgage Loans............................................................................................... 29
Prior Experience............................................................................................. 29
Directors and Executive Officers of Vestin Mortgage and Vestin............................................... 33
Share ownership.............................................................................................. 36
COMPENSATION OF VESTIN MORTGAGE AND AFFILIATES............................................................... 38
CONFLICTS OF INTEREST........................................................................................ 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................ 43
FIDUCIARY RESPONSIBILITY..................................................................................... 44
Indemnification.............................................................................................. 45
SUMMARY OF OPERATING AGREEMENT, RIGHTS OF MEMBERS AND DESCRIPTION OF UNITS................................... 46
Your Status.................................................................................................. 46
Limited Liability of Members................................................................................. 46
Term of the Fund............................................................................................. 46
Meetings..................................................................................................... 46
Voting and Other Rights of Members........................................................................... 46
Capital Accounts............................................................................................. 47
Capital Contribution of Vestin Mortgage...................................................................... 47
Unit Repurchases and Deemed Distributions.................................................................... 47
Write-Down of Investments.................................................................................... 47
Members' Return on Investment................................................................................ 47
Distribution Reinvestment Plan............................................................................... 48
Reinvestment of Proceeds of Capital Transactions............................................................. 49
Assignment and Transfer of Units............................................................................. 49
Repurchase of Units, Withdrawal from the Fund................................................................ 49
Special Power of Attorney.................................................................................... 50
FEDERAL INCOME TAX CONSEQUENCES.............................................................................. 51
Classification as a Partnership.............................................................................. 52
We Will Not Be Classified As A Publicly Traded Partnership................................................... 52
General Principles of Partnership Taxation................................................................... 54
</TABLE>
ii
<PAGE> 8
<TABLE>
<S> <C>
Determination of Basis in Units..............................................................................
Allocations of Profits and Losses............................................................................ 55
Limitations on the Deduction of Losses....................................................................... 55
The Basis Limitation......................................................................................... 55
The At Risk Limitation....................................................................................... 55
The Passive Loss Rules....................................................................................... 55
Computation of Gain or Loss on Sale or Redemption of Units................................................... 56
Character of Gain or Loss.................................................................................... 56
Tax Rates on a Partner's Share of Ordinary Income from the Partnership....................................... 56
Distributions and Deemed Distributions....................................................................... 56
Depreciation................................................................................................. 57
Investment Interest.......................................................................................... 57
Tax Treatment of Tax-Exempt Entities......................................................................... 57
Partnership Tax Returns, Tax Information and Audits.......................................................... 58
Vestin Mortgage is Tax Matters Partner....................................................................... 59
Original Issue Discount Rules................................................................................ 59
Market Discount.............................................................................................. 59
No Section 754 Election--Impact on Subsequent Purchasers..................................................... 59
Treatment of Compensation of Vestin Mortgage................................................................. 60
Possible Legislative Tax Changes............................................................................. 61
State and Local Taxes........................................................................................ 61
ERISA Considerations......................................................................................... 61
Annual Valuation............................................................................................. 61
Plan Assets Generally........................................................................................ 62
HOW WE PROTECT OUR RIGHTS AS A LENDER........................................................................ 64
Overview of Mortgages........................................................................................ 64
Foreclosure.................................................................................................. 64
Environmental Risks.......................................................................................... 65
Second Mortgages; Rights of Senior Mortgages................................................................. 65
Statutory Rights of Redemption............................................................................... 66
Anti-Deficiency Legislation.................................................................................. 66
Bankruptcy Laws.............................................................................................. 67
Enforceability of Certain Provisions......................................................................... 67
REPORTS TO MEMBERS........................................................................................... 69
PLAN OF DISTRIBUTION......................................................................................... 70
LEGAL MATTERS................................................................................................ 71
EXPERTS...................................................................................................... 71
AVAILABLE INFORMATION........................................................................................ 71
</TABLE>
iii
<PAGE> 9
SUMMARY
Because this is a summary, it does not contain all the information that may be
important to you. Before you invest, you should read this entire prospectus
carefully, including the section entitled "Risk Factors," beginning at page 7,
and the Financial Statements and Notes, beginning at page F-1
VESTIN FUND II, LLC Vestin Fund II, LLC was organized in
December 2000 as a Nevada limited liability
company. Under our Operating Agreement, our
existence ends on December 31, 2020, unless
the members vote to extend our duration. In
this prospectus we refer to Vestin Fund II,
LLC as "the Fund", "we," "us", or "our." Our
offices are at 2901 El Camino Avenue, Suite
206, Las Vegas, Nevada 89102, and our
telephone number is (702) 227-0965.
Our Manager...................... Our Manager is Vestin Mortgage, Inc., a
Nevada corporation, which was incorporated
in 1997 as Capsource, Inc. Its executive
offices are at 2901 El Camino Avenue, Suite
206, Las Vegas, Nevada 89102, and its
telephone number is (702) 227-0965. Vestin
Mortgage is a mortgage broker licensed in
the State of Nevada since 1997.
Investment Policies.............. We will invest in mortgage loans where our
collateral is real property located anywhere
in the United States. There may be
commercial or residential buildings on the
real property, but our collateral may also
consist of real property with buildings
under construction or no physical structures
at all. The loans will be selected for us by
Vestin Mortgage from among loans obtained by
Vestin Mortgage or mortgage brokers with
which we are not affiliated. We believe
these loans will be attractive to borrowers
because of the expediency of Vestin
Mortgage's loan approval and funding
process, which takes from 10 to 20 days. See
"Business Strategy" on page 19.
We do not intend to invest in or own real
property. However, we may own real property
if we foreclose on a defaulted loan.
We expect to obtain a line of credit which
we currently intend to use to expand our
lending capacity, operate and develop for
resale properties on which we have
foreclosed, and allocate to other general
business purposes. Our total indebtedness
under the line of credit will not exceed 70%
of the fair market value of the outstanding
mortgage loans in our loan portfolio.
You will not receive any distributions on
your investment before we invest proceeds of
this offering in mortgage loans and receive
interest payments on those loans.
Summary Risk Factors............. The following are some of the significant
risks concerning your investment:
- There is no public trading market for the
units, and we do not expect one to ever
develop. Further, the transfer and
redemption of your units is restricted.
Consequently, you will have a difficult
time trying to obtain cash for your
units.
- We rely on Vestin Mortgage, our Manager,
for the day-to- day management of our
business and the selection of our
mortgages.
- If we do not remain qualified as a
partnership for federal income tax
purposes, we would be subject to the
payment of tax on our income at
<PAGE> 10
corporate rates, which would reduce the
amount of funds available for payment of
distributions to you.
- Any borrowing by us will increase the
risk of your investment and reduce the
amount we have available to distribute to
you.
- Real estate investments are subject to
cyclical economic trends which are out of
our control.
<PAGE> 11
- Vestin Mortgage has not yet identified
the mortgage loans that we will invest in
with the proceeds of this offering. As a
result, you will not have an opportunity
to evaluate for yourself the real
properties that will constitute our
collateral or the creditworthiness of our
borrowers.
- We were formed in December 2000 and have
no significant assets, no operating
history and no current sources of
financing.
Before you invest in the Fund, you should
carefully review the complete discussion of
"Risk Factors" beginning on page 7 of this
prospectus.
Estimated Use of Proceeds
of Offering...................... We anticipate that we will invest in
mortgage loans approximately 97% of the
proceeds of this offering and the
distributions reinvested under our
reinvestment plan. We will use approximately
3% of offering proceeds as a working capital
reserve.
Conflicts of Interest............ Vestin Mortgage will face various conflicts
of interest resulting from its activities,
including the following:
- Vestin Mortgage will receive substantial
fees from borrowers for obtaining,
processing, making and brokering,
managing and selling of mortgage loans,
as well as for other services. The fees
for these services are described in
greater detail under "Compensation to
Vestin Mortgage and Affiliates" in this
summary and as set forth in greater
detail in the main body of this
prospectus. Vestin Mortgage's
compensation is based on the volume and
size of the mortgages selected for us,
and our interests may diverge from those
of Vestin Mortgage and Michael Shustek,
the indirect owner of a controlling
interest in Vestin Mortgage, in deciding
whether we should invest in a particular
loan.
- Vestin Mortgage will be receiving fees
from borrowers that would otherwise
increase our returns. These fees include
the fees listed under "Fees Paid by
Borrower" in the above mentioned
compensation description. Because Vestin
Mortgage receives all of these fees, our
interests will diverge from those of
Vestin Mortgage and Mr. Shustek when
Vestin Mortgage determines whether to
charge higher interest rates and risk
losing fees from the loans.
- Vestin Mortgage must allocate its time
between our activities and its other
activities. These other activities
include its current activities as a
licensed mortgage broker and acting as
the manager of DM Mortgage Investors,
LLC, a fund with objectives similar to
ours. Additional such funds may be formed
by Vestin Mortgage in the future.
2
<PAGE> 12
Vestin Group, Vestin Mortgage
and Their Affiliates
The following chart shows the ownership structure of the various persons
and entities that are affiliated with Vestin and Vestin Mortgage:
Michael V. Shustek
Vestin Group, Inc. Del Mar Mortgage, Inc.
Officers and Directors include: (Licensed mortgage
Michael Shustek, broker)
Chairman of the Board, CEO, 100% owned by
and controlling shareholder Michael Shustek
Stephen Byrne, President
Lance Bradford, CFO, Secretary
Vestin Capital Vestin Mortgage
(Lead Dealer) (Manager and initial
100% owned by Vestin Member of DM LLC and
Group Vestin Fund II, LLC)
100% owned by Vestin Group
DM Mortgage Investors, LLC ("DM LLC")
(A $100 million fund with
investment objectives
similar to ours)
Compensation to Vestin Mortgage.. Vestin Mortgage and Affiliates will receive
the following compensation:
<TABLE>
<CAPTION>
<S> <C> <C>
Type of Compensation Form of Compensation
Offering Stage:
Vestin Mortgage's capital
account in the Company will
be credited up to a maximum
of $2,000,000 for offering
expenses paid by Vestin
Mortgage on our behalf to
third parties that are not
affiliated with Vestin
Mortgage.................... Deemed capital contribution
up to $2,000,000.00
Operational Stage:
Where the fees below are described as competitive fees or based on local
market conditions, that means the fees are determined by price competition
within a given market. To ensure that our fees remain competitive, we will
directly contact our competition, such as major banks in the local market
or other relevant commercial lenders. We expect that the interest rate on
the loans in which we invest will be 2-3 points higher than comparable
loans made by banks and that the fees paid to Vestin Mortgage will be 2-3
points higher than similar fees charged by conventional lenders. We
believe that this rate structure is consistent with rates and fees charged
by other non-conventional lenders. References below to local law also
contemplate additional requirements imposed by local or state law, such as
usury laws.
</TABLE>
3
<PAGE> 13
<TABLE>
<CAPTION>
Paid by Borrower
<S> <C>
Loan Brokerage Fee.............................. 2%-6% of each loan, competitive fee based
on local market conditions
Loan Evaluation and Processing Fees............. 2%-5% of each loan, competitive fee based
on local market conditions
Servicing Fee for Administering Loans........... Annual fee of up to 0.25% of outstanding
principal
Loan Extension Fee.............................. 2%-5% of outstanding principal, as
permitted by local law and local market
conditions
Paid by Us
Annual Management Fee........................... Up to 0.25% of our aggregate capital
contributions, paid monthly in arrears
Real Estate Brokerage Fees on Resales Of
Foreclosed Property............................. If a foreclosure occurs, up to 3% of
proceeds to Vestin Mortgage where it
substantially contributed to sale; up to
6% for all persons involved.
</TABLE>
Members' Return on
Investment................. Our mortgage loans will generate monthly
payments of interest or principal, which
Vestin Mortgage intends to distribute to
you. Distributions of interest received will
be paid monthly by cash or distribution
reinvestment. All net income attributable to
interest payments from borrowers will be
distributed to the members, which will
include an allocation to Vestin Mortgage
corresponding to the relative size of Vestin
Mortgage's capital account.
We will also receive net proceeds in the
form of the repayment of principal or the
prepayment of a mortgage loan, or net
proceeds of a foreclosure sale. We may not
actually distribute these proceeds as cash,
but under our operating agreement, for tax
purposes only, any such proceeds are deemed
to be distributed to the members and then
recontributed to us by the member. Any
distributions of net proceeds of loan
repayments will be made to the members,
including Vestin Mortgage, pro rata based
upon their capital accounts.
Distribution Reinvestment
Plan....................... You may elect to reinvest the distributions
of our net income that you receive from the
Fund when you return your subscription
agreement or at a later date. If you so
elect to participate in our distribution
reinvestment plan, you will be taxed on your
share of our taxable income even though you
will not receive any cash distributions.
Additionally, solely for tax purposes, you
will be deemed to have received and
recontributed to us any proceeds we receive
from loan repayments, foreclosures, other
capital transactions, or any loan
modifications treated as a disposition for
tax purposes. We believe that this
characterization will not affect the tax
liability of our members. However, if the
Internal Revenue Service unexpectedly were
to disagree, you may have a tax liability
with no cash distributions to pay that
liability. We may end the distribution
reinvestment plan at any time. See "Summary
of Operating Agreement, Rights of Members
and Description of Units--Distribution
Reinvestment Plan."
4
<PAGE> 14
ERISA Considerations....... The section of this prospectus entitled
"ERISA Considerations" describes the effect
the purchase of units will have on
individual retirement accounts, or IRAs,
retirement plans subject to the Employee
Retirement Income Security Act of 1974, also
known as ERISA, and the Internal Revenue
Code of 1986, which we call the Internal
Revenue Code. ERISA is a federal law that
regulates the operation of retirement plans.
Any retirement plan trustee or individual
considering purchasing shares for a
retirement plan or an IRA should read this
section of the prospectus very carefully.
Units...................... Your investment will be recorded on our
books only. We will not issue unit
certificates. If you wish to redeem or
transfer your units, you must send an
executed redemption or transfer form to us.
We will provide the required redemption form
to you upon request.
Operating Agreement........ Your relationship with the Fund and with
Vestin Mortgage will be governed by the
Operating Agreement. Some of the significant
features of the Operating Agreement are as
follows:
We will allocate to you our income, gains,
losses and distributions in the same
proportion that your capital account bears
to all of the capital accounts of all of our
members.
Our business operations will be managed by
Vestin Mortgage. You will have voting rights
only with respect to certain fundamental
matters such as changing the manager,
mergers, or changing the nature of our
business.
In this prospectus, when we refer to a
majority, we mean those members whose
capital accounts together are over 50% of
the amount of all of the members' capital
accounts. A majority can bind all of our
members on fundamental matters affecting our
business. If such a vote occurs, you will be
bound by the majority vote even if you did
not vote with the majority.
Michael V. Shustek, an officer and a
director of Vestin Mortgage, is the owner of
a controlling interest in Vestin Group,
Inc., the company that owns Vestin Mortgage.
Accordingly, Mr. Shustek may be deemed to
have indirect control of the conduct of our
business, subject to the rights of the
majority described above and elsewhere in
this prospectus.
The Operating Agreement is discussed in more
detail in "Summary of Operating Agreement,
Rights of Members and Description of Units,"
beginning on page 46. If any statements in
this prospectus differ from the operating
agreement, you should rely on the operating
agreement. The Operating Agreement is
attached as Exhibit A to this prospectus.
The Offering............... We are offering for sale a maximum of
50,000,000 units of limited liability
company interest at $10.00 per unit. These
units include units issued under our
distribution reinvestment plan. The minimum
initial purchase is 200 units for $2,000,
except to the extent that state suitability
standards dictate otherwise.
Tax Considerations......... In the opinion of our tax counsel, we will
be treated for federal income tax purposes
as a partnership. You should consult your
own tax advisor regarding personal tax
consequences that might be associated with
your investment in the units. See "Federal
Income Tax Risks," beginning at page 13, and
"Federal Income Tax Consequences," beginning
at page 51 of this prospectus.
Suitability................ To invest in units, you must have either:
- a net worth, exclusive of home, home
furnishings and automobiles, of at least
$45,000 and a minimum annual gross income
of at least $45,000; or
- a minimum net worth of at least $150,000.
5
<PAGE> 15
As described more fully in "Investor
Suitability Standards," beginning on page
16, a significant number of states have more
stringent requirements than those set forth
above. Additionally, you will have to make
additional representations to us before we
determine that the investment is suitable
for you.
To Purchase Units.......... To purchase units you must complete and sign
the subscription agreement, which is Exhibit
B to this prospectus at page B-1, and
deliver it to the Manager or the securities
dealer that has solicited your investment,
together with payment for the number of
units specified in the subscription
agreement. We may accept or reject your
subscription in whole or in part. If we do
not accept your subscription, your purchase
payment will be returned to you promptly
without interest.
Our acceptance of your subscription
agreement is effective when we countersign
it, for the number of units set forth in the
subscription agreement. If we accept your
subscription agreement, you will be an owner
of the units and a member of the Fund. If we
do accept your subscription agreement, we
will provide you with a confirmation of the
number of units you have acquired. Because
the units are not certificated, we will not
mail you a unit certificate.
6
<PAGE> 16
RISK FACTORS
You should carefully consider the following risks and other information in the
prospectus before purchasing units.
Investment Risks
You will not have the benefit of reviewing our past performance.
We were organized in December 2000. Accordingly we have no operating history. We
have no external source of financing and are relying on capital contributions
received via this Offering. We have no significant assets. We will only commence
operations after we sell 150,000 units and receive $1,500,000.
Your units lack liquidity and marketability.
There will be no public trading market for your units, and you cannot freely
sell or transfer your units or use them as collateral for a loan. Our Operating
Agreement restricts the transfer of units so that we may avoid being classified
as a "publicly traded partnership" under Section 7704 of the Internal Revenue
Code. Because classification as a publicly traded partnership would
significantly decrease the value of the units of all our members, Vestin
Mortgage must consent to any sale or assignment of your units. Vestin Mortgage
will withhold its consent to the extent necessary to prohibit transfers that
could cause us to be classified as a publicly traded partnership. Further, the
resale of the units may be restricted by state securities laws. Consequently,
you may not be able to obtain cash for your units in a timely manner and you
should anticipate holding the units for at least one year.
You have a limited ability to have your units redeemed.
You have a limited ability to have your units redeemed by us. Some of these
limitations include the following:
- You can only redeem your units after you have held them for one
year.
- Redemption payments only return all or the requested part of
your capital account and are not affected by the value of our
underlying assets, except for any payment made upon final
liquidation.
- There is no reserve fund for repurchases.
- Payments are made only to the extent we have available cash from
proceeds of repayments of principal and capital contributions
and the redemption would not impair the capital or operation of
the Fund.
- The total amount withdrawn by all members during any calendar
year cannot exceed 15% of the amount of capital accounts of all
the members.
- We will only make redemption payments once a month.
- If your units are redeemed, you will be paid within 61 to 91
days after you deliver written notice of withdrawal to Vestin
Mortgage.
If we do not sell a significant number of units in this Offering, your
ability to have your units redeemed will be adversely affected,
particularly if the amount of requested withdrawals should increase
substantially. Additionally, because a substantial portion of our loans
are made on an "interest only" basis, we will not receive net proceeds
as frequently as we would with loans where the principal is repaid in
periodic installments. To help permit redemptions, we will not refinance
or invest in new loans using payments of loan principal by borrowers or
new invested capital of members unless we have sufficient funds to cover
requested withdrawals.
Depending upon the number of units we sell, we may be unable to diversify our
loan portfolio adequately or meet investment objectives.
We will require a significant number of loans to adequately diversify our
portfolio. If we fail to adequately diversify our loan portfolio, our revenues
will be too closely tied to the performance of the borrower under each loan we
invest in. If we do not raise significant proceeds, we will not be able to
diversify our portfolio and we may not be able to pursue the investment
opportunities that we anticipate will develop.
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<PAGE> 17
We must rely on Vestin Mortgage to manage our operations and select our loans
for investment.
Our ability to achieve our investment objectives and to pay distributions to you
depends upon Vestin Mortgage's performance in obtaining, processing, making and
brokering loans for us to invest in and determining the financing arrangements
for borrowers. You will have no opportunity to evaluate the terms of mortgages,
the real property that is our collateral, the creditworthiness of borrowers or
other economic or financial data concerning our loans. You must rely entirely on
the judgment of Vestin Mortgage in investing the proceeds of this Offering.
We intend to invest in mortgage loans throughout the United States. However, our
manager, Vestin Mortgage, does not have experience with all real estate markets
in the United States. Real estate markets vary greatly from location to
location. Moreover, the rights of secured real estate lenders are governed by
state laws which vary considerably. Vestin Mortgage's limited experience in most
U.S. real estate markets may impact its ability to make prudent investment
decisions on our behalf. Accordingly, Vestin Mortgage plans to utilize
independent real estate advisors located in markets where Vestin Mortgage lacks
experience for consultation prior to making investment decisions. You will not
have an opportunity to evaluate the qualifications of such advisors and no
assurance can be given that they will render prudent advice to our Manager.
We depend on key personnel of Vestin Mortgage.
We do not have any officers or employees. Our success depends upon the continued
contributions of certain key personnel of Vestin Mortgage, including Michael V.
Shustek, Stephen J. Byrne and Lance Bradford, each of whom would be difficult to
replace because of his extensive experience in his field, extensive market
contacts and familiarity with Vestin Mortgage's activities. If any of these key
employees were to cease employment, our operating results could suffer. Our
future success also depends in large part upon Vestin Mortgage's ability to hire
and retain additional highly skilled managerial, operational and marketing
personnel. Vestin Mortgage may require additional operations and marketing
people who are experienced in obtaining, processing, making and brokering loans
and who also have contacts in the market. The size of our loan portfolio may
require Vestin Mortgage to hire and retain additional financial and accounting
personnel to assist Mr. Bradford in managing Vestin Mortgage's accounting
services. Competition for these people is intense, and we cannot assure you that
Vestin Mortgage will be successful in attracting and retaining skilled
personnel.
You may face a delay before distributions begin.
There will be a period of time before Vestin Mortgage fully invests the proceeds
of this Offering. Although Vestin Mortgage will attempt to invest the proceeds
as quickly as prudence and circumstances permit, no assurance can be given as to
how quickly the proceeds will be invested. Consequently, the distributions you
receive on your investment may be delayed or reduced pending the investment of
the Offering proceeds in mortgage loans.
Any borrowing by us will increase your risk and reduce the amount we have
available to distribute to members.
We anticipate that we will borrow funds to expand our capacity to invest in
mortgage loans. We may borrow up to 70% of the fair market value of our
outstanding mortgage loans at any time. Any such borrowings will require us to
carefully manage our cost of funds. No assurance can be given that we will be
successful in this effort. Should we be unable to repay the indebtedness and
make the interest payments on the loans, the lender will likely declare us in
default and require that we repay all amounts owing under the loan facility.
Even if we are repaying the indebtedness in a timely manner, interest payments
owing on the borrowed funds will reduce our income and the distributions you
receive.
We may borrow funds from several sources, and the terms of any indebtedness we
incur may vary. However, some lenders may require as a condition of making a
loan to us that the lender will receive a priority on repayments received by us.
As a result, if we fail to collect 100% on our investments, the first dollars
may go to our lenders and we may incur a loss.
Risks of the Mortgage Lending Business
Defaults on our mortgage loans will decrease our revenues and your
distributions.
We are in the business of investing in mortgage loans and, as such, we risk
defaults by borrowers. Any failure of a borrower to repay loans or interest on
loans will reduce our revenues and your distributions, the value of your units
and your interest in the Fund as a whole.
- We rely on the value of the property securing the mortgage loan
to protect us in the event of default. However, even though we
will use independent appraisers, we may over-estimate the value
of each property, or the value may decline as a result of
various factors. As a result, we may not be able to recover the
full amount of any defaulted loans.
- We will likely invest a material amount of our assets in
construction mortgage loans. These are loans made to real estate
developers for up to two years to fund the construction or
renovation of buildings on real property. These loans are
riskier than loans secured by income producing properties
because during construction the borrower does not receive income
from the property to make payments on the loan.
- We may also invest our assets in second mortgage loans and, in
rare instances, wraparound, or all-inclusive, mortgage loans. In
a second mortgage loan, our rights as a lender, including our
rights to receive payment on foreclosure, will be subject to the
rights of the first mortgage lender. In a wraparound mortgage
loan, our rights will be similarly subject to the rights of a
first mortgage lender, but the aggregate
8
<PAGE> 18
indebtedness evidenced by our loan documentation will be the
first mortgage loan plus the new funds we invest. We would
receive all payments from the borrower and forward to the senior
lender its portion of the payments we receive. Because both of
these types of loans are subject to the first mortgage lender's
right to payment on foreclosure, we incur a greater risk when we
invest in each of these types of loans.
- We expect to invest in commercial property loans that have
"balloon payments". A balloon payment is a large principal
balance that is payable after a period of time during which the
borrower has repaid none or only a small portion of the
principal balance. Loans with balloon payments are riskier than
loans with even payments of principal over an extended time
period like 15 or 30 years because the borrower's repayment
depends on its ability to refinance the loan or sell the
property profitably when the loan comes due.
- Sometimes we may invest in large loans that constitute a
significant percentage of our net assets. These larger loans are
risky because they reduce our ability to diversify our loan
portfolio.
- We may invest in loans where the collateral is an interest in a
lease. These loans are riskier because the only rights we will
have is to assume the borrower's obligations under the lease and
to use the property for the length of time and in the limited
manner permitted under the lease.
- We may invest in bridge loans. These are loans to enable
commercial borrowers to make improvements to their property so
that they can qualify for institutional refinancing. These loans
are riskier because there is no assurance that the developer
will ever qualify for the refinancing or that the improvements
will yield the anticipated increase in value and income.
- We will also invest in loans to purchase or develop raw,
unimproved land. We determine whether to invest in these loans
based upon the "90-day quick sale value" of the property and the
borrower's actual capital investment in the property. The
"90-day quick sale value" is the highest price for which the
land could actually be sold within the next 90 days, as
determined by local real estate brokers and others. We believe
that this 90-day period approximates the time required for a
foreclosure. These loans are riskier because the property is not
capable of generating any income, as compared to a commercial
property, and because there is no assurance that we will be able
to sell the property within the 90-day period.
- Our underwriting standards and procedures are more lenient than
conventional lenders in that we will invest in loans to
borrowers who will not be required to meet the credit standards
of conventional mortgage lenders, which may create additional
risks to your return.
- Because we approve a mortgage loan more quickly than other
mortgage lenders, there may be a risk that the credit inquiry we
perform will not reveal all material facts pertaining to the
borrower and the security.
Our loans are not guaranteed by any government agency.
Our loans will not be insured or guaranteed by a federally owned or guaranteed
mortgage agency. As a result, our recourse if there is a default may only be to
foreclose upon the mortgaged real property.
Our mortgage loans will not be marketable and we expect no secondary market to
develop.
We do not expect our mortgage loans to be marketable and we do not expect a
secondary market to develop for them. As a result, we will generally bear all
the risk of our investment until they mature.
Our loan portfolio may be riskier if it is not diversified geographically.
Although we intend to invest in mortgage loans throughout the United States, our
Manager does not have experience with all real estate markets in the United
States. Our Manager intends to work with real estate advisors located in markets
where it lacks experience in order to enable us to invest our funds in many
different geographical markets. However, we cannot be certain that these efforts
to diversify geographically will be successful. If our investments are not
diversified and are in markets where economic conditions decline, there could be
an increase in the number of defaults on our loans or fewer loans in which to
invest.
9
<PAGE> 19
We may have difficulty protecting our rights as a secured lender.
We believe that our loan documents will enable us to enforce our commercial
arrangements with borrowers. However, the rights of borrowers and other secured
lenders may limit our practical realization of those benefits. For example:
- Judicial foreclosure is subject to the delays of protracted
litigation. Although we expect non-judicial foreclosure to be
quicker, our collateral may deteriorate and decrease in value
during any delay in foreclosing on it.
- The borrower's right of redemption during foreclosure
proceedings can deter the sale of our collateral and can for
practical purposes require us to manage the property.
- Unforeseen environmental hazards may subject us to unexpected
liability and procedural delays in exercising our rights.
- The rights of senior or junior secured parties in the same
property can create procedural hurdles for us when we foreclose
on collateral.
- We may not be able to pursue deficiency judgments after we
foreclose on collateral.
- State and federal bankruptcy laws can prevent us from pursuing
any actions, regardless of the progress in any of these suits or
proceedings.
By becoming the owner of property, we may become liable for unforeseen
environmental obligations.
We intend to own real property only if we foreclose on a defaulted loan and
purchase the property at the foreclosure sale. Under applicable environmental
laws, however, any owner of real property may be fully liable for the costs
involved in cleaning up any contamination by materials hazardous to the
environment. Even though we might be entitled to indemnification from the person
that caused the contamination, there is no assurance that the responsible person
would be able to indemnify us to the full extent of our liability. Furthermore,
we would still have court and administrative expenses for which we may not be
entitled to indemnification.
Our results are subject to fluctuations in interest rates and other economic
conditions.
- Our results of operations will vary with changes in interest
rates and with the performance of the relevant real estate
markets. If the economy is healthy, we expect that more people
will be borrowing money to acquire, develop or renovate real
property. However, if the economy grows too fast, interest rates
may increase too much and the cost of borrowing may become too
expensive. This could result in a slowdown in real estate
lending which may mean we will have fewer loans to acquire, thus
reducing our revenues and the distributions you receive.
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<PAGE> 20
- One of the results of interest rate fluctuations is that
borrowers seek to extend their low-interest-rate mortgage loans
after market interest rates have increased. Generally, our loan
documents permit us to raise the interest rate we charge on
extended loans anywhere from between 3/4% to 3% from the
then-current rate on the loan. This creates two risks for us:
- There is no assurance that this permitted rate increase will be
adequate if interest rates have increased beyond the range
contemplated by our loan documents.
- If interest rates rise, borrowers under loans with monthly or
quarterly principal payments may be compelled to extend their
loans to decrease the principal paid with each payment because
the interest component has increased. If this happens, we are
likely to be at a greater risk of the borrower defaulting on the
extended loan, and the increase in the interest rate on our loan
may not be adequate compensation for the increased risk.
Additionally, any fees paid to extend the loan are paid to Vestin
Mortgage, not to us. Our revenues and distributions will decline if we
are unable to reinvest at higher rates or if an increasing number of
borrowers default on their loans.
- If, at a time of relatively low interest rates, a borrower
should prepay obligations that have a higher interest rate from
an earlier period, we will likely not be able to reinvest the
funds in mortgage loans earning that higher rate of interest. In
the absence of a prepayment fee, we will receive neither the
anticipated revenue stream at the higher rate nor any
compensation for its loss. This is a risk if the loans we invest
in do not have prepayment penalties or exit fees.
- Our results will also reflect other economic conditions, such as
a particular industry migrating to or from one of the states
into which we make loans.
We face competition for mortgage loans that may reduce available yields and fees
available.
Our competitors consist primarily of conventional mortgage lenders and
mortgage loan investors including commercial banks, insurance companies,
mortgage brokers, pension funds and other institutional lenders. Many of
the companies against which we and Vestin Mortgage compete have
substantially greater financial, technical and other resources than
either the Fund or Vestin Mortgage. Additionally, if our competition
decreases interest rates on their loans or makes funds more easily
accessible, yields on our loans could decrease and the costs associated
with making loans could increase, both of which would reduce our
revenues and the distributions you receive.
Conflicts of Interest Risks
The risk factors below describe material conflicts of interest that may arise in
the course of Vestin Mortgage's management and operation of our business. The
list of potential conflicts of interest reflects our knowledge of the existing
or potential conflicts of interest as of the date of this prospectus. We cannot
assure you that no other conflicts of interest will arise in the future.
Vestin Mortgage will face conflicts of interest concerning the allocation of its
personnel's time.
Vestin Mortgage is the manager of DM Mortgage Investors, LLC ("DM"), a fund
which is raising $100 million with investment objectives similar to ours. As of
November 30, 2000, DM had assets of $36,210,000 of which 92% were invested in
mortgage loans. Vestin Mortgage and Mr. Shustek, who indirectly owns a
controlling interest in Vestin Mortgage, anticipate that they will also sponsor
other real estate programs having investment objectives similar to ours and
engage in the business activities described in the "Conflicts of Interest"
section in this prospectus. As a result, Vestin Mortgage and Mr. Shustek may
have conflicts of interest in allocating their time and resources between our
business and those other activities. During times of intense activity in other
programs and ventures, Vestin Mortgage and Mr. Shustek will likely devote less
time and resources to our business than they ordinarily would.
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<PAGE> 21
Vestin Mortgage will face conflicts of interest arising from our fee structure.
Vestin Mortgage will receive substantial fees from borrowers for transactions
involving loan mortgages. These fees are quantified and described in greater
detail under "Compensation to Vestin Mortgage and Affiliates" in the summary and
in the compensation table contained elsewhere in this prospectus. Vestin
Mortgage's compensation is based on the volume and size of the mortgages
selected for us. Our interests may diverge from those of Vestin Mortgage and Mr.
Shustek when Vestin Mortgage decides whether we should invest in a particular
loan originated by Vestin Mortgage.
Vestin Mortgage will be receiving fees from borrowers that would otherwise
increase our returns. Because Vestin Mortgage receives all of these fees, our
interests will diverge from those of Vestin Mortgage and Mr. Shustek when Vestin
Mortgage decides whether we should charge the borrower higher interest rates or
Vestin Mortgage should receive higher fees from the borrower.
Vestin Mortgage will face conflicts of interest relating to other investments in
mortgage loans.
We expect to invest in mortgage loans when one or more other companies managed
by Vestin Mortgage are also investing in mortgage loans. There is a risk that
Vestin Mortgage may select for us a mortgage loan investment that provides lower
returns than a mortgage loan investment purchased by another Vestin Mortgage
program or entity.
We may not have control over joint ventures.
We will consider investing in or purchasing loans jointly with other lenders,
some of whom might be affiliates of Vestin Mortgage. In joint ventures, there is
a risk that neither co-venturer may control the venture, which could result in
an impasse on joint venture decisions. Alternatively, we may take a minority
position in a joint venture.
Lack of Control by Members
Your right to vote is limited and you are bound by majority vote.
You cannot exercise control over our daily business affairs. That is entirely in
the hands of Vestin Mortgage. You may vote only in a limited number of specific
instances, in which case a majority, being the owners of our capital accounts
aggregating over 50% of all of the members' capital accounts, can take action
and bind all of the members. These situations in which all members are entitled
include votes to:
- dissolve the Fund;
- change the nature of our business;
- amend the Operating Agreement (in certain cases);
- remove and replace Vestin Mortgage;
- approve a merger with or into another company; or
- approve a sale of all or a majority of our assets.
Although Vestin Mortgage may not change the nature of our business without
majority approval, Vestin Mortgage may change our investment policies consistent
with the fiduciary duties it owes to all of the members. While you will not have
any vote on these investment policies, you retain your vote to remove and
replace Vestin Mortgage.
Your interest in the Fund may be diluted as we sell additional units.
When we receive your initial investment, Vestin Mortgage will establish for you
an individual capital account on our books. Your capital account will begin with
the amount of your first capital contribution for units. We do not adjust your
capital account for unrealized appreciation or depreciation of our underlying
assets, except for write-downs of assets. Consequently, your capital account may
not reflect your portion of
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<PAGE> 22
the fair market value of our underlying assets, particularly immediately after
another member makes a capital contribution or distribution reinvestment.
The value of your units may decrease below ten dollars per unit.
The value of your share of our underlying assets at any time may be less or more
than $10.00 per unit, depending on when the unit was purchased. For example, if
the fair market value of our assets at the time of a capital contribution or
distribution reinvestment is less than the cost of these assets on our books,
then the value of your units immediately after a capital contribution or
distribution reinvestment may be less than ten dollars.
Risks Related to Vestin Capital
Vestin Capital has a limited operating history and track record in public
offerings.
Vestin Capital, the lead dealer in this Offering, is a securities brokerage firm
formed in early 1999 that has previously participated in only one public
offering of securities. As a result, Vestin Capital has a limited history of
selling publicly offered securities and in recruiting dealers to assist in the
sale of publicly offered securities. The absence of this track record may make
it more difficult for it to sell our units. If Vestin Capital does not sell a
sufficient number of our units, we may not be able to diversify our portfolio to
the extent necessary to achieve our objectives.
Vestin Capital is an Affiliate of Vestin Mortgage.
Vestin Capital is wholly owned by Vestin Group Inc., which also owns Vestin
Mortgage. Consequently, Vestin Capital may have a conflict of interest in
performing its obligations to conduct a "due diligence" investigation of the
statements made in this prospectus and may not conduct the investigation with
the same degree of care as a non-affiliated dealer.
Federal Income Tax Risks
Your cash flow and distributions will be reduced if we are taxed as a
corporation.
If we fail to qualify as a partnership for any taxable year, we would then be
subject to federal income tax on any taxable income in that taxable year at
regular corporate rates. You could not then take tax deductions for your share
of our deductions or credits. You would be subject to tax on your share of our
income to the extent we distribute it to you out of current or accumulated
earnings and profits, or as taxable gain in excess of the cost of your units. If
we were taxed as a corporation, your cash flow, the distributions you receive
and the value of your units will be significantly reduced. See "Federal Income
Tax Consequences --- General Principles of Partnership Taxation," at page 54 and
"---Tax Rates on a Partner's Share of Ordinary Income from the Partnership," at
page 56.
If we are deemed to not be engaged in a trade or business, the tax benefits of
partnership status will be adversely affected.
If the Internal Revenue Service does not consider us to be engaged in a trade or
business, the result would be that your share of our expenses would be
deductible only to the extent that all of your miscellaneous itemized deductions
exceed two percent of your adjusted gross income.
An IRS audit of our books and records could result in an audit of your tax
returns.
If we are audited by the IRS and it makes determinations adverse to us,
including the disallowance of deductions we have taken, the IRS may decide to
audit your income tax returns. Any such audit could result
13
<PAGE> 23
in adjustments to your tax return for items of income, deductions or credits,
and the imposition of penalties and interest for the adjustments and additional
expenses for filing amended income tax returns.
Inconsistencies between federal, state and local tax rules may adversely affect
your return.
If we are treated as a partnership for federal income tax purposes but as a
corporation for state or local income tax purposes, or if deductions that are
allowed by the IRS are not allowed by state or local regulators, your cash flow
and distributions would be adversely affected.
Retirement Plan Risks
An investment in the Fund may not qualify as an appropriate investment under all
retirement plans.
There are special considerations that apply to pension or profit sharing trusts
or IRAs investing in units. If you are investing the assets of a pension, profit
sharing, 401(k), Keogh or other qualified retirement plan or the assets of an
IRA in the Fund, you could incur liability or subject the plan to taxation if:
- your investment is not consistent with your fiduciary obligations under
ERISA and the Internal Revenue Code;
- your investment is not made in accordance with the documents and
instruments governing your plan or IRA, including your plan's
investment policy.
- your investment does not satisfy the prudence and
diversification requirements of Sections 40(a)(1)(B) and
404(A)(1)(C) of ERISA.
- your investment impairs the liquidity of the plan.
- your investment produces "unrelated business taxable income" for
the plan or IRA.
- you will not be able to value the assets of the plan annually in
accordance with ERISA requirements.
- your investment constitutes a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Internal Revenue
Code.
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<PAGE> 24
USE OF PROCEEDS
We will invest approximately 97% of the Offering proceeds in mortgage loans. We
will maintain working capital reserves of approximately 3%. This reserve is
available to pay any future expenses in excess of revenues, satisfy obligations
of underlying security properties, expend money to satisfy our unforeseen
obligations and for other permitted uses of our working capital. Working capital
reserves of up to 3% in cash or cash equivalents are excluded from the funds
committed to mortgage investments in determining what proportion of the Offering
proceeds and reinvested distributions have been invested in mortgage loans.
The following table contains information about the estimated use of the gross
proceeds of this Offering.
<TABLE>
<CAPTION>
Minimum Offering Maximum Offering
(150,000 units) (50,000,000 units) Pct of Offering
---------------- ------------------ ---------------
<S> <C> <C> <C>
Gross Offering Proceeds ....................... $1,500,000 $500,000,000 100.0%
Less:
Public Offering Expenses(1) ................... -- -- --
Net Amount received in this Offering(2) ....... $1,500,000(3) $500,000,000 100.0%
Less:
Working Capital Reserves ...................... $ 45,000 $ 15,000,000 3.0%
---------- ------------ -----
Cash Available for Investment in mortgage loans $ 1,455,000 $485,000,000 97.0%
</TABLE>
(1) Vestin Mortgage will pay all selling commissions and expenses
related to this Offering. To the extent that such expenses consist of
filing and review fees, legal, accounting, printing and other expenses
of this Offering paid to non-affiliates of Vestin Mortgage, payment of
such expenses will be deemed a capital contribution to us by Vestin
Mortgage up to a maximum of $2,000,000. Such expenses are described
further in the registration statement of which this prospectus forms a
part.
(2) Borrowers will pay to Vestin Mortgage all acquisition, selection,
processing and brokerage and selling expenses for loans made by Vestin
Mortgage. Consequently, these expenses do not appear in the table.
(3) If we fail to adequately diversify our loan portfolio, our revenues
will be too closely tied to the performance of the borrower under each
loan we invest in. If we do not raise significant proceeds above the
minimum offering, we may not be able to pursue the investment
opportunities that we anticipate will develop.
Vestin Mortgage has not set the amount of sales proceeds to be allocated
to the various types of mortgage loans in which we invest, except to the
extent of the guidelines described in "Investment Objectives and
Policies." Vestin Mortgage reviews each loan to determine if it meets
our investment criteria. We plan to invest the entirety of our cash
available for investments in mortgage loans. We do not expect to use any
of the proceeds of this offering to acquire assets other than in the
ordinary course of our business.
Pending investment in mortgage loans, we may invest the proceeds of this
offering in relatively safe, short-term liquid investments such as U.S. Treasury
bills, notes or bonds, certificates of deposit or commercial paper. We
anticipate that these proceeds, once received, will be held at _________________
or in an account at a financial institution or securities firm that has assets
in excess of $50,000,000.
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<PAGE> 25
INVESTOR SUITABILITY STANDARDS
As a result of the risks inherent in an investment in units, the units are
suitable only for persons who meet the financial suitability standards adopted
by the states in which they live, as set forth below. Our units are only
suitable for those who desire a relatively long term investment for which they
do not need liquidity for at least one year, in light of the other limitations
on redemption and transfer described in this prospectus.
You must meet one of the investor suitability standards contained in the second
and third columns in the table below and the suitability standard contained in
the fourth column, if applicable, to purchase units and to participate in our
reinvestment plan. Fiduciaries must also meet one of these conditions. If the
investment is a gift to a minor, the custodian or the donor must meet these
conditions. For purposes of the net worth calculations below, net worth is the
amount by which your assets exceed your liabilities, but excluding your house,
home furnishings or automobile(s) among your assets. In the subscription
agreement, you will have to confirm that you meet these minimum standards. The
inclusion of a state in the chart below is for informational purposes only and
is not intended to imply that the offering of units has been qualified in the
particular state at this time. We will not sell in a state in which we have not
qualified the Offering.
<TABLE>
<CAPTION>
1. Minimum Net
Worth AND Minimum 2. Additional
State(s) Gross Income Minimum Net Worth Standards
-------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Alabama, $45,000/$45,000 $150,000 N/A
Arkansas,
Colorado,
Connecticut,
Delaware,
Florida,
Georgia, Hawaii,
Idaho, Illinois,
Indiana, Kansas,
Kentucky,
Michigan,
Minnesota,
Montana, New
Mexico, New
York, Oklahoma,
Oregon, Texas,
Utah, Vermont,
Virginia,
Washington, West
Virginia, OR AND
Wisconsin
Arizona, Alaska, $60,000/$60,000 $225,000 N/A
California,
Iowa,
Massachusetts,
Mississippi,
Missouri, New
Jersey,
Tennessee
Maine $50,000/$50,000 $200,000 N/A
----------------- ---------- ---
New Hampshire $125,000/$50,000 $250,000 N/A
----------------- ---------- ---
South Carolina $65,000/$65,000 $150,000 N/A
----------------- ---------- ---
Minimum investment is
Nevada $45,000/$45,000 $150,000 $5,000 ($2,000 for IRAs)
----------------- ---------- ------------------------
Investment is less
than 10% of Net Worth.
We will make no
sales in these
states until we
receive proceeds of
Ohio, at least
Pennsylvania $45,000/$45,000 $150,000 $5,000,000.
--------------- -------- -----------
</TABLE>
<TABLE>
<S> <C>
District of
Columbia,
Louisiana, These jurisdictions do not have quantified suitability requirements. We believe
Nebraska, North that it is reasonable for us to rely upon the suitability standards set forth
Dakota, Rhode above for Alabama et al. when selling units to residents of these jurisdictions.
Island
Maryland, South No minimum requirements. Disclosure state only. We will follow the guidelines
Dakota, for the preponderance of the states above in selling units in these states.
Wyoming
</TABLE>
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<PAGE> 26
In addition to the foregoing suitability standards, we cannot accept
subscriptions from anyone if the representations required are either not
provided or are provided but are inconsistent with our determination that the
investment is suitable for the subscriber. In addition to the financial
information we require, the representations we require of you state that you:
- have received this prospectus;
- understand that no federal or state agency has made any finding
or determination as to the fairness of public investment in, nor
made any recommendation or endorsement of, the units; and
- understand that an investment in us will not, in itself, create
a retirement plan as described in the Internal Revenue Code and
that, to create a retirement plan, you must comply with all
applicable provisions of the Internal Revenue Code.
Each of these representations reflects that we are not indicating any
approval by anyone other than Vestin Mortgage or that an investment will
have an effect other than to make you a member of the Fund.
You will also represent that you are familiar with some of the risk factors we
describe and that this investment matches your investment objectives.
Specifically, you represent to us that you:
- understand that we intend to be taxed as a partnership and not
as a corporation, and that, among other things, this may result
in your being required to pay taxes even though we may not have
distributed cash to you;
- understand that there will be no public market for the units,
that there are substantial restrictions on repurchase, sale,
assignment or transfer of the units, and that it may not be
possible readily to liquidate an investment in the units; and
- have investment objectives that correspond to those described
elsewhere in this prospectus, i.e., to preserve the capital
invested and to receive monthly distributions of cash.
You will also represent to us that you have the capacity to invest in
the Fund by confirming that:
- you are legally able to enter into a contractual relationship
with us, and, if you are an individual, have attained the age of
majority in the state in which you live; and
- if you are a trustee, are the trustee for the trust on behalf of
which you are purchasing the units, and have due authority to
purchase units on behalf of the trust.
If you are purchasing as a fiduciary, you will also represent that the
above representations and warranties are accurate for the person(s) for
whom you are purchasing units.
By executing the subscription agreement, you will not be waiving any rights
under the Securities Act of 1933 or the Securities and Exchange Act of 1934.
The subscription agreement also contains a series of short questions so that we
or our dealers may also assess for ourselves the accuracy of these
representations. For employee benefit plans, the questions are more expansive
because of the application of additional provisions of the Internal Revenue Code
relating to retirement plans.
Due to the nature of our investments, it is likely that all or substantially all
of our income will be taxable to you as ordinary income. See "Federal Income Tax
Consequences" at page 51. The units may, therefore, be suitable for:
- persons seeking current taxable income;
- Keogh Plan accounts or corporation, pension or profit sharing
plans, which we refer to collectively as qualified plans;
- IRAs or Roth IRAs;
- Simplified Employee Pensions, or SEP's; and
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<PAGE> 27
- other entities exempt from federal income taxation such as
endowment partnerships and foundations, and charitable,
religious, scientific or educational organizations (assuming the
provisions of their governing instruments and the nature of
their tax exemptions permit such investment).
Our investment objectives and policies are intended to make the units
suitable investments for employee benefit plans under current law. In
this regard, ERISA provides a comprehensive regulatory scheme for plan
assets. Further, Vestin Mortgage intends to manage us so that an
investment by a qualified plan will not make our assets plan assets
under ERISA. The ERISA regulations are also applicable to an IRA.
"Federal Income Tax Consequences --- ERISA Considerations" at page 61.
Vestin Mortgage is not permitted to allow any qualified plan to purchase units
if Vestin Mortgage has investment discretion over the assets of the qualified
plan, or if Vestin Mortgage regularly gives individualized investment advice
that serves as the primary basis for the investment decisions made for these
assets. This prohibition is designed to prevent a violation of ERISA. You should
obtain the advice of your attorney, tax advisor, or business consultant for the
legal, tax and business aspects of this investment before subscribing for units.
To assure that this Offering complies with applicable state law, each dealer
selling our units is required to:
- inquire diligently of all prospective investors to assure that
our units are a suitable investment in light of the investor's
age, educational level, knowledge of investments, financial
means and other pertinent factors;
- for at least six years, maintain records of the information used
to determine that an investment in units is suitable and
appropriate for each investor; and
- transmit promptly to us all properly completed and executed
subscription agreements.
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<PAGE> 28
OUR BUSINESS STRATEGY
Our business strategy is designed to generate current income by investing in
mortgage loans. We believe there is a significant market opportunity to make
mortgage loans to owners and developers of real property whose financing needs
are not met by traditional mortgage lenders. The strict underwriting standards
and length of time required by traditional mortgage lenders such as commercial
banks results in some potential borrowers who are unable to obtain such
financing or who are unwilling to go through the time consuming process often
required by traditional lenders.
We propose to loan funds to such borrowers provided that they have sufficient
equity in the underlying real estate and otherwise meet our lending criteria.
Generally speaking, our underwriting standards are less strict than traditional
mortgage lenders and our loan approval process is faster than traditional
lenders. As a result, in certain cases we may make mortgage loans which are
riskier than the mortgage loans made by commercial banks. However, in return we
anticipate receiving a higher interest rate and we will take steps intended to
mitigate the risks, such as imposing a lower loan to value ratio (thereby
providing us with a bigger cushion if real estate values drop.)
We believe that by focusing on the value of the underlying real estate which
will serve as collateral on our mortgage loans, we can expedite the loan
approval process and make loans to certain borrowers who might not qualify for
loans from traditional mortgage lenders. We will spend comparatively little time
assessing the character and credit history of our borrowers. Rather, we will
focus our underwriting review on the value of the collateral which secures our
loan.
As with all investments, there is a relationship between the risk assumed and
the possible reward earned through our business strategy. We will assume more
risk than traditional mortgage lenders. In return, we will seek to generate
higher yields from our mortgage loans.
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<PAGE> 29
'
INVESTMENT OBJECTIVES AND POLICIES
We intend to invest in mortgage loans where our collateral is real property
located throughout the United States. The loans we invest in will be selected
for us by Vestin Mortgage from among loans originated by Vestin Mortgage or
non-affiliated mortgage brokers. When Vestin Mortgage or someone else originates
a loan for us, that person obtains the borrower, processes the loan application,
makes or invests in the loan, and brokers or sells the loan to us. We believe
our loans will be attractive to borrowers because of the expediency of Vestin
Mortgage's loan approval process, which takes about 10 to 20 days. Vestin
Mortgage will obtain, negotiate and make each loan, after which we will acquire
the loan.
As a non-conventional mortgage lender, we are more willing to invest in loans
that are riskier than first mortgage loans on commercial properties. For
example, we invest a significant amount in loans, in which the real property
being developed is not generating any income to the borrower. Our second
mortgage investments are riskier because our rights will be subject to the
rights of the first mortgage lender. The "balloon payment" loans and bridge
loans in which we invest are riskier because the borrower's repayment depends on
its ability to refinance the loan or develop the property so it can refinance
the loan. All of these loans are described in greater detail in the pages that
follow under "Types of Loans We Intend to Invest In." Additionally, as a
non-conventional lender, we are more willing to invest in mortgage loans to
borrowers that conventional lenders would not deem to be creditworthy. See "Risk
Factors -- Risks of the Mortgage Lending Business." Because of our increased
willingness to fund riskier loan types and borrowers, borrowers are willing to
pay us an interest rate that is 2-3 points above the rates charged by
conventional lenders.
In addition to those policies contained in this prospectus and the operating
agreement, Vestin Mortgage may establish written policies on loans and
borrowings.
Our principal investment objectives are to:
- Produce revenues from the interest income on our mortgage loans;
- Provide monthly cash distributions to you from the net income
earned on our mortgage loans;
- Preserve and return your capital contributions; and
- Reinvest to the extent permissible payments of principal and
proceeds of prepayments, sales and insurance proceeds, net of
expenses.
We cannot assure you that we will achieve these objectives or that your
capital will not decrease. Vestin Mortgage may change the overall
investment strategy, subject to the fiduciary obligations that it owes
to all members. However, Vestin Mortgage may not change the investment
objectives above, except upon majority approval. Vestin Mortgage has no
authority to do anything that would impair our ability to carry on our
ordinary business as a mortgage investor.
Acquisition and Investment Policies
We will seek to invest substantially all of the Offering proceeds and
distribution reinvestments in mortgage loans, after paying applicable fees and
expenses, if any. We anticipate that we will invest about 97% of the Offering
proceeds and distribution reinvestments in mortgage loans. Approximately 3% will
be held as a working capital cash reserve. Vestin Mortgage will receive a credit
to its capital account up to a maximum of $2,000,000 to the extent that it pays
to non-affiliated third parties the expenses of this Offering.
We anticipate that the majority of our collateral on our mortgage loans will be
the real property that the borrower is purchasing or developing with the funds
that we make available. We sometimes refer to these real properties as the
security properties. While we may invest in other types of loans, we believe
that most of the loans in which we invest will have been made to real estate
developers with a lesser proportion of loans involving land loans and bridge
financing.
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<PAGE> 30
We do not anticipate that our mortgage investments will be insured or guaranteed
by any government agency.
Vestin Mortgage will continuously evaluate prospective investments, select the
mortgages in which we invest and make all investment decisions on our behalf in
its sole discretion, unless the Operating Agreement provides otherwise. You are
not entitled to act on any proposed investment. In evaluating prospective
mortgage loan investments, Vestin Mortgage considers such factors as the
following:
- the ratio of the amount of the investment to the value of the
property by which it is secured;
- the potential for capital appreciation of the property securing
the investment;
- expected levels of rental and occupancy rates (if applicable);
- potential for rental increases (if applicable);
- current and projected revenues from the property;
- the status and condition of the record title of the property
securing the investment;
- geographic location of the property securing the investment; and
- the financial condition of the borrowers and their principals,
if any, who guarantee the loan.
Vestin Mortgage may obtain our loans from non-affiliated mortgage
brokers and previous borrowers, and by solicitation of new borrowers in
those states where permissible. We may purchase existing loans that were
originated by third party lenders and acquired by Vestin Mortgage for
us. Vestin Mortgage is required to sell the loans to us for the lower of
Vestin Mortgage's cost or the then-current market value.
When selecting mortgage loans for us, Vestin Mortgage will adhere to the
following guidelines, which are intended to control the quality of the
collateral given for our loans:
1. Priority of Mortgages. Our mortgage on the security property will not
be junior to more than one other mortgage. The only subordinated
mortgages we currently intend to invest in at this time are second
mortgages, although in the future we may invest in wraparound, or
all-inclusive, mortgages
2. Loan-to-Value Ratio. We do not anticipate that the amount of our loan
combined with the outstanding debt secured by a senior mortgage on a
security property will exceed the following percentage of the appraised
value of the security property:
<TABLE>
<S> <C>
Type of Secured Property Loan-to-Value Ratio
Residential 75%
Unimproved Land 60%
Commercial 75%
Property under Development/Construction 75% (of anticipated post-development
Loan value)
Leasehold Interest 75% (of value of leasehold interest)
</TABLE>
3. Construction Mortgage Loans. We anticipate that we will invest in
construction loans other than home improvement loans on residential
property, subject to the following guidelines:
- We do not anticipate that the loan-to-value ratio on
construction loans in which we invest will exceed 75% of the
independently appraised, completed value of the security
property.
- We currently do not intend to invest in or purchase construction
loans secured by properties Vestin Mortgage considers to be
special-use properties, other than loans to casinos.
Vestin Mortgage, in its discretion, may increase any of the above
loan-to-value ratios if a given loan is supported by credit adequate to
justify a higher loan-to-value ratio, including personal guarantees.
These loan-to-value ratios will not apply to financing offered by us to
the purchaser of any real estate
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<PAGE> 31
acquired through foreclosure, or to refinance an existing loan that is
in default when it matures. In those cases, Vestin Mortgage, in its sole
discretion, shall be free to accept any reasonable financing terms it
deems to be in our best interest. Nevertheless, in no event will the
loan-to-value ratio on any loan exceed 80% of the independently
appraised completed value of the property. The target loan-to-value
ratio for our loan portfolio as a whole is approximately 70%.
We will receive an independent appraisal for each security property. You
may review copies of these appraisals upon reasonable notice to us. We
will retain appraisers who will be licensed or qualified as independent
appraisers and be certified by or hold designations from one or more of
the following organizations: The Federal National Mortgage Association,
the Federal Home Loan Mortgage Corporation, the National Association of
Review Appraisers, the Appraisal Institute, the Society of Real Estate
Appraisers, M.A.I., Class IV Savings and Loan appraisers or from among
appraisers with other qualifications acceptable to Vestin Mortgage.
However, appraisals are only estimates of value and cannot be relied on
as measures of realizable value. An employee or agent of Vestin Mortgage
will review each appraisal report and will conduct a "drive-by" for each
property on which an appraisal is made. A "drive-by" means that the
person drives to the property and assesses the front exterior of the
subject property, the adjacent properties and the neighborhood. A
drive-by does not include entering any structures on the property,
although in most cases our employee or agent will attempt to do so.
4. Terms of Mortgage Loans. Most of our loans will be for one to seven
years. We anticipate that most of our loans will provide for payments of
interest only with a "balloon" payment of principal payable in full at
the end of the term.
5. Escrow Conditions. Our loans will often be funded by us through an
escrow account held by a title insurance company, subject to the
following conditions:
- Borrowers will obtain title insurance coverage for all loans,
with the title insurance policy naming us as the insured and
providing title insurance in an amount at least equal to the
principal amount of the loan. Title insurance insures only the
validity and priority of our deed of trust, and does not insure
us against loss by other causes, such as diminution in the value
of the security property.
- Borrowers will obtain fire and casualty insurance for all loans
secured by improved real property, naming us as loss payee in an
amount sufficient to cover the replacement cost of improvements.
- All insurance policies, notes, deeds of trust or mortgages,
escrow agreements, and any other loan document for a particular
transaction will name us as payee and beneficiary. Mortgage
loans will not be written in the name of Vestin Mortgage or any
other nominee.
6. Purchase of Mortgage Investments from Affiliates. We may acquire
mortgage loans from our affiliates, including Vestin Mortgage, for a
price not in excess of the par value of the note or its fair market
value, whichever is lower, plus allowable fees and expenses, but without
the allowance of any other compensation for the loans. Except for the
compensation paid to Vestin Mortgage described elsewhere in this
prospectus, any affiliate from which we purchase mortgage loans will
remit to us all income it earns from the mortgage loan while the loan is
in its portfolio.
7. Note Hypothecation. We may also acquire mortgage loans secured by
assignments of secured promissory notes. These mortgage loans must
satisfy our stated investment standards, including our loan-to-value
ratios, and also may not exceed 80% of the principal amount of the
assigned note. For example, if the property securing a note we acquire
is commercial property, the total amount of outstanding debts secured by
the property must not exceed 75% of the appraised value of the property,
and the mortgage loan will not exceed 80% of the principal amount of the
assigned note. For mortgage loans secured by promissory notes, we will
rely on the appraised value of the underlying property, as determined by
an independent written appraisal which was conducted within the
then-preceding twelve months. If an appraisal was not conducted within
that period, then we will arrange for a new appraisal to be prepared for
the property.
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<PAGE> 32
8. Participation. We may also participate in loans with other lenders,
including affiliates, by providing funds for or purchasing an undivided
interest in a loan meeting our investment guidelines described above. We
would be more likely to participate in loans if, for example:
- we did not have sufficient funds to invest in an entire loan.
- we received Offering proceeds that were insufficient to
adequately diversify our portfolio.
- Vestin Mortgage originated a loan that fit within our investment
guidelines but it would constitute more than 20% of our
anticipated capital contribution or otherwise be
disproportionately large given our then existing portfolio.
We will not give Vestin Mortgage, Vestin or any of their affiliates any
consideration similar to rebates or give-backs or enter into reciprocal
arrangements with Vestin Mortgage or its affiliates that might be
entered into in lieu of joint ventures.
9. Diversification. No single mortgage loan will exceed 20% of our
anticipated capital contributions. Additionally, mortgage loans in favor
of any one borrower will not exceed 20% of the capital to be raised.
10. Reserve Fund. We will establish contingency working capital reserves
of approximately 3% of the gross proceeds of this offering to cover our
unexpected cash needs.
11. Credit Evaluations. Before making a loan, Vestin Mortgage must first
determine that a borrower has sufficient equity in the security property
to meet the loan-to-value ratios described above. Vestin Mortgage may
also consider the income level and creditworthiness of a borrower to
determine its ability to repay the mortgage loan.
12. Sale of Mortgage Investments. Although Vestin Mortgage has no plan
to do so, Vestin Mortgage may sell our mortgage loans or interests in
our loans to either affiliates or non-affiliated parties when Vestin
Mortgage believes that it is advantageous to us to do so. However, as
noted elsewhere in this prospectus, we do not expect that the loans will
be marketable or that a secondary market will ever develop for them.
Mortgage Loans to Affiliates
We will not invest in mortgage loans made to Vestin Mortgage, Vestin or any of
our affiliates. However, we may acquire an investment in a mortgage loan payable
by Vestin Mortgage when Vestin Mortgage has assumed by foreclosure the
obligations of the borrower under that loan.
Purchase of Loans from Vestin Mortgage and its Affiliates
In addition to those loans Vestin Mortgage selects for us, we may purchase loans
that were originated by Vestin Mortgage or other parties and first held for
Vestin Mortgage's own portfolio, as long as the loan is not in default and
otherwise satisfies all of our lending criteria. Additionally, if the loan did
not originate within the 90 days before its purchase by us, Vestin Mortgage must
retain a minimum of a 10% interest in the loan. This requirement also applies to
any loan originated by an affiliate of Vestin Mortgage, such as Vestin, Mr.
Shustek or another principal of Vestin Mortgage.
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<PAGE> 33
Types of Loans We Intend to Invest In
We primarily invest in first and second mortgage loans and construction mortgage
loans on real property, although we will also invest in the types of loans
described below. Ordinarily, we will invest in loans having terms of one to
seven years and we will not invest in mortgage loans with a maturity of more
than 15 years. All loans provide for monthly payments of interest and some also
provide for principal amortization although our loans may provide for payments
of interest only and a payment of principal in full at the end of the loan term.
Vestin Mortgage does not intend to originate loans for us that permit the
principal to grow, or be capitalized, when accrued interest on the loan is not
paid.
First Mortgage Loans
First mortgage loans are secured by first mortgages on real property. We expect
that these loans will have terms of one to seven years.
Second Mortgage Loans
Our collateral for our second mortgage loans is real property that is already
subject to prior mortgage indebtedness. In the future we may also invest in
wraparound loans, which is similar to a second loan except that the loan balance
is the outstanding balance under the existing mortgage loans plus the amount
actually to be advanced by us under the new mortgage loan. Under a wraparound
loan, we would make principal and interest payments on behalf of the borrower to
the holders of the prior mortgage loans.
Construction Loans
Construction loans are loans originally made for both original development and
renovation of property. We expect our construction loans to be secured by first
mortgages on real property for terms of six months to two years.
We do not anticipate that we will disburse funds on a construction loan until
work in the previous phase of the project has been completed, and an independent
inspector has verified certain aspects of the construction and its costs.
Additionally, we require the submission of signed labor and material lien
releases by the borrower for each completed phase of the project before making
any periodic disbursements of loan proceeds.
Leasehold Interest Loans
Loans on leasehold interests are secured by an assignment of the borrower's
leasehold interest in the particular real property. We anticipate that the terms
of these loans will not exceed 15 years. The leasehold interest loans are either
amortized over a period that is shorter than the lease term or have a maturity
date prior to the date the lease terminates. These loans all permit Vestin
Mortgage to cure any default under the lease.
Bridge Loans
A bridge loan provides funds for commercial borrowers to make improvements to
the property to increase the net operating income of their property so that it
can qualify for institutional refinancing. Vestin Mortgage will value the
existing property and we will invest in loans for up to 75% of that value.
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<PAGE> 34
Land Loans
We will also invest in loans to purchase or develop raw, unimproved land. We
determine whether to invest in these loans based upon the "90-day quick sale
value" of the property and the borrower's actual capital investment in the
property. The "90-day quick sale value" is the highest price for which the land
could actually be sold within the next 90 days, as determined by local real
estate brokers and others. We believe this 90-day period approximates the time
required for a foreclosure. The value of the land is generally the same as its
cost to the borrower. We do not expect to invest in loans for more than 60% of
the "90-day quick sale value," and we anticipate that the borrower will have
made actual capital expenditures of at least 25% of the property's value.
Variable Rate Loans
We anticipate that most of the loans we invest in will be variable rate loans.
Variable rate loans originated by Vestin Mortgage may use as indices the one and
five year Treasury Constant Maturity Index, the Prime Rate Index and the Monthly
Weighted Average Cost of Funds Index for Eleventh District Savings Institutions
(Federal Home Loan Bank Board) and other indices. Vestin Mortgage may negotiate
spreads over these indices of 2.5% to 5.5%, depending upon market conditions
when the loan is made.
It is possible that the interest rate index used in a variable rate loan will
rise (or fall) more slowly than the interest rate of other loan investments
available to us. Vestin Mortgage attempts to minimize this interest rate
differential by tying variable rate loans to indices that are sensitive to
fluctuations in market rates. Additionally, most variable rate loans originated
by Vestin Mortgage contain provisions under which the interest rate cannot fall
below the initial rate.
Interest Rate Caps
All our variable rate loans will have interest rate caps. We anticipate that the
interest rate cap will be a ceiling that is 2-4% above the starting rate with a
floor rate equal to the starting rate. For these loans there is the risk that
the market rate may exceed the interest cap rate.
Assumable Loans
Variable rate loans of five to ten year maturities are not assumable without the
prior consent of Vestin Mortgage. We do not expect to invest in or purchase a
significant amount of other assumable loans. To minimize our risk, any borrower
assuming an existing mortgage loan will be subject to the same underwriting
criteria as the original borrower.
Prepayment Penalties and Exit Fees
Some of the loans we invest in will contain prepayment penalties or exit fees.
If our loans are at a high rate of interest in a market of falling interest
rates, the failure to have a prepayment penalty provision or exit fee in the
loan allows the borrower to refinance the loan at a lower rate of interest, thus
providing a lower yield to us on the reinvestment of the prepayment proceeds.
However, these loans will usually be written with relatively high minimum
interest rates, which we would expect to minimize the risk of lower yields.
Balloon Payment
Most of the loans we invest in or purchase will require the borrower to make a
"balloon payment" on the principal amount upon maturity of the loan. To the
extent that a borrower has an obligation to pay mortgage loan principal in a
large lump sum payment, its ability to repay the loan may be dependent upon its
ability to sell the property, obtain suitable refinancing or otherwise raise a
substantial amount of cash. As a result, these loans involve a higher risk of
default than loans where the principal is paid at the same time as the interest
payments.
Borrowing
We intend to borrow money:
- to finance our investments in mortgage loans,
- to prevent a default under mortgage loans that are senior to our
mortgage loans,
- to discharge senior mortgage loans if this becomes necessary to
protect our investment in mortgage loans, or
- to operate or develop a property that we acquired under a
defaulted loan.
At no time will our indebtedness exceed 70% of the fair market value of our
mortgage loans. This indebtedness may be with recourse to our assets.
In addition, we may enter into structured arrangements with lenders in order to
provide them with a senior position in mortgage loans which we might jointly
fund. For example, we might establish a wholly-owned special purpose corporation
which would borrow funds from an institutional lender under an arrangement where
the resulting mortgage loans would be assigned to a trust, and the trust would
issue a senior certificate to the institutional lender and a junior certificate
to the special purpose corporation. This would assure the institutional lender
of repayment in full prior to our receipt of any repayment on the jointly funded
mortgage loans.
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<PAGE> 35
Repayment of Mortgages on Sales of Properties
We may require a borrower to repay a mortgage loan upon the sale of the
mortgaged property rather than allow the buyer to assume the existing loan. We
will require repayment if we determine that repayment appears to be advantageous
to us based upon then-current interest rates, the length of time that the loan
has been held by us, the creditworthiness of the buyer and our objectives. We
will either invest our net proceeds from any capital transaction in new mortgage
loans, hold the net proceeds as cash or distribute them to the members. These
net proceeds will also include the principal of a loan deemed to be repaid for
tax purposes as a result of the nature of a loan modification or loan extension.
Our operating agreement provides that whether we choose to distribute the
proceeds or reinvest them, you will be deemed to have received a distribution of
capital and recontributed the same amount to us. Capital transactions include
payments of principal, foreclosures and prepayments of mortgages, to the extent
classified as a return of capital under the Internal Revenue Code, and any other
disposition of a mortgage or property.
No Trust or Investment Company Activities
We have not qualified as a real estate investment trust under the Internal
Revenue Code, and therefore we are not subject to the restrictions on its
activities that are imposed on real estate investment trusts. We intend to
conduct our business so that we are not an "investment company" within the
meaning of the Investment Company Act of 1940. Last, we intend to conduct our
business so that we are not to be deemed a "dealer" in mortgage loans for
federal income tax purposes.
Various Other Policies and Procedures
Without approval of a majority of the members, we will not:
- issue securities senior to the units or issue any units or other
securities for other than cash;
- invest in the securities of other issuers for the purpose of
exercising control, except when exercising our rights as a
secured lender;
- underwrite securities of other issuers;
- discontinue providing our members with the reports described in
this prospectus; or
- offer securities in exchange for property.
Competition and General Economic Conditions
Commercial banks, insurance companies, mortgage brokers, pension funds and other
institutional lenders may compete with Vestin Mortgage to make the type of loans
in which we invest. For the past few years, the major institutional lenders have
not been as active in the commercial mortgage market as in prior years.
Recently, however, many major institutional lenders have re-entered the
commercial mortgage market due to a stronger economy, stabilized or increased
property values and leasing rates, and the decrease in demand for residential
loans. As a result, we anticipate competition for investments in mortgages
secured by commercial properties, which creates pressure on lenders to lower
interest rates. Consequently, we may not be able to obtain as high interest
rates on mortgage investments as we would otherwise obtain, which would affect
our revenues and the distributions you receive.
Regulation
Our operations are conducted by Vestin Mortgage. Vestin Mortgage's operations as
a mortgage company are subject to extensive regulation by federal, state and
local laws and governmental authorities. Vestin Mortgage conducts its real
estate mortgage business under a "privileged" license issued by the State of
Nevada Financial Institutions Division. Under applicable Nevada law, the
division has broad discretionary authority over Vestin Mortgage's activities,
including the authority to conduct periodic regulatory audits of all aspects of
Vestin Mortgage's operations.
26
<PAGE> 36
We and Vestin Mortgage are also subject to the Equal Credit Opportunity Act of
1974, which prohibits creditors from discriminating against loan applicants on
the basis of race, color, sex, age or marital status, and the Fair Credit
Reporting Act of 1970, which requires lenders to supply applicants with the name
and address of the reporting agency if the applicant is denied credit. We are
also subject to various other federal and state securities laws regulating the
issuance and sale of securities, as well as the Employee Retirement Income
Security Act of 1974.
Should we or Vestin Mortgage fail to adhere to these regulations, we could face
potential disciplinary or other civil action that could have a material adverse
effect on our business.
27
<PAGE> 37
MANAGEMENT
Our Management
Our business is managed by Vestin Mortgage. The telephone number for Vestin
Mortgage's offices is (702) 227-0965. Vestin Mortgage is a mortgage broker
licensed in the State of Nevada and a wholly owned subsidiary of Vestin Group,
Inc. ("Vestin"). Vestin is a Delaware corporation with publicly held common
stock that trades on the Nasdaq SmallCap Market under the symbol "VSTN". Until
early July 2000, Vestin traded under the symbol "DLMA." Vestin had a net worth
of approximately $8,500,000 as of September 30, 2000 and is briefly described
later in this section.
Vestin Mortgage
Vestin Mortgage manages and controls our affairs and has responsibility and
final authority in almost all matters affecting our business. These duties
include dealings with members, accounting, tax and legal matters, communications
and filings with regulatory agencies and all other needed management and
operational duties. Additionally, because Michael Shustek owns a controlling
interest in Vestin and Vestin wholly owns Vestin Mortgage, Mr. Shustek may be
deemed to control our activities through Vestin Mortgage. As our only Manager,
Vestin Mortgage has complete authority and responsibility for:
- evaluating and choosing the mortgage loans in which we will
invest;
- deciding what agreements we will enter into and whether we will
enter into joint ventures with other companies to invest in
mortgage loans;
- originating, servicing and managing our mortgage loan
investments; and
- managing all our other operations.
Notwithstanding that Vestin Mortgage has the broad authority described
above, neither Vestin Mortgage directly nor Mr. Shustek indirectly may
do any of the following:
- impair our ability to carry on or change the nature of our
business;
- admit a Manager without prior approval of a majority of the
members;
- sell all or over 50% of our assets or dissolve the Fund without
prior majority approval; and
- anything else not permitted in the Operating Agreement.
You have no right to participate in the management or control of our
business or affairs other than to exercise the limited voting rights
provided for members in the Operating Agreement. Vestin Mortgage has
primary responsibility for the initial selection, evaluation and
negotiation of our mortgage loans. Vestin Mortgage will provide all
executive, supervisory and administrative services for our operations,
including servicing the mortgage loans we hold. Our books and records
are maintained by Vestin Mortgage, subject to audit by independent
certified public accountants.
Removal of Vestin Mortgage as Manager
Vestin Mortgage will cease to be our Manager upon its removal, withdrawal or
dissolution, or if it is found to be bankrupt. A majority, excluding Vestin
Mortgage's interest, can remove Vestin Mortgage as our Manager upon the
following conditions:
- if the members have not previously elected an additional
Manager, the removal will not become effective for at least 120
days following the consent or authorizing vote by the majority;
- during the 120 days set forth above, a majority can agree in
writing to continue our business and, within six months
following the termination date of the last remaining Manager,
elect and admit a new Manager who agrees to continue our
existence; and
- the substitution of a new Manager shall be effective when the
new Manager accepts in writing the duties and responsibilities
of a Manager.
If our business continues after Vestin Mortgage is no longer our
Manager, then we will pay Vestin Mortgage a sum equal to all amounts
then owing to it. By majority vote, we may terminate Vestin
28
<PAGE> 38
Mortgage's interest in the Fund by paying an amount equal to the then-present
fair market value of Vestin Mortgage's interest in the Fund, which would be
Vestin Mortgage's outstanding Capital Account at such time. All payments to a
terminated Manager must be fair and must protect our solvency and liquidity.
If a majority does not designate and admit a new Manager within the time
specified, we will dissolve. Vestin Mortgage may assign its interest in the
Fund, but our Manager may not be changed except as set forth above.
Evaluation and Acquisition by Vestin Mortgage
Vestin Mortgage considers prospective loans for us. In that regard, Vestin
Mortgage evaluates the credit of prospective borrowers, analyzes the return to
us of potential mortgage loan transactions, reviews property appraisals, and
determines which types of transactions appear to be most favorable to us.
Mortgage Loans
Vestin Mortgage identifies a potential loan and then processes the application.
When processing a loan, Vestin Mortgage will
- order and review a property title search,
- perform a property inspection,
- obtain an appraisal which is reviewed for reasonableness, and
- perform credit underwriting through borrower interviews, credit
reports and review of borrower and principals' financials.
After processing the loan, Vestin Mortgage reviews the loan through its
loan committee.
After we acquire mortgage loans, Vestin Mortgage also manages our mortgage loan
portfolio. Vestin Mortgage is responsible for:
- reviewing of loans;
- recommending changes in loans;
- employing and supervising employees who handle the loans;
- preparing and reviewing projected performance;
- reviewing of reserves and working capital;
- collecting and maintaining all loans;
- creating and implementing investment policies in furtherance of
those contained in the Operating Agreement;
- preparing and reviewing budgets, economic surveys, cash flow and
taxable income or loss projections and working capital
requirements;
- preparing and reviewing of reports for securities filings,
distribution to our members or otherwise;
- communicating with members;
- supervising and reviewing our bookkeeping, accounting and
audits;
- supervising and reviewing the preparation of our state and
federal tax returns; and
- supervising professionals employed by us, including attorneys,
accountants and appraisers.
Prior Experience
In April 1999, Vestin, then known as Sunderland, acquired the mortgage brokerage
business of Del Mar Mortgage, Inc. and Del Mar Holdings, Inc. from Michael
Shustek by purchasing their assets and assuming their liabilities in exchange
for shares of common stock. As part of a corporate
29
<PAGE> 39
reorganization, Vestin transferred the mortgage brokerage business of Del Mar
Mortgage and Del Mar Holdings to Vestin Mortgage, then known as Capsource.
Vestin Mortgage holds a privileged mortgage broker's license in Nevada. As a
licensed mortgage broker, Vestin Mortgage is subject to regular on site
examinations by the Financial Institutions Division of the State of Nevada,
which also reviews its advertising, mandates strict record maintenance, and
reviews its financial reporting, including its financial statements and monthly
activity reports.
Vestin Mortgage obtains borrowers through approved advertisements, referrals and
repeat business, and obtains investors interested in funding the loan in the
same manner. It then matches the two together in compliance with Nevada law.
30
<PAGE> 40
Vestin Mortgage does not charge any fees to investors. Vestin Mortgage's
compensation is primarily in the form of loan evaluation and processing fees as
well as origination fees paid by borrowers, each ranging from three to five
percent of the respective loan amount.
Vestin Mortgage acts as a mortgage broker originating many separate loans, each
of which is separately funded by institutions and individuals. In contrast, here
we will be the party investing in loans with our own funds. Our assets will be a
pool of loans, the distributions from and proceeds of which will be passed
through to you as described in this prospectus. Unlike the Fund, Vestin Mortgage
does not and will not own the loans. The assets of Vestin Mortgage are primarily
receivables in the form of evaluation, processing, origination and servicing
fees.
Since 1997, Vestin Mortgage and its predecessor Del Mar Mortgage have acted as
mortgage brokers for the investment by about 4,500 investors in about 400
mortgage notes totaling about $500 million. Vestin Mortgage currently services
over 125 loans totaling approximately $272 million. The collateral for these
loans are real properties primarily located in Nevada, California and Arizona.
Vestin Mortgage used working capital obtained from capital contributions to fund
some of these loans prior to selling them as part of its mortgage brokerage
business, except for $1,980,000 of indebtedness incurred to finance these
transactions. Vestin Mortgage and Del Mar Mortgage limit their businesses to
mortgage lending, and have not acquired any real properties except in connection
with loan foreclosures.
For the three year period ended December 31, 1999, the properties securing these
loans can be subdivided as follows:
<TABLE>
<CAPTION>
Aggregate amount invested
(as percentage of total purchases by
these programs)
Property Type ------------------------------------
<S> <C>
Commercial (total).............................. 58%
Land Acquisition................................ 36%
Residential..................................... 6%
</TABLE>
Of the loans described in the foregoing table, 90% by dollar amount were
development loans, including construction loans, the balance were land
acquisition loans and loans secured by developed properties.
There have been no major adverse conditions with respect to Vestin Mortgage's or
Del Mar Mortgage's businesses. Of the loans that were made, we are aware of only
five properties that have gone to foreclosure sale over the last six years. The
default rate on the loans brokered by Vestin Mortgage and Del Mar Mortgage has
averaged 2.5% during the last three years.
The description above of Vestin Mortgage and its predecessors is not intended to
provide a description of the loans to be invested in or purchased by us in the
future.
Vestin Mortgage is currently acting as Manager of a fund named DM Mortgage
Investors, LLC ("DM"), which has investment objectives similar to ours. DM
commenced a public offering of its securities and commenced business operations
on September 1, 2000. DM is seeking to raise up to $100,000,000 for investment
in mortgage loans. As of November 30, 2000, DM had total assets of $36,210,000,
of which, 92% were invested in mortgage loans.
The following tables set forth certain information with respect to DM's
experience in raising and investing funds and operating results for the period
ending September 30, 2000.
Table I. Experience in Raising and Investing Funds
<TABLE>
<CAPTION>
DM Mortgage
Investors, LLC
--------------
<S> <C>
AS OF SEPTEMBER 30, 2000:
Dollar amount offered $100,000,000
Dollar amount raised (20%) $ 19,665,400
Less offering expenses:
Selling commission and discounts retained by affiliates $ --
Organizational expenses $ --
Other $ --
Reserves (3%) $ 589,962
Percent available for investment 97%
Acquisition costs:
Prepaid items and fees related to purchase of property $ --
Cash down payment $ --
Acquisition fees $ --
Other $ --
Total acquisition cost $ --
Percent leverage (mortgage financing divided by total acquisition cost) 0%
Date offering began 09/01/2000
Length of offering pending
Months to invest 90% of amount available for investment N/A
</TABLE>
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<PAGE> 41
Table III. Operating Results of Prior Programs
<TABLE>
<CAPTION>
DM Mortgage
Investors, LLC
--------------
<S> <C>
For the one month ended September 30, 2000:
Gross Revenues $ 125,722
Less: Operating expenses (95)
Interest expense --
Depreciation --
---------
Net income-GAAP Basis $ 125,627
=========
Taxable income from operations $ 125,627
=========
Cash generated from operations $ 168,568
Less: Cash distributions to investors
-from operating cash flow --
-from sales and refinancing --
-from other --
---------
Cash generated (deficiency) after cash distributions 168,568
Less: Special items --
---------
Cash generated (deficiency) after cash distributions and special items $ 168,568
=========
Tax and Distribution Data Per $1,000 Invested
Federal Income Tax Results:
Ordinary income (loss)
-from operations $ --
=========
-from recapture $ --
=========
Capital gain (loss) $ --
=========
Cash Distributions to Investors Source (on GAAP basis)
-Investment income $ --
=========
-Return of capital $ --
=========
Source (on cash basis)
-Sales $ --
=========
-Refinancing $ --
=========
-Operations $ --
=========
-Other $ --
=========
</TABLE>
Note: DM Mortgage Investors, LLC commenced operations on
September 1, 2000. Accordingly, the information above
reflects operating results for the one month ended
September 30, 2000. DM Mortgage Investors, LLC year end
is December 31. Therefore, Tax and Distribution Data Per
$1,000 Invested information has not been compiled.
32
<PAGE> 42
Directors and Executive Officers of Vestin Mortgage and Vestin
The directors and executive officers of Vestin Mortgage are listed below:
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
Michael V. Shustek.................................... 42 Director, Chief Executive Officer,
Chairman
Stephen J. Byrne...................................... 43 President and Director
Peggy S. May.......................................... 31 Senior Vice President
Lance K. Bradford..................................... 34 Treasurer, Secretary and Director
</TABLE>
The directors and officers of Vestin are as follows:
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
Michael V. Shustek.................................. 42 Chairman of the Board, Chief
Executive
Officer and Director
Stephen J. Byrne.................................... 43 President and Director
Ira S. Levine....................................... 40 Executive Vice President of Legal and
Corporate Affairs
Lance K. Bradford................................... 34 Chief Financial Officer, Corporate
Secretary and Director
Stephen A. Schneider................................ 54 Chief Operations Officer
Michael J. Whiteaker................................ 50 Vice President of Regulatory Affairs
Robert J. Aalberts.................................. 49 Director
John E. Dawson...................................... 43 Director
Robert L. Forbuss................................... 52 Director
Robert A. Groesbeck................................. 39 Director
</TABLE>
All the directors of Vestin Mortgage and Vestin hold office until the next
annual meeting of shareholders or period of one year. The last annual meeting of
Vestin stockholders was June 23, 2000. Vestin, as the only shareholder of Vestin
Mortgage, can change the composition of Vestin Mortgage's Board of Directors at
its sole discretion. Similarly, Michael Shustek can cause a change in the Board
of Directors of Vestin by virtue of his controlling ownership interest in
Vestin. Vestin, which is a reporting company under the Securities Exchange Act
of 1934, has established an audit committee consisting of three independent
directors and requires that its audit committee be comprised of independent
directors. Vestin Mortgage, which is privately held and has only three
directors, has no audit committee and no requirement of independence at this
time. The By-laws of Vestin Mortgage and Vestin provide for up to 10 directors
and permit the Board of Directors to fill any vacancy on the Board of Directors.
Officers of both companies serve at the discretion of the Board of Directors.
The principal occupation and business experience for each of our officers and
directors and key employees, for at least the last five years, are as follows:
Michael V. Shustek has been a director of Vestin Mortgage and Chairman of the
Board of Directors, Chief Executive Officer and a director of Vestin since April
1999. In 1995, Mr. Shustek founded Del Mar Mortgage, and has been involved in
various aspects of the real estate industry in Nevada since 1990. In 1993, he
founded Foreclosures of Nevada, Inc., a company specializing in non-judicial
foreclosures. In 1993, Mr. Shustek also started Shustek Investments, a company
that originally specialized in property valuations for third-party lenders or
investors and which continues today as the primary vehicle for his private
investment portfolio. In 1997, Mr. Shustek founded Nevada First Bank, with the
largest initial capital base of any new state charter in Nevada's history. In
2000, Mr. Shustek co-authored a book, Trust Deed Investments, on the topic of
private mortgage lending. Mr. Shustek is a guest lecturer at the University of
Nevada, Las Vegas, where he also teaches a course in Real Estate Law and Ethics.
Mr. Shustek received a Bachelor of Science degree in Finance at the University
of Nevada, Las Vegas.
On November 9, 1998, the State of Nevada, Department of Business and Industry,
Financial Institutions Division and Del Mar Mortgage Inc., which is owned by Mr.
Shustek, settled allegations of noncompliance brought by the division. Del Mar
Mortgage neither admitted nor denied the division's allegations. On February 11,
1999, the division issued an order against Del Mar Mortgage, which alleged
violations of the
33
<PAGE> 43
Nevada regulatory statutes and established a conservator to oversee Del Mar
Mortgage's operations. On February 16, 1999, Del Mar Mortgage sued the division,
contesting the order. On March 26, 1999, Del Mar Mortgage and the division
entered into a stipulated court order that effectively superceded the November
1998 agreement. The stipulated court order also vacated the division's order and
removed the conservator. Without admitting any facts, and solely to settle these
matters, Del Mar Mortgage agreed to assure compliance with applicable law in all
advertisements, solicitations of mortgage borrowers and in its making and
servicing of mortgage loans. Vestin Mortgage and Vestin, as successors to the
mortgage company business of Del Mar Mortgage, agreed to adhere to the terms of
the stipulation. Del Mar Mortgage also paid an additional $20,000 to the
division under the November 1998 agreement, in addition to the $30,000 Del Mar
Mortgage had paid prior to February.
Stephen J. Byrne has been the President and a director of Vestin Mortgage since
its inception in 1997 and has been the President and a director of Vestin since
April 1999. Mr. Byrne joined Del Mar Mortgage in June 1998 as its Senior Lending
Officer. In 1997, Mr. Byrne founded Vestin Mortgage which he owned and operated
before joining Del Mar Mortgage. From 1991 to 1997, Mr. Byrne served as Vice
President of Wells Fargo Bank and of its predecessor First Interstate Bank of
Nevada. Mr. Byrne served in various capacities with First Interstate Bank,
including Manager of the Diversified Asset Group based in Las Vegas and the
commercial Diversified Asset Group in Houston, Texas. Mr. Byrne received a
Bachelor of Science degree in Business Administration from Hastings College,
Hastings, Nebraska.
Ira S. Levine received his BS in Business Administration specializing in
accounting from the U. of Nevada in 1982, his Juris Doctorate from Pepperdine
University School of Law in 1985 and his Masters of Legal Letters in Taxation
from New York University in 1986. Mr. Levine is a member of the state bars of
both Nevada and California. Since 1997, Mr. Levine has been a partner in the law
firm of Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP. Prior to that he
was a shareholder in the law firm of Levine, McBride & Garfinkel, LLP. From 1995
to 1997, Mr. Levine was a shareholder in the law firm of Streich Lang. Prior to
that, Mr. Levine was senior vice president, secretary and general counsel of
United Gaming, Inc. now known as Alliance Gaming, Inc. Mr. Levine started his
legal career with the law firm of McKenna, Conner & Cuneo in Los Angeles, CA.
Peggy S. May has been with Vestin since September 1995, and has been the Senior
Vice President since 1997. She is responsible for all new and existing clients,
loan packages and manages investor relationships and serves as the administrator
of the corporate offices. Ms. May has over ten years of experience in title,
escrow and private lending.
Lance K. Bradford has been a director, Treasurer and Secretary of Vestin
Mortgage and the Chief Financial Officer, Corporate Secretary, and a director of
Vestin since April 1999. Since 1992, Mr. Bradford has been a partner in L.L.
Bradford & Company, Las Vegas, Nevada, a Certified Public Accounting firm that
he founded. From 1988 to 1991, Mr. Bradford served as an accountant with Ernst &
Young International. Mr. Bradford received a Bachelor of Science degree in
Accounting from the University of Nevada, Reno.
Stephen A. Schneider has been Chief Operations Officer since July 2000. Mr.
Schneider is responsible for the maintenance of all banking and financial
relationships. Mr. Schneider has over 26 years experience in the financial
services industry. He worked at US Bank where he managed the bank's business
banking department and underwrote loans for companies with sales of $1 million
to $10 million and maintained relationships with the bank's business customers.
Mr. Schneider sits on the boards of Focus Las Vegas and Leadership Las Vegas
Youth as well as several other organizations. He will assist in the creation of
the Vestin Foundation, a non-profit organization aimed at funding local
charitable organizations.
Michael J. Whiteaker has been Vice President of Regulatory Affairs since May 14,
1999 and is experienced in the banking and finance regulatory fields, having
most recently served with the State of Nevada -- from 1982 to 1999 -- as its
Supervisory Examiner, responsible for the financial and regulatory compliance
audits of all financial institutions in Nevada. Mr. Whiteaker has worked
extensively on matters pertaining to both state and federal statutes,
examination procedures, policy determination and credit administration for
commercial and real estate loans. From 1973 to 1982 Mr. Whiteaker was Assistant
Vice President of Nevada National Bank, responsible for a variety of matters
including loan review.
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<PAGE> 44
Robert J. Aalberts has been a director of Vestin since April 1999. Since 1991,
Mr. Aalberts has held the Ernst Lied Professor of Legal Studies professorship at
the University of Nevada, Las Vegas. From 1984 to 1991, Mr. Aalberts was an
Associate Professor of Business Law at Louisiana State University -- Shreveport.
From 1982 through 1984, he served as an attorney for Gulf Oil Company. Mr.
Aalberts has co-authored a book relating to the regulatory environment, law and
business of real estate; and he is the author of numerous legal articles,
dealing with various aspects of real estate, business and the practice of law.
Mr. Aalberts received his Juris Doctor degree from Loyola University, New
Orleans, Louisiana and received a Master of Arts from the University of
Missouri. He is a member of the State Bar of Louisiana.
John E. Dawson has been a director of Vestin since March 2000. Since 1995, Mr.
Dawson has been a partner at the law firm of Marquis & Aurbach. Before joining
Marquis & Aurbach, Mr. Dawson was affiliated with the law firm of Jeffrey L.
Burr & Associates. Mr. Dawson co-authored the Asset Protection Guidebook for
Attorneys and Accountants and has presented seminars on asset protection. Mr.
Dawson received his Bachelor's Degree from Weber State and his J.D. from Brigham
Young University. Mr. Dawson received his Masters of Law (L.L.M.) in Taxation
from the University of San Diego in 1993. Mr. Dawson was admitted to the Nevada
Bar in 1988 and the Utah Bar in 1989.
Robert L. Forbuss has been a director of Vestin since March 2000. Since February
1999, Mr. Forbuss has been the President of Strategic Alliances, a business and
government affairs consulting organization. From March 1998 through February
1999, he was the President of Medical Transportation of America. From February
1997 to March 1998, Mr. Forbes was the Chief Executive Officer of the Southwest
Division of American Medical Response. From March 1994 to February 1997, he was
Senior Vice President of Laidlaw Medical Transportation, which had acquired
Mercy Medical Services, Inc., a company that Mr. Forbuss founded, owned and
managed for 22 years. The latter four companies are all in the business of
providing emergency ambulance and transportation services. Mr. Forbuss received
his Bachelor of Arts in Public Administration and Political Science from the
University of California at Long Beach.
Robert A. Groesbeck has been a director of Vestin since August 2000. Mr.
Groesbeck received his BA in Criminal Justice from the U. of Nevada in 1985, his
Juris Doctorate from Thomas S. Cooley School of Law in 1990 and his Masters of
Business Administration from National University in 1993. Mr. Groesbeck is the
founder of Home Works, a full service home services company. From 1994 to June
2000, Mr. Groesbeck was the General Counsel of Republic Silver State Disposal,
Inc. From 1993 to 1997, Mr. Groesbeck was the Mayor of Henderson, Nevada. Mr.
Groesbeck currently serves on numerous charitable boards.
Daniel B. Stubbs has been Underwriting Administrator of Vestin Mortgage since
January 2000. Mr. Stubbs serves on the loan committee and is responsible for
analyzing the risks of each loan as well as prescribing Title Insurance coverage
for each individual transaction. In addition, Mr. Stubbs acts as a liaison
between Vestin Mortgage and the various banks that carry its lines of credit.
Mr. Stubbs has over 13 years of experience in the Title Insurance industry. Mr.
Stubbs received his Bachelor of Arts in Communications Studies from the
University of Nevada, Las Vegas.
The following information about executive compensation has been provided by
Vestin and Vestin Mortgage. Vestin employees receive no extra pay for serving as
directors. Each non-employee director receives $1,500 per monthly meeting, which
includes personal attendance at one monthly board meeting. Each Vestin outside
director receives 15,000 options to acquire Vestin common stock at the then fair
market value on the later of the date the non-employee director is elected to
the Board or the date the option is approved by Vestin's stockholders and the
underlying shares of common stock are registered. Vestin provides directors' and
officers' liability insurance of $5,000,000 and also has agreed to indemnify
each director to the fullest extent of Delaware law.
The following Summary Compensation Table sets forth the compensation paid or
awarded for the fiscal year ended December 31, 1999 to Vestin and Vestin
Mortgage's Chief Executive Officer and the next most highly compensated
executive officers whose compensation for the fiscal year ended December 31,
1999 exceeded $100,000. No other executive officer received compensation in
excess of $100,000 for fiscal year ended December 31, 1999 from either Vestin or
Vestin Mortgage.
35
<PAGE> 45
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual ----------------------
Compensation(1) All Other
------------------------------------- ----------------------
Name and Position Year Salary($) Bonus($) Other Awards Compensation
----------------- ---- --------- -------- ----- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael V. Shustek............................................. 1999 720,000 0 0 0 0
Chairman and Chief
Executive Officer
Stephen J. Byrne............................................... 1999 240,000 171,515 0 0 0
President
Peggy S. May................................................... 1999 120,000 0 0 0 0
Senior Vice President
</TABLE>
(1) Vestin began payments to its personnel as of April 1999.
The compensation above for each of Messrs. Shustek and Byrne includes
compensation for services rendered to Vestin Mortgage and other Vestin
affiliates as set forth in the most recent 10-K of Vestin, which was
filed by Sunderland Corporation. Of the amounts set forth above, Mr.
Shustek received $360,000 of his total compensation for services
rendered to Vestin Mortgage, and Mr. Byrne received $286,515 of his
total compensation for services rendered to Vestin Mortgage. Ms. May
provided services to and received her compensation directly from Vestin
Mortgage.
Vestin's Board of Directors adopted a stock option plan on July 28, 1999.
Vestin's stockholders approved the plan at Vestin's annual stockholders' meeting
on June 23, 2000.
Share ownership
The following table indicates the share ownership of Vestin. Vestin owns all of
the 100 issued and outstanding shares of Vestin Mortgage, and Vestin Mortgage is
the sole initial member of the Fund.
<TABLE>
<CAPTION>
Percent of
Common Stock Common Stock
Name Beneficially Owned(1) Beneficially Owned
---- --------------------- ------------------
<S> <C> <C>
Michael V. Shustek, Chairman and Chief Executive Officer 3,798,000 54.3%
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
Stephen J. Byrne, President, Director 63,533 *
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
Ira S. Levine, Executive Vice President of Legal and
Corporate Affairs 100,100 *
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
Peggy S. May, Senior Vice President 10,000 *
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
Lance K. Bradford, Chief Financial Officer, Corporate
Secretary and Director 670,000 9.7%
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
Stephen A. Schneider, Chief Operations Officer 10,000 *
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
Michael J. Whiteaker 16,667 *
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
Robert J. Aalberts, Director 6,000 *
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
Robert W. Fine 405,000 5.8%
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
John E. Dawson, Esq., Director 13,400 *
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
</TABLE>
<PAGE> 46
<TABLE>
<S> <C> <C>
Robert L. Forbuss, Director 5,000 *
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
Robert A. Groesbeck, Director 5,000 *
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
All directors and executive officers as a group (8 persons) 4,712,600(2) 67.4%
</TABLE>
* Less than 1%
(1) Based upon 6,989,270 shares outstanding. (2) Includes 640,000 shares
received by Mr. Bradford and his spouse from the Company's acquisition
of L.L. Bradford & Company on March 31, 2000. 320,000 of these shares
are owned by Mr. Bradford's spouse. Mr. Bradford disclaims beneficial
ownership of these shares.
(2) Includes presently exercisable options and warrants in the following
amounts: Shustek --- 500,000, Byrne --- 33,333, Levine --- 75,000,
Schneider --- 10,000, Whiteaker --- 16,667, Aalberts --- 5,000, Fine ---
5,000, Dawson --- 5,000, Forbuss --- 5,000, Groesbeck --- 5,000.
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COMPENSATION OF VESTIN MORTGAGE AND AFFILIATES
<TABLE>
<S> <C>
Compensation to Vestin Mortgage and Affiliates............... Vestin Mortgage and Affiliates will
receive certain fees and credit for
certain expenses for performing
services in this offering and for
conducting our operations.
Offering and Organizational Stage
Public Offering Expenses..................................... Vestin Mortgage will pay all selling
commissions and expenses related to this
Offering. To the extent that such
expenses consist of filing and review
fees, legal, accounting, printing and
other expenses of this Offering paid to
non-affiliates of Vestin Mortgage,
payment of such expenses will be deemed a
capital contribution by Vestin Mortgage
up to a maximum of $2,000,000.
</TABLE>
Operational Stage
Where the fees below are described as competitive fees or based on local
market conditions, that means the fees are determined by price
competition within a given market. To ensure that our fees remain
competitive, we will directly contact our competition, such as major
banks in the local market or other relevant commercial lenders. We
expect that the interest rate on the loans in which we invest will be
2-3 points higher than comparable loans made by banks and that the fees
paid to Vestin Mortgage will be 2-3 points higher than similar fees
charged by conventional lenders. We believe that this rate structure is
consistent with rates and fees charged by other non-conventional
lenders. References below to local law also contemplate additional
requirements imposed by local or state law, such as usury laws.
<TABLE>
<S> <C>
Paid by Borrowers
Loan Brokerage Fees for Loan Selection and
Origination.......................................... 2%-6% of each loan, competitive fee based on
local market conditions.
These fees are paid by the borrower no later
than when the loan proceeds are disbursed.
Loan Evaluation and Processing Fees.................. 2%-5% of each loan, competitive fee based on
local market conditions.
These fees are paid by the borrower no later
than when the loan proceeds are disbursed.
Service Fee for Administering Loans.................. Annual fee of up to 0.25% of the outstanding
principal balance of loans.
These fees will be paid by the borrower either
annually or added to the
monthly payments.
</TABLE>
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<PAGE> 48
<TABLE>
<S> <C>
Loan Extension Fee................................... 2%-5% of outstanding principal, as permitted by
local law and local market
conditions. The amount to be received is not
determinable at this time.
These fees will be paid when the loan is
extended.
Paid by Us
Annual Management Fee................................. Up to 0.25% of our aggregate capital
contributions, paid monthly
in arrears.
Real Estate Brokerage Fees on Resales of
Foreclosed Property to Vestin Mortgage................ Up to 3% of proceeds where Vestin Mortgage
substantially contributed to
the sale; up to 6% for all persons involved.
These fees are not yet
determinable. We will pay these fees promptly
out of the proceeds of a
sale of the relevant real estate.
</TABLE>
Vestin Mortgage will make arrangements with the respective borrowers for Vestin
Mortgage's fees owing from those borrowers. Vestin Mortgage anticipates that
borrowers will pay its compensation out of the proceeds of loans or upon closing
the relevant transaction. For loan servicing fees, Vestin Mortgage will receive
these fees monthly in arrears along with the payments it receives on loans that
we have acquired. Vestin Mortgage will make arrangements with borrowers within
one month to receive late fees on loan payments.
The Manager may, in its sole discretion, share with us the origination fees it
receives from borrowers. The Manager is under no obligation to share its
origination fees and investors should not assume that any origination fees will
be shared with the Company.
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<PAGE> 49
CONFLICTS OF INTEREST
The relationships among us, Vestin Mortgage and the directors and other
affiliates of Vestin Mortgage will result in various conflicts of interest.
Vestin Mortgage and its directors and other affiliates are engaged in business
activities involving real estate lending, including the management of DM
Mortgage Investors, LLC, a fund with investment objectives similar to ours.
Vestin Mortgage anticipates engaging in additional business activities in the
future that may be competitive with us. Vestin Mortgage and its officers and
directors will exercise their fiduciary duties to us and to you in a manner they
believe will preserve and protect your rights as a member. Additionally, our
Operating Agreement contains provisions that limit our ability to enter into
transactions with Vestin Mortgage and its affiliates.
The paragraphs below describe material conflicts of interest that may arise in
the course of Vestin Mortgage's management and operation of our business. The
list of potential conflicts of interest reflects our knowledge of the existing
or potential conflicts of interest as of the date of this prospectus. We cannot
assure you that no additional conflicts of interest will arise in the future.
The organizational structure of Vestin, Vestin Mortgage and their affiliates is
as follows:
Michael Shustek
Vestin Group, Inc.
(controlling interest owned by Michael Shustek)
Del Mar Mortgage, Inc.
(100% owned by Michael
Shustek)
Vestin Capital
(100% owned by Vestin)
Lead Dealer
Vestin Mortgage
(100% owned by Vestin)
Manager and initial Member of
DM Mortgage Investors, LLC
(a $100 million fund with investment
objectives similar to ours)
and VESTIN FUND II, LLC
1. Payment of Fees and Expenses. Vestin Mortgage and its affiliates will receive
substantial fees and expenses from the proceeds of the Offering and our ongoing
operations, including:
Paid by Borrowers:
- loan brokerage fees
- loan evaluation and processing fees
- loan servicing fees
- loan extension fees
Paid by Us:
- annual management fee, and
- real estate brokerage commissions payable upon the resale of
foreclosed properties.
Fees charged to us will be payable even if we are not profitable or the
particular transaction causes us to incur a loss.
We will pay an annual management fee to Vestin Mortgage of up to 0.25% of the
aggregate capital contributions to the Company. Vestin Mortgage will pay and
will not be reimbursed by us for any general or administrative overhead expenses
it incurs that exceed its annual management fee.
2. Purchase Of Mortgage Notes from Vestin Mortgage. We will acquire our mortgage
loans from or through Vestin Mortgage. Vestin Mortgage is in the business of
obtaining, processing, making, brokering and selling, and managing and servicing
mortgage loans. All our mortgage loans purchased from Vestin Mortgage will be at
prices no higher than the lesser of the cost of the mortgage loan to Vestin
Mortgage or the then current market value of the mortgage loan. A committee of
officers and directors of Vestin Mortgage makes
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<PAGE> 50
all decisions concerning the mortgage loans in which we will invest or purchase.
This committee is currently comprised of Stephen J. Byrne, Steve Schneider, Mike
Whiteaker, Peggy May, and Daniel Stubbs. Because Vestin Mortgage's fees are
generated by the volume of the mortgage loans we purchase, Vestin Mortgage will
face a conflict of interest in determining whether a loan not squarely within
our investment guidelines is appropriate for our loan portfolio.
3. Non-Arm's Length Agreements. Our agreements and arrangements for compensating
Vestin Mortgage are not the result of arm's-length negotiations. Additionally,
none of the three directors of Vestin Mortgage is independent.
4. Competition for the Time and Services of Common Officers. We will rely on
Vestin Mortgage and its directors and officers for the management of our
operations. When performing their duties, the officers, directors and employees
of Vestin Mortgage may, for their own account or that of others, originate
mortgages and acquire investments similar to those made or acquired by us. The
directors of Vestin Mortgage also may act as trustees, directors or officers, or
engage in other activities for themselves and/or other entities and may acquire,
broker and originate similar mortgage investments for their own account or that
of others. Vestin Mortgage is the manager of DM, a fund raising $100 million
with investment objectives similar to ours. As of November 30, 2000, DM had
total assets of $36,210,000, of which, 92% were invested in mortgage loans.
Accordingly, conflicts of interest will arise in operating more than one entity
for allocating time between the entities. The directors and officers of Vestin
Mortgage will devote such time to our affairs and as they determine in good
faith and in compliance with their fiduciary obligations to us and our members,
to be necessary for our benefit.
Vestin Mortgage believes it has sufficient staff to be capable of discharging
its responsibility to us and to all other entities to which they or their
officers or affiliates are responsible. However, during times when we and the
other businesses are handling a high volume of loans, a conflict will arise as
to which company's loan processing to complete first.
5. Competition between the Fund, DM, Vestin Mortgage and Vestin Mortgage's
Affiliates for Investment Opportunities. Vestin Mortgage anticipates that it or
its affiliates will engage in businesses which are or will be competitive with
ours or which have the same management as we do. To the extent that these other
entities with similar investment objectives have funds available for investment
when we do and a potentially suitable investment has been offered to us or one
of these programs, conflicts of interest will arise as to which entity should
acquire the investment.
If any conflict arises between us and any other affiliated program as to which
company will have the right to invest in a particular mortgage loan or other
investment, Vestin Mortgage will make the determination largely based on a
review of the respective loan portfolios. Vestin Mortgage will also base the
decision on factors such as the amount of funds available for investment, yield,
portfolio diversification, type and location of the property on which Vestin
Mortgage will make the mortgage loan, and proposed loan or other transaction
terms. The officers and directors of Vestin Mortgage will be responsible for
monitoring this allocation method to be sure that it is applied fairly.
Vestin Mortgage remains subject to a fiduciary duty to us and our members
described in this prospectus. Subject to this fiduciary duty, neither Vestin
Mortgage nor its affiliates will be obligated to present to us any particular
investment opportunity that comes to their attention, even if the opportunity is
of a character that might be suitable for us.
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<PAGE> 51
6. Lack of Separate Representation. We are represented by the same counsel as
Vestin Mortgage and its affiliates, and we anticipate that this multiple
representation by our attorneys will continue in the future. If a dispute arises
between us and Vestin Mortgage or any of its affiliates, Vestin Mortgage or the
affiliate will either obtain separate counsel or facilitate our retaining
separate counsel for such matters. However, we do not anticipate obtaining
separate counsel should there be a need in the future to negotiate or prepare
contracts or other agreements between us and Vestin Mortgage for services
including those contemplated by this prospectus, and as a result these
agreements will not reflect arm's length bargaining.
7. Rights of Affiliates. Any director or officer of Vestin Mortgage and any
other affiliate may acquire, own, hold and dispose of units for his individual
account and may exercise all rights of a member, except for voting rights with
respect to the Manager, to the same extent and in the same manner as if he were
not an affiliate of ours.
8. We May Co-Invest in Mortgages Acquired by Vestin Mortgage. If Vestin Mortgage
determines that an entire loan is not suitable for our loan portfolio, we may
co-invest in the loan with Vestin Mortgage. Our portion of the total loan may be
smaller or greater than the portion of the loan made by Vestin Mortgage, but we
expect that the terms of the loans will be substantially similar. Co-investing
with Vestin Mortgage could result in a conflict of interest between us and
Vestin Mortgage if the borrower defaults on the loan and each of us seeks to
protect our interests in the loan and in the security property. Because we have
no written or oral agreement or understanding with Vestin Mortgage concerning
our relative priority when a borrower defaults, you must rely on Vestin Mortgage
to act in accordance with its fiduciary duty under the Operating Agreement to
protect your interest.
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<PAGE> 52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Twelve Month Plan of Operation
During the next 12 months, if we sell at least 150,000 units, we plan to invest
in mortgage loans where our collateral is real property located thoughout the
United States. Upon the sale of these units and the end of our escrow
arrangement, Vestin Mortgage will select mortgage loans for us, and also will
assist us by obtaining, processing and managing these loans for us. We believe
that we will have an adequate number of opportunities to invest in mortgage
loans nationwide when our escrow ends.
During the next 12 months, we anticipate that our 3% cash reserve will be
adequate to pay our administrative expenses. We therefore do not anticipate
needing additional funds to satisfy our cash requirements during this period.
We do not anticipate hiring any employees, acquiring any fixed assets like
office equipment or furniture, or incurring material office expenses during the
next 12 months because we will be utilizing Vestin Mortgage's personnel and
office equipment. We will pay Vestin Mortgage a flat, annual management fee of
up to 0.25% of our aggregate capital contributions.
We intend to establish a line of credit for future use and may enter into
financing arrangements with institutional lenders to expand our portfolio of
mortgage loans.
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<PAGE> 53
FIDUCIARY RESPONSIBILITY
Vestin Mortgage is a fiduciary for you and the Fund. As a fiduciary, Vestin
Mortgage must exercise good faith and integrity when handling our affairs.
Vestin Mortgage must not take advantage of us, and must make full disclosure of
any conflicts of interest or benefit to it in its dealings with us. As set forth
in the Operating Agreement, Vestin Mortgage has fiduciary responsibility for the
safekeeping and use of all of our funds and assets and Vestin Mortgage will not
use, or permit another to use our funds or assets in any manner except for our
exclusive benefit. Vestin Mortgage will not allow our assets to be commingled
with its assets or the assets of any other person or company. Vestin Mortgage
and its affiliates may engage in activities similar to or identical with our
business, but Vestin Mortgage must devote such of its time to our business as it
determines, in good faith, to be reasonably necessary. Vestin Mortgage also acts
for its own account as a mortgage broker. In connection with this activity, it
also brokers, arranges and services mortgage loans for investors that it obtains
in the ordinary course of its mortgage brokerage business, including by way of
seminars, general solicitations and referrals. When it acts in those capacities,
it has a fiduciary duty to each company as set forth in the respective
organizational documents, if any, and under applicable law, and Vestin Mortgage
is bound to treat each fairly and with appropriate access to investment
opportunities.
Additionally, Vestin Mortgage could change our investment guidelines when a
reasonably prudent person would do likewise, subject to its fiduciary duties to
our members. However, Vestin Mortgage can only change our investment objectives
upon approval of a majority of our members.
The above described fiduciary duty is both contractual, arising by virtue of the
Operating Agreement, and imposed by Nevada common law.
Based upon the present state of the law, you have the following legal rights and
remedies concerning Vestin Mortgage and the conduct of our operations:
- you may bring individual actions on behalf of yourself or class
actions on behalf of yourself and other members to enforce your
rights under the Operating Agreement and Nevada limited
liability company law, including for breaches by Vestin Mortgage
of its fiduciary duty;
- a majority may remove Vestin Mortgage as our Manager, as
described elsewhere in this prospectus;
- you may bring actions on our behalf for claims we might have as
derivative actions, if Vestin Mortgage refuses to bring suit;
and
- you may bring actions under federal or state securities laws,
either individually or as part of a class of members, if Vestin
Mortgage has violated those laws in connection with the offer
and sale, or repurchase of units.
This is a rapidly changing and developing area of law. If you have
questions concerning the duties of Vestin Mortgage in its role as our
Manager, you should consult with your own legal counsel.
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<PAGE> 54
Indemnification
We may indemnify Vestin Mortgage or hold it harmless under certain
circumstances. We will not indemnify Vestin Mortgage or any of its affiliates,
agents, attorneys, nor any person acting as securities broker or dealer for any
loss or liability suffered by the Fund, unless all of the following conditions
are met:
- Vestin Mortgage has determined in good faith, that the course of
conduct which caused the loss or liability was in the best
interests of the Fund;
- Vestin Mortgage was acting on behalf of or performing services
for the Fund;
- Such liability or loss was not the result of negligence or
misconduct by the Manager; and
- Such indemnification or agreement to hold harmless is
recoverable only out of the assets of the Fund and not from the
members.
Notwithstanding the statements regarding indemnification in the preceding
paragraph, we will not indemnify Vestin Mortgage or any of its affiliates,
agents, or attorneys, nor any person acting as securities broker or dealer for
the units from any liability, loss or damage incurred by them arising due to an
alleged violation of federal or state securities laws unless:
- there has been a successful adjudication on the merits of each
count involving alleged securities law violations as to the
particular party;
- the claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction as to the particular party; or
- a court of competent jurisdiction approves a settlement of the
claims against the particular party and finds that
indemnification of the settlement and related costs should be
made.
Before seeking a court approval for indemnification, Vestin Mortgage is required
to cause the party seeking indemnification to apprise the court of the position
of the Securities and Exchange Commission and the Nevada Administrator
concerning indemnification for securities violations.
We will not purchase any insurance that protects a party from any liability for
which we could not indemnify that party.
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<PAGE> 55
SUMMARY OF OPERATING AGREEMENT,
RIGHTS OF MEMBERS AND DESCRIPTION OF UNITS
This is a summary of the Operating Agreement and does not contain all the
information that may be important to you. Furthermore, you will be bound by the
Operating Agreement by purchasing your units. Consequently, you should read
carefully both this prospectus and the operating agreement, which is attached as
Exhibit A to this prospectus.
Your Status
Our acceptance of your subscription agreement is effective when we countersign
it. If we accept your subscription and payment for units, you will receive units
in the Fund. We will promptly send you a confirmation of the number of units you
have acquired. This will be evidence that you are a member of the Fund. As a
member, you have the rights that are outlined in this prospectus.
Limited Liability of Members
The Nevada statute under which the Fund has been formed provides that members
are not personally liable for the obligations of their limited liability
company. The Operating Agreement also provides that every written agreement
entered into by us is not enforceable against our members personally.
Term of the Fund
The Fund will cease operating on December 31, 2020. Before then, the members may
vote by a majority to extend its life or to dissolve it sooner. Additionally, we
may dissolve earlier if Vestin Mortgage ceases serving as the Manager and the
members cannot agree on a new Manager within six months.
Meetings
Either Vestin Mortgage or members owning capital accounts with at least 10% of
the amounts in all capital accounts may call meetings of the members. Vestin
Mortgage has informed us that it has no present intention of calling any
meetings of the members. Any voting by the members is anticipated to be by
written consent.
Voting and Other Rights of Members
We require the vote or consent of a majority of members to do any of the
following:
- amend the Operating Agreement, except that Vestin Mortgage may
amend it
-- to remedy any ambiguity or formal defect or omission,
-- to conform it to applicable laws and regulations, and
-- to make any change which, in the judgment of Vestin
Mortgage, is not to the prejudice of the members.
- dissolve the Fund and wind up our business.
- add or remove a Manager.
- cause us to merge with another company.
- approve or disapprove the sale of more than 50% of our assets.
You may inspect certain of our books and records at our principal office
during our regular business hours. We also maintain a copy of each
appraisal for the security property where we have invested in a mortgage
loan at our principal office for at least six years after the last date
that we held the related mortgage. You may inspect and copy these
appraisals during our regular business hours. We may charge you a fee
for copying them.
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<PAGE> 56
Capital Accounts
Vestin Mortgage will credit the capital account it establishes for you when we
receive your initial investment after the escrow ends. We will allocate to your
capital account the percentage of our income, gains, losses and distributions
that the amount in your capital account bears to all members' capital accounts.
Your capital account will increase by the amount of additional capital
contributions you make, including distribution reinvestments, and by your share
of income and gains realized by us. Your capital account will decrease by your
share of losses realized by us and any income or capital we distribute to you.
Increases and decreases in your capital account do not depend on the number of
units you own.
Except for when we write down our investments, we do not adjust capital accounts
to reflect unrealized appreciation or depreciation of our underlying assets.
Consequently, the amount in your capital account may not reflect your portion of
the fair market value of our underlying assets. This is a continuous offering in
which allocations will be made based on the proportionate interest of capital
accounts. As a result, depending upon when units are purchased, the units
purchased by our members for ten dollars will likely have:
- different rights to distributions and income from our mortgage
loans, and
- different proportionate interests in the fair market value of
our underlying assets.
If the fair market value of our assets is less than the cost of the
assets on our books when you make a capital contribution, then the value
of your units' interest in the fair market value of our underlying
assets may be less than ten dollars. Conversely, if the fair market
value of our assets is greater than the cost of the assets on our books
when a new member makes a capital contribution, then your units'
interest in the realized gains in the fair market value of our assets
will be shared with the new members making the contribution or
reinvestment. This will result in a dilution in the value of your units'
interest in the fair market value of our underlying assets. These
principles apply equally for when a member makes a distribution
reinvestment.
Capital Contribution of Vestin Mortgage
Vestin Mortgage's capital account will be credited up to a maximum of $2,000,000
for expenses of this offering which it pays to non-affiliated third parties. In
addition, Vestin Mortgage may make a cash capital contribution to us.
Unit Repurchases and Deemed Distributions
The number of units you hold will decrease when we return capital to you and
will increase when you contribute or are deemed to recontribute capital. If we
return capital to you, we will treat it as a redemption of units in an amount
proportionate to the amount in your capital account. We will provide statements
to you reflecting the number of units that we have redeemed and the number of
units that you still own as a result of the redemption.
Additionally, for tax purposes you will be deemed to have received a return of
capital and recontributed to us any proceeds we receive from loan repayments,
foreclosures or other capital transactions, or any loan modifications or
extensions treated as a disposition for tax purposes. While we believe that this
characterization will not affect the tax liability of our members, if the
Internal Revenue Service unexpectedly were to disagree, you may have a tax
liability with no cash distributions to pay that liability.
Write-Down of Investments
As indicated above, we make quarterly downward adjustments to the fair market
value of our assets to reflect then-current market conditions. We refer to these
downward adjustments as write-downs. We will make any necessary write-downs
within 30 days following the end of each calendar quarter. Our accountants will
then confirm that the write-down conforms with generally accepted accounting
principles. If a write-down is required, the write-down shall be effective on
the last day of the calendar quarter and the capital accounts of all members on
that date shall be reduced accordingly.
Members' Return on Investment
Our mortgage loans will generate monthly payments of interest and/or principal
to us. We intend to distribute these payments to you as described below. These
distributions will be paid monthly in arrears in
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<PAGE> 57
cash or via reinvestment. We will not accumulate assets other than mortgage
notes or similar instruments and we will not accumulate cash on hand, except for
working capital reserves of approximately 3% of capital contributions. We cannot
make distributions to you until we have received the proceeds from the offering,
and invested them in mortgage loans. Thereafter, our first distribution to you
will be your share of our distribution for the month in which your contribution
is actually received by us and invested. We calculate the amount of your
distributions on a pro rata basis, based upon the monthly return, if any, on all
of our assets, the size of your capital account and, if applicable, when during
the month we received your contribution.
We will distribute all net income attributable to interest and fee payments we
receive from borrowers. When we distribute net income attributable to these
payments, all distributions will be made to the members, including Vestin
Mortgage, in proportion to their contributed capital.
Net proceeds will include the proceeds from the repayment of principal or the
prepayment of a mortgage loan, or the net proceeds of a foreclosure sale. Vestin
Mortgage may consider the alternatives listed below in determining whether and
how much of the net proceeds to distribute in cash:
- reinvesting in new loans,
- improving or maintaining any properties that we acquire through
foreclosure,
- paying permitted operating expenses, or
- distributing to the members.
Before making a distribution, we will pay our expenses and other
liabilities and confirm that our working capital reserves are adequate.
Distribution Reinvestment Plan
You can elect to participate in the distribution reinvestment plan by so
indicating in your completed subscription agreement, or you can later elect to
become a participant. We will treat you as a distribution reinvestment plan
participant on the date we actually receive your initial investment, if you
indicate in your subscription agreement that you want to participate in the
plan. You may also make an election or revoke a previous election at any time by
sending us written notice. Units purchased under the plan will be credited to
your capital account as of the first day of the month following the month in
which the reinvested distribution was made. If you notify us prior to 10 days
before the end of any given month, you will be removed from the reinvestment
plan during that month and any distribution you receive that month will be paid
in cash. If you notify us within ten days of the end of the month, you will need
to wait a month to receive cash instead of units.
Your continued participation in the plan depends on whether you meet our
investor suitability standards. While you are a participant, for each $10.00 in
distributions you reinvest, you will acquire one unit. Vestin Mortgage may
terminate or reinstate, as applicable, the distribution reinvestment plan at any
time. Vestin Mortgage shall not earn any fees when you reinvest net proceeds.
If you choose to reinvest your distributions in units, we will send you a report
within 30 days after each time you receive units describing the distributions
you received, the number of units you purchased, the purchase price per Unit,
and the total number of units accumulated. We will also send you a current
prospectus and tax information for income earned on units under the reinvestment
plan for the calendar year when you receive annual tax information from us. You
must pay applicable income taxes upon all distributions, whether the
distribution is paid in cash or reinvested.
No reinvestment participant shall have the right to draw checks or drafts
against his distribution reinvestment account.
Units you acquire through the distribution reinvestment plan carry the same
rights as the units you acquired through your original investment. However, as
previously noted, the value of the new units issued for ten dollars will not
necessarily be the same as those previously acquired for ten dollars.
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<PAGE> 58
We may amend or end the distribution reinvestment plan for any reason at any
time by mailing a notice to you at your last address of record at least 30 days
before the effective date of our action. Vestin Mortgage specifically reserves
the right to suspend or end the distribution reinvestment plan if:
- Vestin Mortgage determines that the distribution reinvestment
plan impairs our capital or operations;
- Vestin Mortgage determines that an emergency makes continuing
the plan unreasonable;
- any governmental or regulatory agency with jurisdiction over us
requires us to do so;
- in the opinion of our counsel, the distribution reinvestment
plan is no longer permitted by federal or state law;
- if transactions involving units within the previous twelve (12)
months would result in our being considered terminated under
Section 708 of the Internal Revenue Code; or
- Vestin Mortgage determines that allowing any further
reinvestments would create a material risk that we would be
treated as a "publicly traded partnership" within the meaning of
Section 7704 of the Internal Revenue Code.
Reinvestment of Proceeds of Capital Transactions
We will either invest our net proceeds from any capital transaction in new
mortgage loans, hold the net proceeds as cash or distribute them to the members.
Capital transactions include payments of principal, foreclosures and prepayments
of mortgages, to the extent classified as a return of capital under the Internal
Revenue Code, and any other disposition of a mortgage or property. Net proceeds
of capital transactions will also include the principal of a loan deemed to be
repaid for tax purposes as a result of a loan modification or loan extension.
Our Operating Agreement provides that if we reinvest the proceeds, you will be
deemed to have received a distribution of capital and recontributed the same
amount to us for tax purposes. Units purchased by virtue of a deemed
recontribution of distributed capital will be credited to your capital account
as of the day when the distribution was deemed to be made. Units you acquire
through the deemed recontribution of capital carry the same rights as the units
you acquired through your original investment. However, as previously noted, the
value of the new units issued for ten dollars will not necessarily be the same
as those previously acquired for ten dollars.
Assignment and Transfer of Units
Your rights to sell or transfer units are limited. There is no public market in
which you may sell your units. We do not expect a public market to emerge
anytime in the future. You may not sell parts of units unless required by law
and you may not transfer any units if, as a result, you would own fewer than 200
units. You may transfer your units using a form approved by Vestin Mortgage and
must obey all relevant laws when you are permitted to transfer units. Any person
who buys units from you must meet the investor suitability requirements in his
home state. Vestin Mortgage must approve any new members and all transfers of
membership must comply with the operating agreement. Vestin Mortgage's consent
to transfers will be withheld to the extent needed to prohibit transfers that
would cause us to be classified as a publicly traded partnership under the
Internal Revenue Code.
Repurchase of Units, Withdrawal from the Fund
You may withdraw, or partially withdraw, from the Fund and obtain the return of
all or part of your capital account within 61 to 91 days after you deliver
written notice of withdrawal to Vestin Mortgage, subject to the following
additional conditions:
- You may not withdraw from the Fund until one year after you
purchased units.
- We can only make cash payments in return of an outstanding
capital account from net proceeds and capital contributions.
- The Manager must determine that your proposed withdrawal will
not impair the capital or operation of the Fund.
- We are not required to sell any portion of our assets to fund a
withdrawal.
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- The amount to be distributed to you depends solely on your
capital account on the date of the distribution, even if this is
not the same as your proportionate share of the then fair market
value of our assets.
- We will not permit more than 15% of the outstanding capital
accounts of members to be withdrawn during any calendar year,
except upon dissolution of the Fund.
- If your capital account is reduced below $2,000 due to any
withdrawal payment, we may distribute all remaining amounts in
your capital account to you in cancellation of your units, and
you will then cease to be a member.
- All payments to meet requests for withdrawal are on a
"first-come, first-served" basis. If the sums needed to fund
withdrawals in any particular month exceed the amount of cash
available for withdrawals, funds will be distributed first to
the member whose request we received first, until his withdrawal
request is paid in full.
Special Power of Attorney
Under the terms of the operating agreement and the subscription agreement, you
appoint Vestin Mortgage your attorney-in-fact for certain documents, including
the signing of the operating agreement. You cannot revoke this special power of
attorney, which will survive your death and stays with your units even if they
are assigned.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated federal income tax aspects of an
investment in units. Because this is a summary, it does not contain all the
information that may be important to you. This summary is based on the Internal
Revenue Code as in existence on the date of this prospectus, existing laws,
judicial decisions and administrative regulations, rulings and practice, any of
which are subject to change, and these changes could be retroactive.
We and our members may be subject to state and local taxes in states and
localities in which the IRS or state authorities deem us to be doing business,
and except where we reference specific states, this discussion does not cover
state or local tax consequences you may incur in connection with your
investment.
Some of the deductions we intend to claim or positions we intend to take for tax
purposes may be challenged by the IRS. The IRS has increased its audit efforts
with respect to limited partnerships and limited liability companies, and an
audit of our information return may result in, among other things, an increase
in our gross income, the disallowance of certain deductions or credits we have
claimed or in an audit of your income tax returns.
Any audit adjustments made by the IRS could adversely affect you even if none of
these adjustments are ultimately sustained, since you and the other members
will, directly or indirectly, bear the expense of contesting the adjustments.
We advise you to consult your own tax advisors, with specific reference to your
own tax situation and potential changes in applicable laws and regulations.
Vestin Mortgage will prepare our information returns, which will not be reviewed
by our independent accountants or tax counsel. Vestin Mortgage will handle all
of our other tax matters, often with the advice of independent accountants
and/or tax counsel.
Tax counsel has delivered an opinion letter to us which is attached as an
exhibit to the registration statement of which this prospectus forms a part.
This letter contains the following opinions with respect to tax matters
affecting us:
- we will be classified as a partnership rather than as an association
taxable as a corporation for federal income tax purposes;
- we will not be classified as a publicly traded partnership for
federal income tax purposes; and
- the discussion set forth below is an accurate summary of the
material federal income tax aspects of your investment in units.
The following discusses the material tax issues associated with an
investment in units. All of the conclusions as to the tax treatment of a
particular tax item set forth in the following discussion reflect the
opinion of tax counsel unless otherwise expressly indicated.
The discussion considers existing laws, applicable current and proposed Treasury
Regulations, current published administrative positions of the IRS contained in
revenue rulings, revenue procedures and other IRS pronouncements, and published
judicial decisions. We do not know whether a court would sustain any position we
take for tax purposes, if contested, or whether there might be legislative or
administrative changes or court decisions that would modify this discussion. Any
of these changes may or may not be retroactive with respect to transactions
prior to the date of the changes. Moreover, it is possible that the changes,
even if not applied retroactively, could reduce the tax benefits anticipated to
be associated with an investment in units.
We urge you to consult and rely upon your own tax advisor with respect to the
federal and state consequences arising from an investment in units. The cost of
the consultation could, depending on the amount charged to you, decrease any
return anticipated on the investment. Nothing in this prospectus is or should be
construed as legal or tax advice to any specific investor as individual
circumstances may vary. This federal income tax consequences section of this
prospectus only provides the current state of
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tax laws. You should be aware that the IRS may not agree with all tax positions
taken by us and that legislative, administrative or court decisions may reduce
or eliminate your anticipated tax benefits.
Classification as a Partnership
Under Treasury Regulations issued in December 1996, a domestic limited liability
company with more than one member will be classified as a partnership for
federal income tax purposes unless it makes an election to be classified as an
association taxable as a corporation. We are a domestic limited liability
company, and we have more than one member. Vestin Mortgage will not cause us to
make an election to be classified as an association taxable as a corporation.
Based on the foregoing, it is the opinion of tax counsel that we will be
classified as a partnership for federal income tax purposes.
Assuming that we will be classified as a partnership for federal income tax
purposes, in the discussion that follows, as the context requires:
- the use of the term partnership will be construed to refer also
to a limited liability company classified as a partnership for
federal income tax purposes;
- the use of the term partner will be construed to refer also to a
member of a limited liability company; and
- the use of the terms partnership interest or interest in the
partnership or similar terms will be construed to refer also to
the interest of a member in a limited liability company.
We Will Not Be Classified As A Publicly Traded Partnership
Section 7704 of the Internal Revenue Code treats publicly traded partnerships as
corporations for federal income tax purposes. Section 7704(b) of the Internal
Revenue Code defines the term publicly traded partnership as any partnership,
including a limited liability company otherwise classified as a partnership for
federal income tax purposes, where the equity interests are:
- readily traded on an established securities market; or
- readily tradable on a secondary market or the substantial
equivalent of a secondary market. In the discussion that
follows, the references to a secondary marked also include the
substantial equivalents to a secondary market.
In 1995, the IRS issued final Treasury Regulations under Section 7704 of
the Internal Revenue Code. These regulations provide that an established
securities market includes:
- a national securities exchange registered under the Securities Exchange
Act of 1934;
- a national securities exchange exempt from registration because
of the limited volume of transactions;
- a foreign securities exchange;
- a regional or local exchange; and
- an interdealer quotation system that regularly disseminates firm
buy or sell quotations by identified brokers or dealers by
electronic means or otherwise.
In determining when partnership interests will be treated as readily
tradable on a secondary market, there are a number of safe harbors that
allow certain transactions to be disregarded including a safe harbor
that is available if the sum of the percentage interests in partnership
capital or profits that are sold or otherwise disposed of during the
taxable year does not exceed two percent (2%) of the total interests in
partnership capital or profits.
The IRS will disregard certain transfers for purposes of determining whether
this safe harbor is met:
- transfers at death,
- transfers in which the basis is determined under Section 732 of
the Internal Revenue Code,
- interests issued by the partnership for cash, property or
services, and
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- interests in the partnership which are redeemed pursuant to the safe
harbor discussed in the next paragraph.
The IRS also will disregard transfers of an interest in a partnership pursuant
to a redemption or repurchase agreement where the partnership maintains a plan
of redemption or repurchase in which the partners may tender their partnership
interests for purchase by the partnership, another partner or persons related to
another partner. These transfers will be disregarded in determining that our
units are readily tradable on a secondary market if:
- the redemption agreement requires that the redemption cannot
occur until at least 60 calendar days after the partner notifies
the partnership in writing of the partner's intention to
exercise the redemption rights;
- the redemption agreement requires that the redemption price
cannot be established until at least 60 days after receipt of
the notification by the partnership or the price is established
not more than 4 times during the partnership's taxable year; and
- the sum of the percentage interests in partnership capital and
profits represented by partnership interests that are
transferred, other than in transfers otherwise disregarded, as
described above, during the taxable year of the partnership,
does not exceed 10% of the total interests in partnership
capital or profits.
Our operating agreement provides that, subject to the limitations
described elsewhere in this prospectus, you may withdraw or partially
withdraw as a member and obtain the return of your outstanding capital
account. These provisions constitute a redemption or repurchase
agreement within the meaning of these regulations.
The limitations on your right to withdraw your capital account set forth in our
Operating Agreement include:
- a requirement that the withdrawal will not be made until at least 61
days after written notice of withdrawal is delivered to Vestin Mortgage;
- the amount distributed to you will be a sum equal to your
capital account as of the date of the distribution; and
- in no event will Vestin Mortgage permit the withdrawal during
any calendar year of more than 10% of the outstanding units.
In the opinion of tax counsel, the foregoing limitations satisfy the
requirements applicable to the safe harbor for transfers made pursuant
to a redemption or repurchase agreement.
Our Operating Agreement provides that you may not transfer your units if Vestin
Mortgage determines that the transfer would result in our being classified as a
publicly traded partnership within the meaning of Section 7704(b) of the
Internal Revenue Code. To prevent this classification, our Operating Agreement
provides that:
- Vestin Mortgage will not permit trading of units on an
established securities market within the meaning of Section
7704(b) of the Internal Revenue Code;
- Vestin Mortgage will prohibit any transfer of units which would
cause the sum of percentage interests in our capital or profits
represented by partnership interests that are transferred during
any taxable year to exceed the limitation under the safe harbor
which applies if the sum of the percentage interests in the
partnership capital or profits that are sold or otherwise
disposed of during the taxable year does not exceed two percent
of the total interests in partnership capital or profits; and
- Vestin Mortgage will not permit any withdrawal of units except
in compliance with the provisions of our operating agreement.
Based upon the provisions of our operating agreement and the
representations of Vestin Mortgage, tax counsel's opinion is that:
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- units will not be traded on an established securities market within the
meaning of Section 7704 of the Internal Revenue Code;
- our operation with regard to the withdrawal by members will
qualify for the safe harbor that applies to interests which are
transferred pursuant to a redemption or repurchase agreement;
- our operation with regard to the transfer of units by members
will qualify for the above-referenced safe harbor that applies
based upon the percentage interests in the partnership capital
or profits that are sold or otherwise disposed of during the
taxable year;
- units will not be considered as readily tradable on a secondary
market; and
- we will not be classified as a publicly traded partnership for
purposes of Section 7704 of the Internal Revenue Code.
A partnership which is classified as a publicly traded partnership under
Section 7704 of the Internal Revenue Code will not be treated as a
corporation for federal income tax purposes if 90% or more of its gross
income is qualifying income. Qualifying income under Section 7704(c)
includes for these purposes, among other passive-type items, interest,
dividends, real property rents, and gains from the sale of real
property, but excludes interest derived in the conduct of a financial
business.
If a publicly traded partnership is not taxed as a corporation because it meets
the qualifying income test, the passive loss rules discussed below are applied
separately to the partnership, and a tax-exempt partner's share of the
partnership's gross income is treated as income from an unrelated trade or
business under the unrelated trade or business taxable income rules discussed
below.
It is not clear whether we would satisfy the qualifying income test of Section
7704(c) of the Internal Revenue Code, and tax counsel is unable to give an
opinion on this issue. This would be relevant only if it were determined that we
should be classified as a publicly traded partnership. Vestin Mortgage expects
that more than 90% of our income will be qualifying income. However, it is not
clear whether we will be engaged in the conduct of a financial business, and tax
counsel is unable to give an opinion on this issue. If we were classified as a
publicly traded partnership and considered to be engaged in a financial
business, we would be treated as a corporation for federal income tax purposes.
General Principles of Partnership Taxation
A partnership is not subject to any federal income taxes. We will file
information returns reporting our operations on the accrual basis for each
calendar year.
Determination of Basis in Units
You will not be taxed on distributions you receive from us unless the
distributions exceed your adjusted basis in your units. Your adjusted basis in
your units is the amount you originally paid for the units increased by:
- your proportionate share of partnership indebtedness with respect to
which no member is personally liable;
- your proportionate share of our taxable income, and
- any additional capital contributions made by you, and decreased
by:
- your proportionate share of our losses,
- the amount of cash, and fair value of noncash, distributions to
you, and
- any decreases in your share of any of partnership nonrecourse
liabilities.
Any increase in nonrecourse liabilities is treated as a cash
contribution and a decrease in nonrecourse liabilities is treated as a
cash distribution, even though you do not actually contribute or receive
cash. Distributions in excess of your basis generally will be treated as
gain from the sale or exchange of your units.
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Allocations of Profits and Losses
We will allocate to the members profits and losses and cash distributions in the
manner described in our operating agreement. Any allocation of profits and
losses will be recognized as long as it has substantial economic effect under
the Treasury Regulations promulgated under Section 704(b) of the Internal
Revenue Code by satisfying one of these tests:
- it has substantial economic effect;
- it is in accordance with the partners' interest in the
partnership, determined by taking into account all facts and
circumstances; or
- it is deemed to be in accordance with the partners' interest in
the partnership.
We have decided to establish the validity of the allocations of profits
and losses under our operating agreement by demonstrating that these
allocations will be in accordance with the partners' interest in the
partnership. The allocations of profits, losses and cash distributions
contained in our operating agreement will be substantially proportionate
to the capital accounts of the members. For this reason, in the opinion
of tax counsel, the IRS should treat the allocations as being
substantially in accordance with the partners' interests in the
partnership within the meaning of this alternative method for
establishing the validity of allocations.
Limitations on the Deduction of Losses
We do not expect that we will incur net losses in any taxable year. However, if
we were to incur losses in any year, your ability to deduct your distributive
share of the losses would be subject to the potential application of the
limitations discussed below.
The Basis Limitation
Section 704(d) of the Internal Revenue Code provides that a partner's share of
partnership losses is deductible only to the extent of his adjusted basis in his
partnership interest at the end of the year in which the losses occur. Losses
disallowed under Section 704(d) of the Internal Revenue Code may be carried
forward indefinitely until adequate basis is available to permit their
deduction. Due to this limitation, you will be precluded from deducting losses
in excess of your adjusted basis in your units.
The At Risk Limitation
Section 465 of the Internal Revenue Code provides that a partner's share of
partnership losses is deductible only to the extent the partner is at risk. The
primary effect of this provision is to limit the availability of tax losses of a
partnership as offsets against other taxable income of a partner to the
partner's adjusted basis in his partnership interest, excluding any portion of
adjusted basis attributable to partnership nonrecourse indebtedness. In
addition, the at risk amount does not include contributions by a partner to the
extent the partner used the proceeds of a nonrecourse borrowing to make the
contributions.
The Passive Loss Rules
Section 469 of the Internal Revenue Code limits the deductibility of losses from
passive activities for individuals, estates, trusts and certain closely- held
corporations. A passive activity includes an activity which involves the conduct
of a trade or business in which the taxpayer does not materially participate.
Losses from passive activities are only allowed to offset income from passive
activities and will not be allowed to offset portfolio income, trade or business
income or other nonpassive income, including wages or salaries. Suspended losses
and credits attributable to passive activities are carried forward and treated
as deductions and credits from passive activities in the next year. Suspended
losses from a passive activity are allowed in full when the taxpayer disposes of
his entire interest in the passive activity in a taxable transaction.
The Treasury Regulations under Section 469 of the Internal Revenue Code provide
that in certain situations, net income, but not net loss from a passive activity
is treated as nonpassive. One of the items covered by these regulations is net
income from an equity-financed lending activity. An equity-financed lending
activity is defined as an activity that involves a trade or business of lending
money, if the average outstanding balance of liabilities incurred in the
activity for the taxable year does not exceed 80% of the average outstanding
balance of the interest-bearing assets held in the activity for the year.
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Vestin Mortgage expects that at no time will the average outstanding balance of
our liabilities exceed 80% of the average outstanding balance of our mortgage
loans. If we are deemed to be engaged in the trade or business of lending money,
our income will generally be recharacterized as nonpassive income, even though
our net losses or your loss on the sale of a unit will be treated as passive
activity losses.
If we are not considered engaged in a trade or business of lending money, then
income and loss will be considered portfolio income and loss, and you will not
be permitted to offset passive losses from other activities against your share
of our income.
Section 67(a) of the Internal Revenue Code provides that most miscellaneous
itemized deductions are deductible by an individual taxpayer only to the extent
that they exceed 2% of the taxpayer's adjusted gross income and are subject to
additional limitations for certain high-income taxpayers. Deductions from a
trade or business are not subject to these limitations. Your allocable share of
our expenses will be considered miscellaneous itemized deductions subject to
this 2% limitation only if we are not considered to be in the trade or business
of lending money.
Computation of Gain or Loss on Sale or Redemption of Units
If you sell your units, including a sale of your units to us in a redemption
transaction, you will recognize gain or loss on the sale measured by the
difference between the amount realized and your adjusted basis in the units.
Character of Gain or Loss
Gain on the sale of units which have been held over 12 months should be taxable
as long-term capital gain, except for that portion of the gain allocable to
substantially appreciated inventory items and unrealized receivables, as those
terms are defined in Section 751 of the Internal Revenue Code, which would be
treated as ordinary income. We may have unrealized receivables arising from the
ordinary income component of market discount bonds. In addition, if we hold
property as a result of foreclosure, which is unsold at the time you sell your
units, or hold an investment in a mortgage loan that is classified as an equity
interest, the amount of ordinary income that would result if we were to sell the
property is expected to be an unrealized receivable.
For noncorporate taxpayers, long-term capital gain for assets held longer than
12 months is subject to a maximum rate of 20%, or 10% for individuals in the 15%
tax bracket. The amount of ordinary income against which a noncorporate taxpayer
may deduct a capital loss is the lower of $3,000 or $1,500 in the case of a
married taxpayer filing a separate return, or the excess of these losses of the
taxpayer over the taxpayer's capital gain.
Tax Rates on a Partner's Share of Ordinary Income from the Partnership
Your tax liability with respect to an investment in units will depend upon your
individual tax bracket. Currently, there are five tax brackets for individuals.
For calendar year 2000,
- the first bracket is at 15% on taxable income not over $43,850 in the
case of married taxpayers filing joint returns,
- the second at 28% on taxable income from $43,850-$105,950,
- the third at 31% on taxable income from $105,950-$161,450,
- the fourth at 36% on taxable income from $161,450-$288,350, and
- the fifth at 39.6% on taxable income over $288,350.
Distributions and Deemed Distributions
Distributions to you from us may take the form of either actual cash
distributions or so-called "deemed distributions." A deemed distribution is
treated as a cash distribution and can result from your decision to participate
in our distribution reinvestment plan. If you elect to participate in our
distribution reinvestment plan, under the terms of our operating agreement, you
will be deemed to have received a distribution of your share of net income and
to have recontributed the same amount to the Fund.
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Our operating agreement also provides that a deemed distribution and an
equivalent recontribution will result if we reinvest our net proceeds from any
capital transactions in new mortgage loans. Capital transactions are defined in
the operating agreement to include payments of principal, foreclosures and
prepayments of mortgages, or any other disposition of a mortgage or property.
For this purpose, a disposition of a mortgage is deemed to occur if "significant
modifications" to the mortgage are made within the meaning of Section 1001 of
the Internal Revenue Code and the regulations thereunder.
Distributions to you, including deemed distributions, will not generate taxable
income to you unless and to the extent the amount of any such distribution
exceeds your basis in your units. We do no anticipate that you will recognize
any taxable income as a result of any deemed distributions resulting from your
election to participate in our distribution reinvestment plan or from our
decision to reinvest net proceeds from any capital transactions (including
significant modifications of any existing mortgage).
Depreciation
From time to time we may acquire equity or leasehold interests in real property
by foreclosure. The cost of the improvements on any of these owned real property
may be recovered through depreciation deductions over a period of 39 years.
Investment Interest
Section 163(d) of the Internal Revenue Code, applicable to noncorporate
taxpayers and S corporation shareholders, limits the deductibility of interest
incurred on loans used to acquire or carry property held for investment.
Property held for investment includes all investments held for the production of
taxable income or gain, but does not include trade or business property or
interest incurred to construct trade or business property. Investment interest
is deductible by noncorporate taxpayers and S corporation shareholders only to
the extent it does not exceed net investment income for the taxable year.
Net investment income is the excess of investment income over the sum of
investment expenses. Interest expense we incur and interest expense you incur to
acquire your units will not be treated as investment interest to the extent
attributable to a passive activity conducted by us. However, that portion of
interest expense allocable to portfolio investments is subject to the investment
interest limitations.
Interest attributable to debt you incur in order to purchase or carry units may
constitute investment interest subject to these deductibility limitations. You
should consider the effect of investment interest limitations on using debt
financing for your purchase of units.
Tax Treatment of Tax-Exempt Entities
Sections 511 through 514 of the Internal Revenue Code impose a tax on the
unrelated business taxable income of organizations otherwise exempt from tax
under Section 501(a) of the Internal Revenue Code. The entities subject to the
unrelated business income tax include:
- qualified plans, and
- IRAs.
Other charitable and tax-exempt organizations are also generally subject
to the unrelated business income tax. Interest income is not subject to
this tax unless it constitutes debt-financed income.
Unrelated business taxable income includes gross income, which may be subject to
deductions and modifications, derived from any trade or business regularly
carried on by a partnership. Among the items excluded from unrelated business
taxable income are:
- interest and dividend income;
- rents from real property, other than debt-financed property or
property from which participating rentals are derived; and
- gains on the sale, exchange or other disposition of assets held
for investment.
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The receipt of unrelated business taxable income by an entity subject to the
unrelated business income tax has no effect on the entity's tax-exempt status or
on the exemption from tax of its other income; however, the continual receipt of
unrelated business taxable income may cause some of these entities to lose their
exemptions. For certain types of entities subject to this tax, the receipt of
any unrelated business income taxable may cause all income of the tax-exempt
entity to be subject to tax. For example, for charitable remainder trusts, the
receipt of any taxable income from an unrelated trade or business during a
taxable year will result in the taxation of all of the trust's income from all
sources for that year. If you are a tax-exempt entity, we urge you to consult
your own tax advisors concerning the possible adverse tax consequences resulting
from an investment in units.
Vestin Mortgage intends to invest our assets so as to assure that tax-exempt
members will not derive unrelated business taxable income or unrelated debt-
financed income with respect to their units. Unrelated debt-financed income
might be derived in the event that Vestin Mortgage deems it advisable to incur
indebtedness under a line of credit in connection with foreclosures on property
where mortgagors have defaulted on their loans.
If we acquire property subject to acquisition indebtedness, the income
attributable to the portion of the property which is debt financed may be
treated as unrelated business taxable income to the entity holding units.
Sales of foreclosure property might also produce unrelated business taxable
income if we are characterized as a dealer with respect to that property.
Mortgage loans which we invest in or purchase which permit us to participate in
the appreciation value of the properties may be recharacterized by the IRS as an
equity interest and the recharacterization could result in unrelated debt-
financed income. The IRS might not agree that our other income is not subject to
tax under the unrelated business income and unrelated debt-financed income tax
provisions.
If an IRA or a qualified plan is a member and its partnership income constitutes
unrelated business taxable income, this income is subject to tax only to the
extent that its unrelated business taxable income from all sources exceeds
$1,000 for the taxable year.
In considering an investment in units of a portion of the assets of a qualified
plan or IRA, a fiduciary should consider:
- whether the investment is in accordance with the documents and
instruments governing the plan or IRA;
- whether the investment satisfies the diversification
requirements of Section 404(a)(1)(c) of ERISA;
- whether the investment is prudent considering, among other
matters, that there probably will not be a market created in
which the investment can be sold or otherwise disposed of; and
- whether the investment would cause the IRS to impose an excise
tax under Section 4975 of the Internal Revenue Code.
We do not expect an investment in units by an IRA to be subject to the
above diversification and prudence requirements of ERISA unless the IRA
also is treated under Section 3(2) of ERISA as part of an employee
pension benefit plan which is established or maintained by an employer,
employee organization, or both.
Partnership Tax Returns, Tax Information and Audits
Vestin Mortgage will prepare our information income tax returns. In connection
with the preparation of our income tax returns, Vestin Mortgage will prepare and
distribute to the Members not later than seventy-five (75) days after the close
of each fiscal year all information necessary in the preparation of the Members'
federal income tax returns, including our Schedule K (Form 1065), Partner's
Share of Income, Credits, Deductions, and each Member's respective Schedule K-1.
Such information will not be supplied to assignees who are not substitute
Members.
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You are required to report your distributive share of the items set forth on
your Schedule K-1 on your individual tax return consistent with our treatment of
the items on our returns. You may report an item inconsistently if you file a
statement with the IRS identifying the inconsistency. Otherwise, the IRS may
summarily assess additional tax necessary to make your treatment of the item
consistent with our treatment of the item without a notice of deficiency or an
opportunity to protest the additional tax in the Tax Court being afforded to
you. Penalties for intentional disregard of the consistency requirements may
also be assessed.
Our tax returns may be audited by the IRS. Tax audits and adjustments are made
at our level in once unified proceeding, the results of which are binding on all
members. You may, however, protest the additional tax paying the full amount
thereof and suing for a refund in either the U.S. Claims Court or a U.S.
District Court.
Vestin Mortgage is Tax Matters Partner
A limited liability company which is classified as partnership for tax purposes
must designate a tax matters partner to represent it in dealing with the IRS.
Vestin Mortgage will serve as the tax matters partner to act on our behalf and
on behalf of the members with respect to partnership items, to deal with the IRS
and to initiate any appropriate administrative or judicial actions to contest
any proposed adjustments at the partnership level.
If you own less than a 1% of the units, you will not receive notice from the IRS
of these administrative proceedings unless you form a group with other members,
having an aggregate interest of 5% or more, and request the notice. However, all
members have the right to participate in the administrative proceedings will be
our responsibility and may adversely affect the profitability, if any, of our
operations.
Adjustments, if any, resulting from any audit may require you to file an amended
tax return, and may result in an audit of your own tax return. Any audit of your
tax return could result in adjustments of items unrelated to our operations as
well as income and losses from our operations.
Original Issue Discount Rules
The original issue discount rules under the Internal Revenue Code pertain to
mortgage loans and obligations issued by us. The effect will be that we will
realize as interest income the amount that economically accrues under a mortgage
loan during the course of the year, using compound interest concepts, even where
a lesser amount is actually paid or accrued under its terms. Identical concepts
will be used for determining our interest deduction on our obligations, if any.
Market Discount
We may purchase mortgage investments for an amount substantially less than the
remaining principal balance of the mortgage investments. Each monthly payment
which we receive from a mortgagor will consist of interest at the stated rate
for the investment in a mortgage loan and a principal payment. If we purchase an
investment in a mortgage loan at a discount, for federal income tax purposes the
principal portion of each monthly payment will constitute the return of a
portion of our investment in the investment in a mortgage loan and the payment
of a portion of the market discount for the investment in a mortgage loan.
We will recognize the amount of each monthly payment attributable to market
discount as ordinary income, but the amount of each monthly payment representing
the return of our investment will not constitute taxable income to us. The
Internal Revenue Code also treats accrued market discount as ordinary income on
the sale of an investment in a mortgage loan.
No Section 754 Election -- Impact on Subsequent Purchasers
Section 754 of the Internal Revenue Code permits a partnership to elect to
adjust the basis of its property in the case of a transfer of an interest in the
partnership. The effect of this election would be that, with respect to the
transferee only, the basis of our property would either be increased or
decreased by the difference between the transferee's basis for his units and his
proportionate share of our basis for all proportionate share of our basis for
all property we own.
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Vestin Mortgage has decided that due to the accounting difficulties which would
be involved, it will not cause us to make an election pursuant to Section 754 of
the Internal Revenue Code. Accordingly, our basis in our assets will not be
adjusted to reflect the transferee's purchase price of his units.
This treatment might not be attractive to prospective purchasers of units, and
you might have difficulty for that reason in selling your units or you might be
forced to sell at a discounted price.
Treatment of Compensation of Vestin Mortgage
We will pay Vestin Mortgage and its affiliates certain fees and expenses for
services relating to the conduct of our business, including real estate
brokerage fees of up to 3% of proceeds from the resale of foreclosed property
and an annual management fee of up to 0.25%.
In computing our taxable income for each year, we intend:
- to reduce our gain from the resale of any foreclosed property
sold during such year by the amount of all real estate brokerage
fees paid to Vestin Mortgage and its affiliates,
- to allocate income and losses to Vestin Mortgage consistent with
its capital account.
Our ability to obtain the foregoing tax treatment relative to these fees
depends in large measure on the value of the services rendered in
exchange therefore, which is a question of fact that may depend on
events to occur in the future. Due to this uncertainty, tax counsel was
unable to give an opinion as to the proper tax treatment of these fees,
and the IRS may attempt to recharacterize one or more aspects of our
treatment of these items by, for example, disallowing the deduction of
fees paid. If successful, such recharacterization could cause the tax
benefits generated by these payments and/or allocations of profits and
losses to Vestin Mortgage to be deferred or lost.
Vestin Mortgage will also be entitled to fees payable by borrowers in connection
with our investing in or purchasing a mortgage loan. These fees include loan
brokerage fees for loan selection and origination, loan evaluation and
processing fees and loan extension fees. The exact amount of the foregoing fees
will be negotiated with prospective borrowers on a case-by-case basis. In
addition, Vestin Mortgage will act as a servicing agent with respect to our
investments, for which it will be paid by the relevant borrower an annual fee of
up to one-quarter of one percent (0.25%) of the unpaid balance of the respective
mortgage loan serviced.
Since any of the commissions or fees described in the preceding paragraph will
be payable by the borrowers, their payment should not have any effect on the
calculation of our taxable income. The IRS could take the position that these
commissions or fees, or any of them, are constructively paid by us, in which
case our interest income would be increased by the amount of the commissions,
and we could deduct the commissions only to the extent the commissions or fees
are reasonable compensation for the services rendered and otherwise considered
deductible expenditures. This could result in an increase in the Company's
taxable income for any year in which such a recharacterization occurs and an
allocation of this increase in taxable income among the members.
Since this is ultimately an issue of fact which may depend on future events, tax
counsel was unable to give an opinion regarding the issue.
We will receive fees from borrowers when Vestin Mortgage
- permits the reconveyance of property upon full payment of a
loan,
- permits the assumption of a loan,
- acts as escrow agent for our mortgage investments, or
- receives a delinquent payment under a mortgage loan or, in some
cases, a prepayment of a mortgage loan.
We expect that our fees will be comparable to those generally prevailing
in the geographic area where the mortgaged property is located. These
fees will be included as income when we calculate our taxable income.
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Possible Legislative Tax Changes
In recent years there have been a number of proposals made in Congress by
legislators, government agencies and by the executive branch of the federal
government for changes in the federal income tax laws. In addition, the IRS has
proposed changes in regulations and procedures, and numerous private interest
groups have lobbied for regulatory and legislative changes in federal income
taxation. It is impossible to predict the likelihood of adoption of any
proposal, the likely effect of any proposals upon the income tax treatment
presently associated with investment in mortgage loans or units, or the
effective date, which could be retroactive, of any legislation which may derive
from any past or future proposal.
We strongly urge you to consider ongoing developments in this uncertain area and
to consult your own tax advisors in assessing the risks of investment in units.
State and Local Taxes
We currently contemplate investing in or purchasing loans in Nevada, California
and Arizona. Nevada does not have an income tax law, and, we believe that no
taxes will be imposed by the State of Nevada or any of its localities on our
assets or income or on any member's share of any income derived from our
activities in Nevada.
California and Arizona may impose a tax on our assets or income, or on each
member based on his share of any income derived from our activities in those
states. In addition, we may decide to invest in or purchase loans secured by
properties in other states and localities which also may impose these taxes.
If you are entity that is exempt from federal income taxation, it is likely that
you are also exempt from state and local taxation.
The state in which you reside may impose taxes on your share of any income
derived from your interest in us. You should consult with your own tax advisors
concerning the applicability and impact of any state and local tax laws in your
state of residence.
ERISA Considerations
ERISA requires that the assets of qualified plans be held in trust and that the
trustee, or a duly authorized investment Manager, within the meaning of Section
3(38) of ERISA shall have exclusive authority and sole discretion to manage and
control the assets of the plan. ERISA also imposes certain duties on persons who
are fiduciaries of employee benefit plans subject to its provisions and
prohibits certain transactions between ERISA and an employee benefit plan and
the parties in interest with respect to qualified plans, including fiduciaries.
Under the Internal Revenue Code, similar prohibitions apply to all qualified
plans and IRAs. Under ERISA, any person who exercises any authority or control
respecting the management or disposition of the assets of a qualified plan or
IRA is considered to be a fiduciary of the plan or IRA, subject to certain
exceptions not here relevant.
ERISA and the Internal Revenue Code also prohibit parties in interest, including
fiduciaries of an IRA or qualified plan, from engaging in various acts of
self-dealing. To prevent a possible violation of these self-dealing rules,
Vestin Mortgage may not permit the purchase of units with assets of any IRA or
qualified plan if Vestin Mortgage:
- has investment discretion with respect to the assets of the plan
or IRA, or
- regularly gives individualized investment advice which serves as
the primary basis for the investment decisions made with respect
to the assets of the plan or IRA.
Annual Valuation
Fiduciaries of any qualified plan subject to ERISA are required to determine
annually the fair market value of the assets of the plan as of the close of the
plan's fiscal year. Although Vestin Mortgage will provide annually upon the
written request of a member an estimate of the value of the units based upon,
among other
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things, outstanding mortgage investments, fair market valuation based on trading
will not be possible because there will be no market for the units.
Plan Assets Generally
If our assets are deemed to be plan assets under ERISA:
- our investment will be subject to the prudence standards and
other provisions of ERISA applicable to investments by qualified
plans and their fiduciaries would extend to investments made by
us,
- certain transactions that we might seek to enter into might
constitute prohibited transactions under ERISA and the Internal
Revenue code because Vestin Mortgage would be deemed to be a
fiduciary of the plans, and
- our audited financial information would have to be reported
annually to the Department of Labor.
In 1986, the Department of Labor promulgated final regulations defining
the term plan assets. Under these regulations, when a plan makes an
equity investment in another entity, the underlying assets of that
entity will be considered plan assets unless one or more of the
following exemptions applies:
- equity participation by benefit plan investors is not
significant,
- the entity is a real estate operating company, or
- the equity interest is a publicly-offered security.
Exemption for Insignificant Participation by Qualified Plans. This
exemption is available if less than 25% of each class of equity
interests in the corporation or partnership is held in the aggregate by
qualified plans or IRAs.
For purposes of this 25% rule, the interests of any person who had discretionary
authority or control with respect to the assets of the entity, or who provides
investment advice for a fee with respect to the assets of the entity, or any
affiliate of a person who has that authority or control, shall be disregarded.
Thus, while Vestin Mortgage and its affiliates are not prohibited from
purchasing units, any purchases of units by any of them will be disregarded in
determining whether this exemption is satisfied. We cannot assure you that we
will always qualify for this exemption.
Exemption For a Real Estate Operating Company. For purposes of this exemption,
an entity is a real estate operating company if at least 50% of its assets
valued at cost, other than short-term investments pending long-term commitment,
are invested in real estate which is managed or developed and with respect to
which the entity has the right substantially to participate directly in the
management or development of real estate.
The preamble to these regulations states the Department of Labor's view that an
entity would not be engaged in the management or development of real estate if
it merely services mortgages on real estate. Thus, it is unlikely that we would
qualify for an exemption from plan assets treatment as a real estate operating
company.
Exemption for Publicly Offered Securities. For purposes of this exemption, a
publicly offered security is a security that is:
- freely transferable,
- part of a class of securities that is owned by 100 or more
investors independent of the issuer and of one another, and
- either part of a class of securities registered under Section
12(b) or 12(g) of the Exchange Act of 1934, or sold to the plan
as part of an offering of securities to the public pursuant to
an effective registration statement under the Securities Act and
the class of securities of which the security is a part is
registered under the Securities Exchange Act of 1934 within 120
days, or such later time as may be allowed by the Securities and
Exchange Commission, after the end of the fiscal year of the
issuer during which the offering of such securities to the
public occurred.
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For purposes of this definition, whether a security is freely transferable is a
factual question to be determined on the basis of all relevant facts. If a
security is part of an offering in which the minimum is $10,000 or less,
however, certain customary restrictions on the transferability of partnership
interests necessary to permit partnerships to comply with applicable federal and
state laws, to prevent a termination or of the entity for federal or state tax
purposes and to meet certain enumerated administrative needs not, alone or in
combination, affect a finding that such securities are freely transferable.
The units will be sold as part of an offering of securities to the public
pursuant to registration under the Securities Act, and Vestin Mortgage has
represented that it will cause us to register the units under the Exchange Act
within 120 days, or such later time as may be allowed by the Securities and
Exchange Commission, after the end of our fiscal year during which the offering
of units to the public occurred. The units will not be subject to any
restrictions on transfer other than those enumerated in the operating agreement,
these regulations and referenced in the preceding paragraph. Based on the
foregoing, the units should be publicly offered securities within the meaning of
these regulations. As a result, our underlying assets should be not considered
to be plan assets under these regulations.
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HOW WE PROTECT OUR RIGHTS AS A LENDER
The following discussion is a summary of legal aspects of mortgage loans.
Because this is a summary, it does not contain all the information that may be
important to you. Many of the legal aspects of mortgage loans are governed by
applicable state laws, which may vary substantially. The following material does
not reflect the laws of any particular state, unless specifically indicated.
Overview of Mortgages
We invest in mortgage loans. In connection with these loans, we receive
mortgages or other similar instruments such as deeds of trust, granting us
rights in the security properties. Our authority under a mortgage is governed by
applicable law and the express provisions of the mortgage.
Priority of liens on mortgaged property created by mortgages depends on their
terms and on the order of filing with a state, county or municipal office,
although this priority may be altered by the mortgagee's knowledge of unrecorded
liens against the security property. However, filing or recording does not
establish priority over governmental claims for real estate taxes and
assessments. In addition, the Internal Revenue Code provides priority for
certain tax liens over the mortgage.
Foreclosure
Non-judicial Foreclosure
If a mortgage loan secured by a deed of trust is in default, we will protect our
rights by foreclosing by a non-judicial sale. Deeds of trust differ from
mortgages in form, but are in most other ways similar to mortgages. Deeds of
trust will contain specific provisions enabling non-judicial foreclosure in
addition to those provided for in applicable statutes upon any material default
by the borrower. Applicable state law controls the extent that we have to give
notice to interested parties and the amount of foreclosure expenses and costs,
including attorney's fees, which may be covered by a lender, and charged to the
borrower.
Judicial Foreclosure
Foreclosure under mortgage instruments other than deeds of trust is more
commonly accomplished by judicial action initiated by the service of legal
pleadings. When the mortgagee's right to foreclose is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. A judicial
foreclosure is subject to most of the delays and expenses of other litigation,
sometimes requiring up to several years to complete. For this reason, we do not
anticipate using judicial foreclosure to protect our rights due to the
incremental time and expense involved in these procedures.
When foreclosing under a mortgage instrument, the sale by the designated
official is often a public sale. The willingness of third parties to purchase
the property will depend to some extent on the status of the borrower's title,
existing redemption rights and the physical condition of the property. It is
common for the lender to purchase the security property at a public sale where
no third party is willing to purchase the property, for an amount equal to the
outstanding principal amount of the indebtedness and all accrued and unpaid
interest and foreclosure expenses. In this case, the debt owed to the mortgagee
will be extinguished. Thereafter, the mortgagee would assume the burdens of
ownership, including paying operating expenses and real estate taxes and making
repairs. The lender is then obligated as an owner until it can arrange a sale of
the property to a third party. If we foreclose on the security property, we
expect to obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal our
investment in the property. A lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings.
Lenders also need to comply with procedure-related environmental rules and
regulations. An increasing number of states require that any environmental
hazards are eliminated before a property may be resold. A lender may be
responsible under federal or state law for the cost of cleaning up a mortgaged
property that is environmentally contaminated. As a result, a lender could
realize an overall loss on a mortgage loan even if the related mortgaged
property is sold at foreclosure or resold after it is acquired through
foreclosure for an amount equal to the full outstanding principal amount of the
mortgage loan, plus accrued interest.
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In foreclosure proceedings, courts frequently apply equitable principles, which
are designed to relieve the borrower from the legal effects of his immaterial
defaults under the loan documents or the exercise of remedies that would
otherwise be unjust in light of the default. These equitable principles and
remedies may impede our efforts to foreclose.
Environmental Risks
Our security property may be subject to potential environmental risks. Of
particular concern may be those security properties which are, or have been, the
site of manufacturing, industrial or disposal activity. These environmental
risks may give rise to a diminution in value of the security property or
liability for clean-up costs or other remedial actions. This liability could
exceed the value of the real property or the principal balance of the related
mortgage loan. For this reason, we may choose not to foreclose on contaminated
property rather than risk incurring liability for remedial actions.
Under the laws of certain states, an owner's failure to perform remedial actions
required under environmental laws may give rise to a lien on mortgaged property
to ensure the reimbursement of remedial costs. In some states this lien has
priority over the lien of an existing mortgage against the real property.
Because the costs of remedial action could be substantial, the value of a
mortgaged property as collateral for a mortgage loan could be adversely affected
by the existence of an environmental condition giving rise to a lien.
The state of law is currently unclear as to whether and under what circumstances
clean-up costs, or the obligation to take remedial actions, can be imposed on a
secured lender. If a lender does become liable for clean up costs, it may bring
an action for contribution against the current owners or operators, the owners
or operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but these persons or entities may be
bankrupt or otherwise judgment-proof. Furthermore, an action against the
borrower may be adversely affected by the limitations on recourse in the loan
documents.
For the foregoing reasons, we anticipate that Vestin Mortgage will protect us
and you by requiring a Phase I Environmental Site Assessment of the security
properties prior to selecting a loan for us to invest in.
Second Mortgages; Rights of Senior Mortgages
We do not presently intend to acquire mortgages that are subordinate to more
than one other mortgage. Our rights as mortgagee or beneficiary under a second
mortgage will be subordinate to those of the mortgagee under the senior
mortgage, including the prior rights of the senior mortgagee to receive rents,
hazard insurance and condemnation proceeds and to cause the security property to
be sold upon default of the mortgagor. This can extinguish a second mortgage
unless we assert our subordinate interest in foreclosure litigation or satisfy
the defaulted senior loan. In many states a junior mortgagee may satisfy a
defaulted senior loan in full, or may cure the default, and bring the senior
loan current, in either even adding the amounts expended to the balance due on
the junior loan. Absent a provision in the senior mortgage, or unless required
by state law, a senior mortgagee need not give notice of default to a junior
mortgagee.
The form of mortgage used by many institutional lenders confers on the mortgagee
the right both to receive insurance proceeds and condemnation awards. Thus, in
the event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the first
mortgagee will have the prior right to collect any insurance proceeds payable
and any condemnation award of damages in and to apply the same to the
indebtedness secured by the senior mortgage. Proceeds in excess of the amount of
senior indebtedness will, in most cases, be applied to the indebtedness secured
by a junior mortgage. The right to insurance proceeds and condemnation awards
may be limited, as in cases where the mortgagor is allowed to use the insurance
proceeds and condemnation award to repair the damage unless the security of the
mortgagee has been impaired.
The form of mortgage used by many institutional lenders also contains a "future
advance" clause, which provides that additional amounts advanced to or on behalf
of the mortgagor by the mortgagee are to be secured by the mortgage. While this
type of clause is valid under the laws of most states, the priority of any
advance made under the clause may depend on whether the advance was an
"obligatory" or "optional" advance. If the mortgagee is obligated to advance the
additional amounts, the advance may be entitled to
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receive the same priority as amounts initially made under the mortgage,
notwithstanding that there may be intervening junior mortgages and other liens
and notwithstanding that the mortgagee or beneficiary had actual knowledge of
them. Where the mortgagee is not obligated to advance the additional amounts and
has actual knowledge of the intervening junior mortgages and other liens, the
advance may be subordinate to these intervening junior mortgages and other
liens. Priority of advances under a "future advance" clause may also rest on
state law giving priority to advances made under the loan agreement up to a
"credit limit" amount stated in the recorded mortgage.
We can also protect ourselves by including provisions obligating the mortgagor
to do the following:
- pay before delinquency all taxes and assessments on the property
and, when due, all encumbrances, charges and liens on the
property which appear prior to the mortgage,
- to provide and maintain fire insurance on the property,
- to maintain and repair the property,
- and not to commit or permit any waste on the property, and
- to appear in and defend any action or proceeding purporting to
affect the property or the rights of the mortgagee under the
mortgage.
Upon a failure of the mortgagor to perform any of these obligations, we
would have the right under the mortgage to perform the obligation, with
the mortgagor agreeing to reimburse us for any sums we expend on behalf
of the mortgagor. All sums we expend become part of the indebtedness
secured by the mortgage.
Statutory Rights of Redemption
After a foreclosure sale pursuant to a mortgage, the borrower and foreclosed
junior lienors may have a statutory period in which to redeem the property from
the foreclosure sale. Redemption may be limited to where the mortgagee receives
payment of all or the entire principal balance of the loan, accrued interest and
expenses of foreclosure. The statutory right of redemption diminishes the
ability of the lender to sell the foreclosed property. The right of redemption
may defeat the title of any purchaser at a foreclosure sale or any purchaser
from the lender subsequent to a foreclosure sale. One remedy we may have is to
avoid a post-sale redemption by waiving our right to a deficiency judgment.
Consequently, as noted above, the practical effect of the redemption right is
often to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run.
Anti-Deficiency Legislation
We may acquire interests in mortgage loans which limit our recourse to
foreclosure upon the security property, with no recourse against the borrower's
other assets. Even if recourse is available pursuant to the terms of the
mortgage loan against the borrower's assets in addition to the mortgaged
property, we may confront statutory prohibitions which impose prohibitions
against or limitations on this recourse. For example, the right of the mortgagee
to obtain a deficiency judgment against the borrower may be precluded following
foreclosure. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the security and the amount due to the lender. Other
statutes require the mortgagee to exhaust the security afforded under a mortgage
by foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the borrower. We may elect, or be deemed to have elected, between
exercising our remedies with respect to the security or the deficiency balance.
The practical effect of this election requirement is that lenders will usually
proceed first against the security rather than bringing personal action against
the borrower. Other statutory provisions limit any deficiency judgment against
the former borrower following a judicial sale to the excess of the outstanding
debt over the fair market value of the property at the time of the public sale.
In Nevada, we can pursue a deficiency judgment against the borrower or a
guarantor if the value of the property securing the loan is insufficient to pay
back the debt owed to us. In jurisdictions like California, however, if we
desire to seek a judgment in court against the borrower for the deficiency
balance, we may be required to seek judicial foreclosure and/or have other
security from the borrower. We would expect this to be a more prolonged
procedure, and is subject to most of the delays and expenses that affect other
lawsuits.
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Bankruptcy Laws
We may be subject to delays from statutory provisions that afford relief to
debtors from our ability to obtain payment of the loan, to realize upon
collateral and/or to enforce a deficiency judgment. Under the United States
Bankruptcy Code of 1978, which we refer to as the Bankruptcy Code, and analogous
state laws, foreclosure actions and deficiency judgment proceedings are
automatically suspended upon the filing of the bankruptcy petition, and often no
interest or principal payments are made during the course of the bankruptcy
proceeding. The delay and consequences in obtaining our remedy can be
significant. Also under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of the holder of a second mortgage may prevent the
senior lender from taking action to foreclose out the junior lien.
Under the Bankruptcy Code, the amount and terms of a mortgage on property of the
debtor may be modified under equitable principles or otherwise. Under the terms
of an approved bankruptcy plan, the court may reduce the outstanding amount of
the loan secured by the real property to the then current value of the property
in tandem with a corresponding partial reduction of the amount of the lender's
security interest. This leaves the lender having the status of a general
unsecured creditor for the differences between the property value and the
outstanding balance of the loan. Other modifications may include the reduction
in the amount of each monthly payment, which may result from a reduction in the
rate of interest and/or the alteration of the repayment schedule, and/or change
in the final maturity date. A court may approve a plan, based on the particular
facts of the reorganization case that effected the curing of a mortgage loan
default by paying arrearage over time. Also, under the Bankruptcy Code, a
bankruptcy court may permit a debtor to de-accelerate a mortgage loan and to
reinstate the loan even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court prior to the
filing of the debtor's petition. This may be done even if the full amount due
under the original loan is never repaid. Other types of significant
modifications to the terms of the mortgage or deed of trust may be acceptable to
the bankruptcy court, often depending on the particular facts and circumstances
of the specific case.
In a bankruptcy or similar proceeding action may be taken seeking the recovery
as a preferential transfer of any payments made by the mortgagor under the
related mortgage loan to the lender. Payments on long-term debt may be protected
from recovery as preferences if they are payments in the ordinary course of
business made on debts incurred in the ordinary course of business. Whether any
particular payment would be protected depends upon the facts specific to a
particular transaction.
Enforceability of Certain Provisions
Due-On-Sale Provisions
Federal law pre-empts state constitutional, statutory and case law that
prohibits the enforcement of due-on-sale clauses and permits lenders to enforce
these claims in accordance with their terms. As a result, due-on-sale clauses
are enforceable except in those states whose legislatures exercised their
limited authority to regulate the enforceability of these clauses. Due-on-sale
clauses will not be enforceable in bankruptcy proceedings.
Acceleration on Default
We may invest in mortgage loans which contain a "debt-acceleration" clause,
which permits us to accelerate the full debt upon a monetary or nonmonetary
default of the borrower. The courts of most states will enforce clauses
providing for acceleration in the event of a material payment default after we
give appropriate notices. The equity courts of any state, however, may refuse to
foreclose a mortgage when an acceleration of the indebtedness would be
inequitable or unjust. Furthermore, a borrower may avoid foreclosure and
reinstate an accelerated loan by paying only the defaulted amounts and the costs
and attorney's fees incurred by the lender in collecting these defaulted
payments.
State courts also are known to apply various legal and equitable principles to
avoid enforcement of the forfeiture provisions of installment contracts. For
example, a lender's practice of accepting late payments from the borrower may be
deemed a waiver of the forfeiture clause. State courts also may impose equitable
grace periods for payment of arrearage or otherwise permit reinstatement of the
contract following a default. If a borrower under an installment contract has
significant equity in the property, a court may apply equitable
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principles to reform or reinstate the contract or to permit the borrower to
share the proceeds upon a foreclosure sale of the property if the sale price
exceeds the debt.
Prepayment Provisions
In the absence of state statutory provisions prohibiting prepayment fees, we
expect that the courts will enforce claims requiring prepayment fees. However,
in some states prepayment fees may be unenforceable for residential loans or
after a mortgage loan has been outstanding for a number of years. Applicable law
may limit the amount of any prepayment fee to a specified percentage of the
original principal amount of the mortgage loan, to a specified percentage of the
outstanding principal balance of a mortgage loan, or to a fixed number of
month's interest on the prepaid amount. We may have to contend with laws that
render prepayment provisions on default or other involuntary acceleration of a
mortgage loan unenforceable against the mortgagor or trustor. Some state
statutory provisions may also treat prepayment fees as usurious if they exceed
statutory limits. We anticipate that our loans will not have prepayment
provisions.
Secondary Financing: Due-on-Encumbrance Provisions
Some mortgage loans may have no restrictions on secondary financing, thereby
permitting the borrower to use the mortgaged property as security for one or
more additional loans. We are more likely to invest in mortgage loans that
permit us, as first lender, to accelerate the maturity of a loan if the borrower
grants a second mortgage or in mortgage loans that require our consent to any
junior or substitute financing.
Where a borrower encumbers the mortgaged property with one or more junior liens,
the first lender is subjected to the following additional risks:
- the borrower may have difficulty servicing and repaying multiple
loans;
- acts of the senior lender which prejudice the junior lender or
impair the junior lender's security may create a superior equity
in favor of the junior lender;
- if the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the
senior lender and can interfere with, delay and even prevent the
taking of action by the senior lender.
- the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
We expect that our loans will prohibit junior mortgages and intend to
monitor our loans closely so that we will know when a junior lien holder
acquires an interest in the security property.
Applicability of Usury Laws
State and federal usury laws limit the interest that lenders are entitled to
receive on a mortgage loan. In determining whether a given transaction is
usurious, courts may include charges in the form of points and fees as interest,
but may exclude payments in the form of reimbursement of foreclosure expenses or
other charges found to be distinct from interest. If, however, the amount
charged for the use of the money loaned is found to exceed a statutorily
established maximum rate, the form employed and the degree of overcharge are
both immaterial. Statutes differ in their provision as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the interest
above the applicable limit or imposes a specified penalty. Under this statutory
scheme, the borrower may have the recorded mortgage or deed of trust cancelled
upon paying its debt with lawful interest, or the lender may foreclose, but only
for the debt plus lawful interest. Under a second, more severe type of statute,
a violation of the usury law results in the invalidation of the transaction,
thereby permitting the borrower to have the recorded mortgage or deed of trust
cancelled without any payment and prohibiting the lender from foreclosing.
Nevada law does not apply limitations on interest that may be charged on the
type of loans that we intend to invest in or purchase. In California, we will
only invest in loans that were made through real estate brokers licensed by the
California Department of Real Estate. Mortgage loans made or arranged by a
licensed real estate broker are exempt from the California usury law provisions
that restrict the maximum rate of interest on California loans. All underlying
mortgage loans on California property that are invested in or purchased by us
will be arranged for us by such a licensed California real estate broker.
68
<PAGE> 78
REPORTS TO MEMBERS
Pursuant to applicable state guidelines and the undertakings we have made to the
Securities and Exchange Commission in our filings, we will be required to
deliver certain reports to our members and make various filings with the
Commission, particularly in the early stages of our operations. These reports
and filings are described in this section.
Within 75 days after the close of our fiscal year, Vestin Mortgage will prepare
and distribute to you all the information about us you need to prepare your
federal income tax return. The materials delivered to you annually will include:
- audited financial statements: balance sheet, statements of
income or loss, Members' equity, and cash flow;
- a statement as to any transactions between us and Vestin
Mortgage or its affiliates, and of the fees, commissions,
compensation and other benefits paid by us or accrued to Vestin
Mortgage or its affiliates for the fiscal year completed,
showing the amount paid or accrued to each recipient and the
respective services performed; and
- a report identifying distributions from:
-- cash flow from operations during that year,
-- cash flow from operations of prior years that had been
held as reserves,
-- proceeds from capital transactions, lease payments on
net leases with builders and sellers, and
-- reserves from the gross proceeds of the offering
originally obtained from our members.
Copies of the financial statements and reports referred to above, other
than those delivered for purposes of your income tax return, shall be
distributed to you within 120 days after the close of each taxable year.
We will also provide you with the information required by Form 10-Q within 45
days of the end of each fiscal quarter.
Because the Securities and Exchange Commission has declared effective the
registration statement of which this prospectus is a part, we have become
subject to the reporting requirements of the Securities Exchange Act of 1934.
This means that we will be required to file periodic reports, including
quarterly reports within 45 days after the end of each fiscal quarter and annual
reports within 90 days of the end of each fiscal year. These reports contain
financial information and an analysis of our business for that quarter or year,
including comparisons with prior performance, as well as additional disclosure
in the annual reports. Our Manager and the holders of over 10% of our units will
also be required to file reports reflecting their levels of unit ownership.
Furthermore, for so long as the proceeds of this offering are not fully
committed or returned to investors, Vestin Mortgage shall prepare a special
report containing a statement of the amount of the mortgage loans in which we
have invested, the material terms of these loans, the identity of the borrower
and the real property securing the mortgage loans and the appraised values of
that real property. This report may be included in the quarterly report
described below. We will send you copies of the report within sixty (60) days
after the end of each quarter. Vestin Mortgage will not prepare a special report
during quarters when there are no mortgage loans or origination, placement or
evaluation fees.
When we register our units under Section 12(g) of the Securities Exchange Act of
1934, Vestin Mortgage shall prepare, at our expense:
- a quarterly report for each of the first three quarters in each
fiscal year containing unaudited financial statements,
consisting of a balance sheet, a statement of income or loss and
statement of cash flow, and
- a statement of other pertinent information regarding the Fund
and its activities during the period covered by the report.
We will distribute copies of these statements and information to you
within sixty (60) days after the close of the respective quarter.
69
<PAGE> 79
PLAN OF DISTRIBUTION
Vestin Capital, Inc., our lead dealer, is using this prospectus to offer units
to the public on our behalf. Vestin Capital, which is an NASD member, is an
affiliate of Vestin Mortgage and wholly owned subsidiary of Vestin Group, Inc.,
the Delaware corporation that owns Vestin Mortgage. In addition, employees of
Vestin Mortgage, where they may legally do so, will sell units directly. They
will not receive any compensation for such sales. Vestin Mortgage may pay Vestin
Capital up to 1.0% of the gross proceeds of the sale of units it sells as a fee
for selling the units and for managing any selected dealers. Vestin Capital may
engage non-affiliated securities brokerage firms that are members of the NASD to
act as selected dealers to sell units to the public. Vestin Mortgage will pay
the selected dealers sales commissions of up to 3.5% of the gross proceeds of
their respective sales of units. We will not reimburse Vestin Mortgage for such
commissions or any expenses incurred by Vestin Capital and reimbursed by Vestin
Mortgage in connection with this Offering. Vestin Mortgage's capital account in
the Company will be credited up to a maximum of $2,000,000 for offering expenses
paid by Vestin Mortgage on our behalf to third parties that are not affiliated
with Vestin Mortgage. In no event will the maximum compensation to be paid to
NASD members by Vestin Mortgage in connection with this Offering exceed 10% of
the gross proceeds plus 0.5% for bona fide due diligence expenses.
We will be reviewing subscription applications as they are received. We will
indicate our acceptance of your subscription agreement by countersigning it and
indicating the number of units we will issue. We will place all proceeds from
the sale of units in a segregated escrow account until at least 150,000 units
have been sold. The escrow account will be with _________________, whose
address is _____________________________________________________. We have
entered into escrow agreement with ________, which you can find as an exhibit to
our registration statement.
If we sell 150,000 units on or before December 31, 2001, the escrow account will
be closed and the proceeds, after deduction of _________'s escrow agent fees,
together with amounts earned as interest on those proceeds, will be delivered to
us. If we have not sold 150,000 units on or before December 31, 2001, _________
will promptly return to all investors the amounts they have paid to buy units,
without interest. We will then stop selling units and the subscription
agreements will be cancelled, regardless or whether or not previously accepted.
If we sell 150,000 units on or before December 31, 2001, we will continue to
sell units to the public through Vestin Capital, Vestin Mortgage where
permitted, and selected dealers. We will seek to sell a total of 50,000,000
units for $500,000,000, which includes units to be issued under our distribution
reinvestment plan. We may sell units through ___________, 2003, or we may decide
to end the Offering. In certain states where the Offering will be made, we may
not be allowed to extend the Offering beyond one year unless we have the
permission of the appropriate state agency.
If you want to purchase units, you should complete the subscription agreement,
which you can find at Exhibit B to this prospectus and which will be provided by
the person or the securities dealer that offered you the units. You should
return the subscription agreement and full payment for the units being purchased
to that dealer, who will tell you whether to make your payment to "____________,
as Escrow Agent" or, to "Vestin Fund II, LLC". You may obtain additional copies
of the subscription agreement from the Manager or Vestin Capital, whose address
is 2901 El Camino Avenue, Suite 207, Las Vegas, Nevada 89102, telephone number
(702) 876-1143.
By submitting the signed Subscription Agreement with payment for the purchase of
units, you:
- agree to be bound by the Operating Agreement;
- grant a special and limited power of attorney to Vestin
Mortgage; and
- represent and warrant that you meet the relevant standards
specified in the Subscription Agreement and are eligible to
purchase units.
Neither Vestin Capital nor any other securities brokerage firm will
permit sales to discretionary accounts without prior specific written
approval of the owner of the account.
70
<PAGE> 80
LEGAL MATTERS
For matters of Nevada law, Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP,
Vestin Mortgage's attorneys, have reviewed the legality of our issuance of
units. Ira Levine, Executive Vice President of Legal and Corporate Affairs of
Vestin Group, Inc., is a partner in Berkley, Gordon, Levine, Goldstein &
Garfinkel, LLP. Our tax counsel is Wendel, Rosen, Black & Dean, LLP, Oakland,
California.
EXPERTS
Grant Thornton LLP has audited our financial statements as of December 8, 2000.
These financial statements are included in this prospectus and in the
registration statement of which this prospectus forms a part. We include Grant
Thornton's report here and elsewhere in this registration statement. We rely on
Grant Thornton as experts in auditing and on the Grant Thornton report for the
financial statements we include in this prospectus.
AVAILABLE INFORMATION
This prospectus does not contain all the information in the Registration
Statement on Form S-11 (No. 333- ) and accompanying exhibits which we have
filed with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933. Additionally, we will become subject to the reporting
requirements of the Securities and Exchange Act of 1934 and, consequently, will
file annual and quarterly reports and other information with the Commission.
Copies of the Registration Statement on Form S-11 and all amendments thereto and
other reports and information filed by us can be inspected and copied at the
public reference facilities (phone number (800) SEC-0330) maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of that
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains a World Wide Web site that contains reports, proxy and
information statements and other information for registrants that file
electronically with the Commission. The address of this site is
http://www.sec.gov.
As required by the Commission in connection with real estate related offerings
on Form S-11, we have also undertaken to provide you directly with the financial
statements required by Form 10-K for the first full year of operations of the
Company and to file with the Commission "sticker supplements" to this prospectus
during the distribution period.
You will also be able to review our filing on Form 8-K that we will file after
the end of the distribution period. This report will contain additional
financial statements and information required under the Securities Exchange Act
for purchases made after the end of the distribution period involving the use of
10 percent or more, on a cumulative basis, of the net proceeds of the offering.
We will also provide the information contained in this report to the members at
least once each quarter after the distribution period of the offering has ended.
71
<PAGE> 81
INDEX TO FINANCIAL STATEMENTS
VESTIN FUND II, LLC
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants ..................... F-2
Balance Sheet at December 8, 2000 ...................................... F-3
Statements of Members' Equity for the Period from December 7, 2000
(Date of Inception) through December 8, 2000 ........................... F-4
Notes to the Financial Statements ...................................... F-5
VESTIN GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet at September 30, 2000 (Unaudited) ........... F-9
Consolidated Statements of Operations for the Nine
Months Ended September 30, 2000 (Unaudited) ............................ F-10
Consolidated Statement of Statements of Cash Flows for the Nine
Months Ended September 30, 2000 (Unaudited) ............................ F-11
Notes to Consolidated Financial Statements (Unaudited) ................. F-12
</TABLE>
F-1
<PAGE> 82
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Member
Vestin Fund II, LLC
We have audited the accompanying balance sheet of Vestin Fund II, LLC (A
Development Stage Company), as of December 8, 2000, and the related statement of
members' equity for the period from December 7, 2000 (date of inception) through
December 8, 2000. These financial statements are the responsibility of the
Company's management and Board of Directors. 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 of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vestin Fund II, LLC, as of
December 8,2000, in conformity with accounting principles generally accepted in
the United States of America.
/s/ GRANT THORNTON LLP
Reno, Nevada
December 8, 2000
F-2
<PAGE> 83
VESTIN FUND II, LLC
(A Development Stage Company)
BALANCE SHEET
<TABLE>
<CAPTION>
December 8,
2000
-----------
<S> <C>
ASSETS
Deferred offering costs ................................ $195
----
Total assets ........................................... $195
====
LIABILITIES AND MEMBERS' EQUITY
Liabilities ............................................ $ --
Members' equity---actual 20 units at $10 per unit ...... 195
----
Total liabilities and members' equity .................. $195
====
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 84
VESTIN FUND II, LLC
(A Development Stage Company)
STATEMENT OF MEMBERS' EQUITY
For the period from December 7, 2000 (Date of Inception)
through December 8, 2000
<TABLE>
<S> <C>
Inception, December 7, 2000 .............. $ --
Issuance of units ........................ 195
----
Members' equity at December 8, 2000 ...... $195
====
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 85
VESTIN FUND II, LLC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 8, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. ORGANIZATION
Vestin Fund II, LLC, a Nevada Limited Liability Company, (the Company) is
a development stage company primarily engaged in business as a mortgage
lender to make and purchase first, second, wraparound, participating and
commercial mortgage investments secured by deeds of trust and mortgages on
real estate. The Company was organized on December 7, 2000 (date of
formation) and will continue until December 31, 2020 unless dissolved
prior or extended thereto under the provisions of the operating agreement.
The Manager of the Company is Vestin Mortgage, Inc., a Nevada corporation
engaged in the business of mortgage services, specifically the origination
of mortgages. Vestin Mortgage, Inc. is a wholly-owned subsidiary of Vestin
Group, Inc., a Delaware Corporation, whose common stock is publicly held
and is traded on the Nasdaq Small Cap Market under the symbol "VSTN".
For the period from December 7, 2000 (date of inception) through December
8, 2000, the Company has not commenced its planned operations and the only
transactions were non-cash deferred offering costs which were paid by the
Manager on behalf of the Company. These costs are deemed capital
contributions by the Manager.
The fiscal year end of Vestin Fund II, LLC is December 31.
2. MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3. INCOME TAXES
Income tax effects resulting from the Company's operations pass through to
the members individually and, accordingly, no provision for income taxes
is included in the financial statements.
4. REVENUE RECOGNITION
Interest is recognized as revenue when earned according to the terms of
the loan.
5. DEBT SECURITIES
The Company will classify its debt securities as held-to-maturity, as the
Company has the ability and the intent to hold the securities until
maturity. These securities will be recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. A decline in
the market value of any held-to-maturity security below cost that is
deemed to be other than temporary will result in a reduction in carrying
amount to fair value. The impairment would be charged to earnings and a
new cost basis for the security would be established. Premiums and
discounts will be amortized or accreted over the life of the related
security as an adjustment to yield using the effective interest method.
F-5
<PAGE> 86
VESTIN FUND II, LLC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 8, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. LOANS SECURED BY TRUST DEEDS
Loans secured by trust deeds will be originated by Vestin Mortgage, Inc.
and will be recorded at cost. Interest income on loans will be accrued by
the simple interest method. The Company will not recognize interest income
on loans once they are determined to be impaired until the interest is
collected in cash. A loan is impaired when, based on current information
and events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement and a
specific reserve has been recorded. Cash receipts will be allocated to
interest income, except when such payments are specifically designated as
principal reduction or when management does not believe the Company's
investment in the loan is fully recoverable.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
Revenue Recognition, which outlines the basic criteria that must be met to
recognize revenue and provide guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements
filed with the SEC. The Company believe the adoption of SAB 101 will not
have a material impact on the Company's financial position and results of
operation.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivatives and Hedging Activities, ("SFAS 133"). SFAS
133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. SFAS 133 establishes accounting and reporting
standards of derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In
July 1999, the Financial Accounting Standards Board issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133 ("SFAS 137"). SFAS 137
deferred the effective date until the next fiscal year beginning after
June 15, 2000. We will adopt SFAS 133, in our quarter ending March 31,
2001 and do not expect such adoption to have a material effect on our
financial statements.
NOTE B - MEMBERS' EQUITY
1. MEMBERSHIP UNITS
The Manager (in its Capacity as the Initial Member) shall contribute to
the capital of the Company such amount as it deems appropriate; provided
that the Manager shall be deemed to have contributed to the capital of the
Company an amount equal to expenses of the Company incurred in connection
with the Offering up to a maximum of $2,000,000, to the extent such
expenses are paid by the Manager to non-affiliated parties. The members
shall contribute to the capital of the Company an amount equal to $10.00
for each unit subscribed for by each member, with a minimum subscription
of 200 units per member. The total Capital contributions of the members
will not exceed $500,000,000.
F-6
<PAGE> 87
VESTIN FUND II, LLC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 8, 2000
2. ALLOCATIONS AND DISTRIBUTIONS
In accordance with the Operating Agreement, the Company's income, gains and
losses are to be credited to and charged against each member in proportion
to their respective capital accounts as of the close of business on the
last day of each calendar month.
Distributions of interest received on mortgage loans are paid monthly in
cash or as reinvested distributions. All of net income attributable to
interest payments from borrowers is distributed to the members, which will
include an allocation to Vestin Mortgage, Inc. corresponding to the
relative size of Vestin Mortgage's capital account.
Distributions of net proceeds in the form of the repayment of principal,
the prepayment of a mortgage loan, net proceeds of a foreclosure sale, or
deemed proceeds resulting from loan modifications or extensions will be
made to members, including Vestin Mortgage, Inc. pro rata based upon their
capital accounts.
NOTE C - TRANSACTIONS WITH THE MANAGER AND ITS AFFILIATES
1. FEES PAID BY THE COMPANY
a. The Company shall pay the Manager an annual management fee up to
0.25% of aggregate capital contributions to the Company, paid
monthly in arrears.
b. Vestin Mortgage, Inc. will receive fees for reselling properties
foreclosed upon. These fees are to be not greater than 3.00% of
the proceeds where substantial service has been performed by the
Manager.
F-7
<PAGE> 88
VESTIN FUND II, LLC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 8, 2000
NOTE C - TRANSACTIONS WITH THE MANAGER AND ITS AFFILIATES - Continued
2. FEES PAID BY BORROWERS
a. Vestin Mortgage, Inc. will receive fees of 2.00% to 5.00% of
each loan as compensation for loan evaluation and processing
fees. These fees shall be reasonable and shall be payable only
for services actually rendered.
b. Vestin Mortgage, Inc. will originate all loans the Company
invests in. Vestin Mortgage, Inc. has the ability to act as
broker for which it will receive a commission of approximately
2.00% to 6.00% of the principal amount of each mortgage
investment made during the year.
c. All of the Company's loans are to be serviced by Vestin
Mortgage, Inc., in consideration for which Vestin Mortgage, Inc.
will receive up to 0.25% of the total unpaid principal balance
of each mortgage investment serviced.
d. Vestin Mortgage, Inc. will receive loan extension fees of 2.00%
to 5.00% of the outstanding principal as permitted by local law
and local market conditions.
Vestin Mortgage, Inc. has the right to purchase from the Company
the interest receivable or principal on delinquent loans held by
the Company. The Company shall not sell a foreclosed property to
the Manager or to another program in which the Manager or its
affiliates has an interest.
F-8
<PAGE> 89
VESTIN GROUP, INC.
AND SUBSIDIARIES
(FORMERLY SUNDERLAND CORPORATION AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 30,
2000
------------
<S> <C>
Assets
Cash ................................................................. $ 945,461
Accounts receivable .................................................. 2,085,006
Due from stockholder ................................................. 508,569
Due from affiliate ................................................... 173,799
Notes receivable-related party ....................................... 629,900
Notes receivable ..................................................... 1,753,626
Investments in marketable securities ................................. 149,382
Investment in real estate held for sale .............................. 1,306,901
Investments in mortgage loans on real estate ......................... 5,176,400
Other investments .................................................... 1,094,520
Deferred tax asset ................................................... 27,540
Property and equipment, net .......................................... 276,671
Other assets, net .................................................... 93,539
-----------
Total assets ......................................................... $14,221,314
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Accounts payable ..................................................... $ 380,063
Accrued expenses ..................................................... 177,988
Income taxes payable ................................................. 1,742,069
Due to related party ................................................. 46,845
Note payable ......................................................... 1,294,624
Lines of credit ...................................................... 2,016,511
-----------
Total liabilities .................................................... 5,658,100
Commitments and contingencies ........................................ --
Stockholders' equity
Preferred stock, $.0001 par value; 20 million shares authorized;
no shares issued ................................................... --
Common stock, $.0001 par value; 100 million shares authorized;
7,240,681 shares issued and outstanding ............................ 724
Additional paid-in capital ........................................... 2,344,379
Retained earnings .................................................... 6,218,111
-----------
Total stockholders' equity ........................................... 8,563,214
-----------
Total liabilities and stockholders' equity ........................... $14,221,314
===========
</TABLE>
See Accompanying Notes to Financial Statements
The investors in Vestin Fund II, LLC, are not acquiring an
interest in Vestin Group, Inc. and subsidiaries.
F-9
<PAGE> 90
VESTIN GROUP, INC.
AND SUBSIDIARIES
(FORMERLY SUNDERLAND CORPORATION AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues
Revenues from lending services and income
investments ........................................ $10,966,289 $ 8,921,952
Revenue from financial services .................... 1,486,499 1,014,051
Interest income .................................... 537,602 298,571
Other income ....................................... 13,514 --
----------- -----------
Total revenues ..................................... 13,003,904 10,234,574
Operating expenses
Sales and marketing ................................ 1,253,675 2,106,020
General and administrative ......................... 6,440,835 4,338,668
----------- -----------
Total operating expenses ........................... 7,694,510 6,444,688
Income before provision for income taxes ........... 5,309,394 3,789,886
Provision for income taxes ......................... 1,805,194 1,288,561
----------- -----------
Net income ......................................... $ 3,504,200 $ 2,501,325
=========== ===========
Basic and fully diluted earnings per common
share .............................................. $ 0.48 $ 0.35
=========== ===========
Weighted average number of common shares used
in per share calculation ........................... 7,240,681 7,240,681
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
The investors in Vestin Fund II, LLC, are not acquiring an
interest in Vestin Group, Inc. and subsidiaries.
F-10
<PAGE> 91
VESTIN GROUP, INC.
AND SUBSIDIARIES
(FORMERLY SUNDERLAND CORPORATION AND SUBSIDIARIES)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................................. $ 3,504,200 $ 2,501,325
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .......................................................... 58,432 25,777
Unrealized loss on investment in marketable securities ................................. 85,567 --
Changes in operating assets and liabilities:
Increase in accounts receivable ........................................................ (900,377) (372,598)
Increase in other assets ............................................................... (73,105) (308,096)
Increase in due from shareholder and affiliate ......................................... (682,368) (307,699)
Increase (decrease) in accounts payable and accrued expenses ........................... 67,892 (70,124)
Decrease in due to related party ....................................................... (222,796) --
Increase in income taxes payable ....................................................... 1,005,194 1,302,814
----------- -----------
Net cash provided by operating activities .............................................. 2,842,639 2,771,399
----------- -----------
Cash flows from investing activities:
Cash outlay for property and equipment ................................................. (79,663) (59,273)
Increase in notes receivable ........................................................... (767,968) --
Net purchase of investments ............................................................ (773,283) (1,500,813)
----------- -----------
Net cash used by investing activities .................................................. (1,620,914) (1,560,086)
----------- -----------
Cash flows from financing activities:
Distribution to the stockholders ....................................................... (178,435) (2,152,737)
Stockholder contributions .............................................................. -- 347,666
Payments received on stockholder loan .................................................. -- 535,646
Payments on capital lease obligations .................................................. -- (17,821)
Net advances (payments) on notes payable and lines of credit ........................... (1,282,889) 11,808
----------- -----------
Net cash used by financing activities .................................................. (1,461,324) (1,275,438)
----------- -----------
Net decrease in cash ................................................................... (239,599) (64,125)
Cash-beginning balance ................................................................. 1,185,060 590,441
----------- -----------
Cash-ending balance .................................................................... $ 945,461 $ 526,316
=========== ===========
</TABLE>
Supplemental Schedule of Non-Cash Investing Activities:
On March 15, 2000, 10,300 shares of common stock were issued to acquire all of
the outstanding shares of DM Financial Services, Inc.
On March 31, 2000, 800,000 shares of common stock were issued to acquire all of
the outstanding shares of L.L. Bradford & Company.
On January 31, 2000, 17,700 shares of common stock were issued to acquire all of
the outstanding shares of DM Mortgage Advisors, Inc.
On August 31, 2000, 251,000 shares of common stock were issued to acquire all of
the outstanding shares of Mortgage Source, Inc.
See Accompanying Notes to Financial Statements
The investors in Vestin Fund II, LLC, are not acquiring an
interest in Vestin Group, Inc. and subsidiaries.
F-11
<PAGE> 92
VESTIN GROUP, INC.
AND SUBSIDIARIES
(FORMERLY SUNDERLAND CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
(UNAUDITED)
Note 1--Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with Securities and Exchange Commission requirements for interim
financial statements. Therefore, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The financial statements should be read in conjunction
with the Form 10-KSB/A for the year ended December 31, 1999 of Vestin Group,
Inc. ("Vestin" or "the Company").
Financial data for all periods presented have been retroactively adjusted to
reflect the effect of the recent mergers with L.L. Bradford & Company, Vestin
Capital, Inc., DM Mortgage Advisors, Inc., and Mortgage Source, Inc. each of
which was accounted for as a pooling of interest transaction.
The results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for the full year. In the
opinion of management, the information contained herein reflects all adjustments
necessary to make the results of operations for the interim periods a fair
statement of such operation. All such adjustments are of a normal recurring
nature.
Note 2--Acquisition
On August 31, 2000, the Company acquired all the outstanding capital stock of
Mortgage Source, Inc. (MSI), in exchange for approximately 251,000 shares of the
Company's common stock pursuant to a tax-free reorganization. MSI is a Las Vegas
based mortgage company currently licensed in 13 states. The acquisition of MSI
has been accounted for as a pooling of interests, and accordingly, the
accompanying consolidated financial statements of the Company have been restated
to include the accounts and operations of MSI for all periods presented.
Note 3--DM Mortgage Investors, LLC
In August 2000, the Securities Exchange Commissions (SEC), declared effective
the registration statement of DM Mortgage Investors, LLC (the "Fund") under
which it will offer up to 10,000,000 units at $10 per unit. The Fund will invest
in mortgage loans secured by real property. Vestin Mortgage, Inc. a subsidiary
of the Company is the Managing Member of the fund. As of September 30, 2000,
Vestin's investment in the fund totaled $788,370 which is included as other
investments totaling $1,094,520. Vestin Mortgage, Inc., as the Managing Member,
is entitled to an annual management fee of up to 0.25% of the aggregate capital
contributions to the Fund which will be paid by the Fund. Vestin Mortgage, Inc.
has elected to waive such fee for the three months ended September 30, 2000.
Note 4--Due From Stockholder
As of September 30, 2000, due from stockholder of approximately $509,000 consist
of advances made to an officer and director of the Company. Due from stockholder
is non-interest bearing and due on demand.
Note 5--Note Receivable-Related Party
In September of 2000, Mortgage Source, Inc., a subsidiary of Vestin Group, Inc.,
extended a loan to the Chief Financial Officer of the Company in the amount of
$629,900 for the purchase of a personal residence. The loan was extended at an
interest rate of 7.25% with normal and usual closing costs. On October 2, 2000,
Mortgage Source sold the loan to a third party lender for the original principal
balance and interest rate.
F-12
<PAGE> 93
VESTIN GROUP, INC.
AND SUBSIDIARIES
(FORMERLY SUNDERLAND CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
(UNAUDITED)
Note 6--Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (the "commission")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the Commission's views in
applying generally accepted accounting principles to revenue recognition. The
Company has applied the provisions for SAB 101 in the financial information
presented herein.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The new standard
establishes accounting and reporting standards for derivative instrument,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for all quarters of the fiscal
years beginning after June 15, 2000. We do not expect SFAS No. 133 to have a
material effect on our financial conditions or results of operations.
F-13
<PAGE> 94
EXHIBIT A
VESTIN FUND II, LLC
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
VESTIN FUND II, LLC
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1
ORGANIZATION OF THE LIMITED LIABILITY COMPANY ....... A-1
1.1 Formation ........................................... A-1
1.2 Name ................................................ A-1
1.3 Place of Business ................................... A-1
1.4 Purpose ............................................. A-1
1.5 Articles of Organization ............................ A-1
1.6 Term of Existence ................................... A-1
1.7 Power of Attorney ................................... A-2
1.8 Nature of Power of Attorney ......................... A-2
ARTICLE 2
DEFINITIONS ......................................... A-2
2.1 Acquisition and Investment Evaluation Expenses ...... A-2
2.2 Acquisition and Investment Evaluation Fees .......... A-2
2.3 Administrator ....................................... A-2
2.4 Affiliate ........................................... A-2
2.5 Agreement ........................................... A-3
2.6 Capital Account ..................................... A-3
2.7 Capital Contribution ................................ A-3
2.8 Capital Transaction ................................. A-3
2.9 Cash Flow ........................................... A-3
2.10 Code ................................................ A-4
2.11 Company ............................................. A-4
2.12 Deed of Trust ....................................... A-4
2.13 Fiscal Year ......................................... A-4
2.14 Gross Asset Value ................................... A-4
2.15 Independent Expert .................................. A-4
2.16 Interest ............................................ A-4
2.17 Investment in Mortgage Loans ........................ A-4
2.18 Majority ............................................ A-4
2.19 Manager ............................................. A-5
2.20 Member .............................................. A-5
2.21 Mortgage Investment(s) .............................. A-5
2.22 Mortgage Loans ...................................... A-5
2.23 NASAA Guidelines .................................... A-5
2.24 Net Income Available for Distribution ............... A-5
2.25 Net Proceeds ........................................ A-5
2.26 Net Worth ........................................... A-5
2.27 Nevada Statutes ..................................... A-5
</TABLE>
<PAGE> 95
<TABLE>
<S> <C>
2.28 Offering ............................................ A-5
2.29 Person .............................................. A-5
2.30 Profits and Losses .................................. A-5
2.31 Program ............................................. A-6
2.32 Prospectus .......................................... A-6
2.33 Real Property ....................................... A-6
2.34 Regulations ......................................... A-6
2.35 Reinvested Distributions ............................ A-6
2.36 Roll-Up ............................................. A-6
2.37 Roll-Up Entity ...................................... A-6
2.38 Sponsor ............................................. A-6
2.39 Subscription Agreement .............................. A-6
2.40 Units ............................................... A-6
2.41 Writedown ........................................... A-7
2.42 Writedown Amount .................................... A-7
ARTICLE 3
THE MANAGER ......................................... A-7
3.1 Control in Manager .................................. A-7
3.2 Limitations on Manager's Authority .................. A-8
3.3 Right to Purchase Receivables and Loans ............. A-9
3.4 Extent of Manager's Obligation and Fiduciary Duty.... A-9
3.5 Liability and Indemnification of Manager ............ A-10
3.6 Assignment by the Manager ........................... A-10
3.7 Removal of Manager .................................. A-11
3.8 Right to Rely on Manager ............................ A-11
3.9 Transfer of the Control of the Manager .............. A-11
ARTICLE 4
INVESTMENT AND OPERATING POLICIES ................... A-11
4.1 Commitment of Capital Contributions ................. A-11
4.2 Investment Policy ................................... A-11
ARTICLE 5
CAPITAL CONTRIBUTIONS; LOANS TO COMPANY ............. A-12
5.1 Capital Contribution by Manager ..................... A-12
5.2 Contributions of Other Members ...................... A-12
5.3 Interest ............................................ A-12
5.4 Loans ............................................... A-12
ARTICLE 6
VOTING AND OTHER RIGHTS OF MEMBERS ................. A-12
6.1 No Participation in Management ..................... A-12
6.2 Rights and Powers of Members ....................... A-12
6.3 Meetings ........................................... A-13
6.4 Limited Liability of Members ....................... A-13
6.5 Access to Books and Records ........................ A-13
6.6 Representation of Company .......................... A-13
</TABLE>
ii
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<TABLE>
<S> <C>
ARTICLE 7
PROFITS AND LOSSES; CASH DISTRIBUTIONS .............. A-14
7.1 Allocation of Profits and Losses .................... A-14
7.2 Net Income Available For Distribution ............... A-14
7.3 Net Proceeds ........................................ A-14
7.4 Cash Distributions Upon Dissolution ................. A-14
7.5 Special Allocation Rules ............................ A-14
7.6 Code Section 704(c) Allocations ..................... A-15
7.7 Intent of Allocations ............................... A-15
7.8 Quarterly Valuation of Assets ....................... A-16
ARTICLE 8
REINVESTED DISTRIBUTIONS PLAN ....................... A-16
8.1 Members' Reinvested Distributions ................... A-16
8.2 Purchase of Additional Units ........................ A-16
8.3 Statement of Account ................................ A-16
8.4 Continued Suitability Requirements .................. A-16
8.5 Changes or Termination of the Plan .................. A-16
ARTICLE 9
BOOKS AND RECORDS, REPORTS AND RETURNS .............. A-17
9.1 Books and Records ................................... A-17
9.2 Annual Statements ................................... A-17
9.3 Special Quarterly Reports ........................... A-17
9.4 Filings ............................................. A-18
9.5 Suitability Requirements ............................ A-18
9.6 Fiscal Matters ...................................... A-18
ARTICLE 10
TRANSFER OF COMPANY INTERESTS ....................... A-19
10.1 Interest of Manager ................................. A-19
10.2 Transfer of Member's Interest ....................... A-19
10.3 Further Restrictions on Transfers ................... A-20
ARTICLE 11
DEATH, LEGAL INCOMPETENCY, OR WITHDRAWAL OF
A MEMBER; WITHDRAWAL OF MANAGER ..................... A-21
11.1 Effect of Death or Legal Incompetency of
a Member on the Company ........................... A-21
11.2 Rights of Personal Representative ................... A-21
11.3 Withdrawal of Members Other than Managers ........... A-21
11.4 Withdrawal by Manager ............................... A-22
11.5 Payment to Terminated Manager ....................... A-22
ARTICLE 12
DISSOLUTION OF THE COMPANY .......................... A-22
12.1 Events Causing Dissolution .......................... A-22
12.2 Winding Up .......................................... A-22
12.3 Order of Distribution of Assets ..................... A-23
12.4 No Recourse to Manager .............................. A-23
12.5 Compliance With Timing Requirements of
Regulations ....................................... A-23
ARTICLE 13
ROLL-UPS AND INVESTMENTS IN OTHER PROGRAMS .......... A-23
13.1 Roll-Up Transactions: Appraisal ..................... A-23
13.2 Members' Rights in a Roll-Up ........................ A-23
13.3 Limitations on Roll-Ups ............................. A-24
</TABLE>
iii
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<TABLE>
<S> <C>
ARTICLE 14
COMPENSATION TO THE MANAGER AND ITS AFFILIATES ...... A-24
ARTICLE 15
MISCELLANEOUS ....................................... A-24
15.1 Covenant to Sign Documents .......................... A-24
15.2 Notices ............................................. A-24
15.3 Right to Engage in Competing Business ............... A-24
15.4 Amendment ........................................... A-25
15.5 Entire Agreement .................................... A-25
15.6 Waiver .............................................. A-25
15.7 Severability ........................................ A-25
15.8 Application of Nevada law ........................... A-25
15.9 Captions ............................................ A-25
15.10 Number and Gender ................................... A-25
15.11 Counterparts ........................................ A-25
15.12 Waiver of Action for Partition ...................... A-25
15.13 Defined Terms ....................................... A-26
15.14 Binding on Assignees ................................ A-26
</TABLE>
iv
<PAGE> 98
EXHIBIT A
OPERATING AGREEMENT
OF
VESTIN FUND II, LLC
A Nevada Limited Liability Company
THIS OPERATING AGREEMENT (this "Agreement") was made and entered into as of the
7th day of December, 2000, by and among Vestin Mortgage, Inc., a Nevada
corporation (the "Manager" and, in its capacity as a member of the Company, the
"Initial Member" and collectively with all Persons who may become members of the
Company from time to time in accordance herewith, the "Members"), and Vestin
Fund II, LLC, a Nevada limited liability company (the "Company").
WITNESSETH
WHEREAS, the Initial Member and the Company desire to enter into an Operating
Agreement to govern the Company's operations;
NOW, WHEREFORE, in consideration for the mutual agreements, covenants and
premises set forth herein, the Operating Agreement is hereby adopted:
ARTICLE 1
ORGANIZATION OF THE LIMITED LIABILITY COMPANY
1.1 Formation. The Initial Member caused the formation of the Company on
December 7, 2000 under the provisions of Title 7, Chapter 86, of the Nevada
Statutes.
1.2 Name. The name of the Company is VESTIN FUND II, LLC.
1.3 Place of Business. The principal place of business of the Company is
and will be located at 2901 El Camino Avenue, Suite 206, Las Vegas,
Nevada 89102, until the Manager changes it after giving the Members
notice. In addition, the Company may maintain such other offices and
places of business in the United States as the Manager may deem
advisable. The Manager will file all necessary or desirable documents to
permit the Company to conduct its business lawfully in any state or
territory of the United States.
1.4 Purpose. The primary purpose of this Company is to generate cash flow and to
distribute to the Members the Profits of the Company from its operations. The
Company will invest in and purchase first, second, wraparound, participating and
construction Mortgage Investments, and do all things reasonably related thereto,
including developing, managing and either holding for investment or disposing of
real property acquired through foreclosure, either directly or through general
partnerships or other joint ventures, all as further provided for in this
Agreement.
1.5 Articles of Organization. The Company's Articles of Organization, as
amended, and Certificate of Acceptance of Appointment of Resident Agent have
been duly executed, acknowledged and filed with the Office of the Secretary of
State of the State of Nevada under the provisions of the Nevada Statues. The
Initial Member hereby approves, ratifies and confirms all of these actions. The
Manager is authorized to execute and cause to be filed additional Certificates
of Amendment of the Articles of Organization whenever required by the Nevada
Statutes or this Agreement.
1.6 Term of Existence. The Company's existence began on December 7, 2000 and,
notwithstanding anything to the contrary in the Articles of Organization, will
continue until December 31, 2020, unless earlier terminated under the provisions
of this Agreement or by operation of law. A
<PAGE> 99
Majority may extend the Company's term, provided that the Company remains in
compliance with the NASAA Guidelines.
1.7 Power of Attorney. Each of the Members irrevocably constitutes and appoints
the Manager as his true and lawful attorney-in-fact, with full power and
authority for him, and in his name, place and stead, to execute, acknowledge,
publish and file:
1.7.1 This Agreement, the Articles of Organization, as well as any and
all amendments thereto required under the laws of the State of Nevada or
of any other state, or which the Manager deems advisable to prepare,
execute and file;
1.7.2 Any certificates, instruments and documents, including, without
limitation, Fictitious Business Name Statements, as may be required to
be filed by the Company by any governmental agency or by the laws of any
state or other jurisdiction in which the Company is doing or intends to
do business, or which the Manager deems advisable to file; and
1.7.3 Any documents which may be required to effect the continuation of
the Company, the admission of an additional or substituted Member, or
the dissolution and termination of the Company, provided that the
continuation, admission, substitution or dissolution or termination, as
applicable, is in accordance with the terms of this Agreement.
1.8 Nature of Power of Attorney. The grant of authority in Section 1.7:
1.8.1 Is a Special Power of Attorney coupled with an interest, is
irrevocable, survives the death of the Member and shall not be affected
by the subsequent incapacity of the Member;
1.8.2 May be exercised by the Manager for each member by a facsimile
signature of or on behalf of the Manager or by listing all of the
members and by executing any instrument with a single signature of or on
behalf of the Manager, acting as attorney-in-fact for all of them; and
1.8.3 Shall survive the delivery of an assignment by a Member of the
whole or any portion of his Interest; except that where the assignee
thereof has been approved by the Manager for admission to the Company as
a substituted Member, the Special Power of Attorney shall survive the
delivery of the assignment for the sole purpose of enabling the person
to execute, acknowledge, and file any instrument necessary to effect the
substitution.
ARTICLE 2
DEFINITIONS
Unless stated otherwise, the terms set forth in this Article 2 shall, for all
purposes of this Agreement, have the following meanings:
2.1 Acquisition and Investment Evaluation Expenses means expenses including but
not limited to legal fees and expenses, travel and communication expenses, costs
of appraisals, accounting fees and expenses, title insurance funded by the
Company, and miscellaneous expenses related to the evaluation, selection and
acquisition of Mortgage Investments, whether or not acquired.
2.2 Acquisition and Investment Evaluation Fees means the total of all fees and
commissions paid by any Person when purchasing or investing in Mortgage
Investments. Included in the computation of these fees or commissions shall be
any selection fee, mortgage placement fee, nonrecurring management fee, and any
evaluation fee, loan fee, or points paid by borrowers to the Manager, or any fee
of a similar nature, however designated.
2.3 Administrator means the agency or official administering the securities law
of a state in which Units are registered or qualified for offer and sale.
2.4 Affiliate means, for any person, (a) any person directly or indirectly
controlling, controlled by or under common control with the Person, (b) any
other Person owning or controlling ten percent (10%) or more of the
A-2
<PAGE> 100
outstanding voting securities of the Person, (c) any officer, director or Member
of the Person, or (d) if the other Person is an officer, director or Manager,
any company for which the Person acts in any similar capacity.
2.5 Agreement means this Operating Agreement, as amended from time to time.
2.6 Capital Account means, for any Member, the Capital Account maintained for
the Member in accordance with the following provisions:
2.6.1 The Manager shall credit to each Member's Capital Account the
Member's Capital Contribution, the Member's distributive share of
Profits, any items in the nature of income or gain (from unexpected
adjustments, allocations or distributions) that are specially allocated
to a Member, and the amount of any Company liabilities that are assumed
by the Member or that are secured by any Company property distributed to
the Member.
2.6.2 The Manager shall debit from each Member's Capital Account the
amount of cash and the fair market value of any Company property
distributed to the Member under any provision of this Agreement, the
Member's distributive share of Losses, and any items in the nature of
expenses or losses that are specially allocated to a Member and the
amount of any liabilities of the Member that are assumed by the Company
or that are secured by any property contributed by the Member to the
Company.
If the Gross Asset Value of a Company asset is adjusted as a result of a
Writedown, the Manager shall concurrently adjust the Capital Accounts of
all Members in order to reflect the aggregate net adjustment that would
have occurred if the Company had recognized Losses equal to the
Writedown Amount and the Losses were allocated under Article 7.
If any interest in the Company is transferred in accordance with Section 10.2 of
this Agreement, the transferee shall succeed to the Capital Account of the
transferor to the extent it relates to the transferred interest.
The foregoing provisions and the other provisions of this Agreement relating to
the maintenance of Capital Accounts are intended to comply with Treasury
Regulation Section 1.704-1(b), and shall be interpreted and applied in a manner
consistent with the Regulation. If the Manager determines that it is prudent to
modify the manner in which the Capital Accounts, or any debits or credits
thereto, are computed in order to comply with the then existing Treasury
Regulation, the Manager may make the modification, provided that it is not
likely to have a material effect on the amounts distributable to any Member
under Articles 7 and 12 of this Agreement upon the dissolution of the Company.
The Manager shall adjust the amounts debited or credited to Capital Accounts for
(a) any property contributed to the Company or distributed to the Manager, and
(b) any liabilities that are secured by the contributed or distributed property
or that are assumed by the Company or the Manager, if the Manager determines the
adjustments are necessary or appropriate under Treasury Regulation Section
1.704-1(b)(2)(iv). The Manager shall make any appropriate modification if
unanticipated events might otherwise cause this Agreement not to comply with
Treasury Regulation Section 1.704-1(b) as provided for in Sections 7.7 and 15.4.
2.7 Capital Contribution means the total investment and contribution to the
capital of the Company made by a Member (i) in cash, (ii) by advancing expenses
to non-affiliated third parties on behalf of the Company and with the Company's
authorization or (iii) by way of automatic reinvestment of Company distributions
(or deemed distributions) of capital and/or net income. "Initial Capital
Contribution" means the amount paid in cash by each Member with his original
subscription for an acquisition of Units of the Company under the Prospectus
plus, in the case of the Manager, the amount advanced to non-affiliated third
parties on behalf of the Company.
2.8 Capital Transaction means (i) the repayment of principal or prepayment of a
Mortgage Investment, including deemed repayments of Mortgage Investments or
other dispositions thereof, to the extent classified as a return of capital
under the Code, (ii) the foreclosure, sale, exchange, condemnation, eminent
domain taking or other disposition under the Code of a Mortgage Investment or
Real Property subject to a Mortgage Investment, or (iii) the payment of
insurance or a guarantee for a Mortgage Investment.
2.9 Cash Flow means cash funds provided from operations (other than repayments
of mortgage loan principal) including without limitation, interest, points,
revenue participations, participations in property
A-3
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appreciation, and interest or dividends from interim investments paid to the
Company after deducting cash funds used to pay general Company expenses and debt
payments.
2.10 Code means the Internal Revenue Code of 1986, as amended from time to time,
and corresponding provisions of subsequent revenue laws.
2.11 Company means Vestin Fund II, LLC, the Nevada limited liability company to
which this Agreement pertains.
2.12 Deed(s) of Trust means the lien(s) created on the Real Property of
borrowers securing their respective obligations to the Company to repay Mortgage
Investments, whether in the form of a deed of trust, mortgage or otherwise.
2.13 Fiscal Year means, subject to the provisions of Section 706 of the Code and
Section 9.6.1, (i) the period commencing on the date of formation of the Company
and ending on December 31, 2000 (ii) any subsequent 12 month period on January 1
and ending on December 31 and (iii) the period commencing January 1 and ending
on the date on which all Company assets are distributed to the Members under
Article 12.
2.14 Gross Asset Value means, for any Company asset, the following:
2.14.1 The initial Gross Asset Value of any Company asset at the time
that it is contributed by a Member to the capital of the Company shall
be an amount equal to the fair market value of the Company asset
(without regard to the provisions of Code Section 7701(g)), as
determined by the contributing Member and the Manager;
2.14.2 The Gross Asset Values of all Company assets shall be adjusted,
as determined by the distributed Member and the Manager, to equal their
respective fair market values upon the distribution to a Member by the
Company of more than a de minimis amount of Company assets (other than
money), unless all Members simultaneously receive distributions of
undivided interests in the distributed Company assets in proportion to
their respective Capital Accounts;
2.14.3 The Gross Asset Values of all Company assets shall be adjusted to
equal their respective fair market values (as determined by the Manager,
in its reasonable discretion) upon the termination of the Company for
Federal income tax purposes under Code Section 708(b)(1)(B); and
2.14.4 The Gross Asset Value of a Company asset shall be adjusted in the
case of a Writedown of the Company asset in accordance with Sections
2.41, 2.42 and 7.8.
2.15 Independent Expert means a Person with no material current or prior
business or personal relationship with the Manager, who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Company, and who is qualified to perform the
services.
2.16 Interest means the Capital Accounts of Members, which are divided into
"Units."
2.17 Investment in Mortgage Loans means the amount of Capital Contributions used
to make or invest in Mortgage Investments or the amount actually paid or
allocated to the purchase of Mortgage Investments, working capital reserves
allocable thereto (except that working capital reserves in excess of 3.0% shall
not be included), and other cash payments such as interest and taxes.
2.18 Majority means any group of Members who together hold a majority of the
total outstanding Interests of the Company as of a particular date (or if no
date is specified, the first day of the then current calendar month).
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2.19 Manager means Vestin Mortgage, Inc., a Nevada corporation, in that
capacity, or any Person replacing Vestin Mortgage under this Agreement. For
greater certainty, Vestin Mortgage, in its capacity as the Initial Member, is a
distinct entity from the Manager for purposes of this Agreement unless the
context should indicate to the contrary.
2.20 Member means an owner of Units in the Company, unless the instruments
through which the Units were transferred to the owner did not also convey the
transferor's status as a Member.
2.21 Mortgage Investment(s) means the Mortgage Loan(s) or an interest in the
Mortgage Loans that are held by the Company.
2.22 Mortgage Loans means investments of the Company that are notes, debentures,
bonds and other evidences of indebtedness or obligations that are negotiable or
non-negotiable and secured or collateralized by Deeds of Trust on Real Property.
2.23 NASAA Guidelines means the Mortgage Program Guidelines of the North
American Securities Administrators Association, Inc. adopted on September 10,
1996, as amended from time to time unless indicated to the contrary by the
context.
2.24 Net Income Available for Distribution means Cash Flow less amount set aside
for creation or restoration of reserves during the month; provided that:
2.24.1 The operating expenses shall not include any general overhead
expenses of the Manager; and
2.24.2 Net Income Available for Distribution shall not exceed the amount
of cash on hand.
2.25 Net Proceeds means the net cash proceeds (or deemed net proceeds) from any
Capital Transaction.
2.26 Net Worth means the excess of total assets over total liabilities as
determined by generally accepted accounting principles consistently applied,
except that if any of the assets have been depreciated, then the amount of the
depreciation relative to any particular asset may be added to the depreciated
cost of the asset to compute total assets, provided that the amount of
depreciation may be added only to the extent that the amount resulting after
adding the depreciation does not exceed the fair market value of the asset.
2.27 Nevada Statutes means Nevada Revised Statutes, as amended from time to
time, unless indicated to the contrary by the context.
2.28 Offering means the offer and sale of Units of the Company made under the
Prospectus.
2.29 Person means any natural person, partnership, corporation, unincorporated
association or other legal entity.
2.30 Profits and Losses mean, for each Fiscal Year or any other period, an
amount equal to the Company's taxable income or loss for the Fiscal Year or
other given period, determined in accordance with Code Section 703(a) (for this
purpose, all items of income, gain, loss, or deduction required to be stated
separately under Code Section 703(a)(1) shall be included in taxable income or
loss), with the following adjustments (without duplication):
2.30.1 Any income of the Company that is exempt from federal income tax
and not otherwise taken into account in computing Profits or Losses
under this Section 2.30 shall be added to the taxable income or loss;
2.30.2 Any expenditures of the Company described in Section 705(a)(2)(B)
of the Code or treated as Section 705(a)(2)(B) of the Code expenditures
under Treasury Regulation Section 1.704- 1(b)(2)(iv)(i), and not
otherwise taken into account in computing Profits or Losses under this
Section 2.30, shall be subtracted from the taxable income or loss.
A-5
<PAGE> 103
If any Company asset has a Gross Asset Value which differs from its adjusted
cost basis, gain or loss resulting from the disposition of the Company asset
shall be computed using the Gross Asset Value (rather than adjusted cost basis)
of the Company asset.
Notwithstanding any other provision of this Section, any items in the nature of
income, gain, expenses or losses, which are specially allocated under Section
7.5.1, 7.5.2 and 7.6, shall not be taken into account in computing Profits or
Losses.
2.31 Program means a limited or general partnership, limited liability company,
limited liability partnership, trust, joint venture, unincorporated association
or similar organization other than a corporation formed and operated for the
primary purpose of investing in mortgage loans.
2.32 Prospectus means the prospectus that forms a part of the Registration
Statement on Form S-11 to be filed under the Securities Act of 1933 with the
Securities and Exchange Commission and any supplement or amended Prospectus or
new prospectus that forms a part of a supplement to the Registration Statement
filed by the Company, unless the context should indicate to the contrary.
2.33 Real Property means and includes (a) land and any buildings, structures,
and improvements, and (b) all fixtures, whether in the form of equipment or
other personal property, that is located on or used as part of land. Real
Property does not include Deeds of Trust, mortgage loans or interests therein.
2.34 Regulations means, except where the context indicates otherwise, the
permanent, temporary, proposed, or proposed and temporary regulations of the
U.S. Department of the Treasury under the Code, as the regulations may be
lawfully changed from time to time.
2.35 Reinvested Distributions means Units purchased under the Company's Plan (as
defined in Article 8 of this Agreement).
2.36 Roll-Up means a transaction involving the acquisition, merger, conversion,
or consolidation, either directly or indirectly, of the Company and the issuance
of securities of a Roll-Up Entity. "Roll-Up" does not include a transaction
involving (i) securities of the Company, if any, listed on a national securities
exchange or quoted on the Nasdaq National Market for 12 months or (ii)
conversion to corporate, trust, limited liability company, or association form
of only the Company if, as a consequence of the transaction, there will be no
significant adverse change in any of the following: (a) Members' voting rights;
(b) the term of existence of the Company; (c) Manager compensation; (d) the
Company's investment objectives.
2.37 Roll-Up Entity means a company, real estate investment trust, corporation,
limited liability company, limited or general partnership or other entity that
would be created or would survive after the successful completion of a proposed
Roll-Up.
2.38 Sponsor means any Person (a) directly or indirectly instrumental in
organizing, wholly or in part, a Program, or a Person who will manage or
participate in the management of a Program, and any Affiliate of any Person, but
does not include a Person whose only relation with a Program is that of an
independent property manager or other provider of services (such as attorneys,
accountants or underwriters), whose only compensation is received in that
capacity, or (b) is a "Sponsor" as otherwise defined in the NASAA Guidelines.
Vestin Group, Inc., the Manager's parent company, is the initial Sponsor of the
Company.
2.39 Subscription Agreement means the document that is an exhibit to and part of
the Prospectus that every Person who buys Units of the Company must execute and
deliver with full payment for the Units and which, among other provisions,
contains the written consent of each Member to the adoption of this Agreement.
2.40 Units mean the units of equity in the Company evidencing the Company's
Interests that are (a) issued to Members upon their admission to the Company
under the Subscription Agreement and the Prospectus or (b) transferred to those
who become substituted Members under Section 10.2 hereof. The Manager may
purchase
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Units on the same basis as other Members. Units purchased at different times do
not necessarily represent the same underlying amount of Interests.
2.41 Writedown means a determination by the Manager for a particular Mortgage
Investment or other Company investment (which determination has been verified by
the Company's accountants as being in conformity with generally accepted
accounting principles) that the fair market value of the investment at the time
the determination is made is less than the amount actually paid or allocated to
the purchase of the investment, which determination shall be made by the Company
and its accountants within thirty (30) days of the end of each calendar quarter
and any Writedown shall be effective on the last day of the relevant calendar
quarter during the term of this Agreement.
2.42 Writedown Amount means, for any Mortgage Investment or other Company
investment, the amount by which, at the time that a Writedown is determined for
the Investment, the amount actually paid or allocated to the purchase of the
investment exceeds its fair market value.
ARTICLE 3
THE MANAGER
3.1 Control in Manager. Subject to the provisions of Section 3.2 and except as
otherwise expressly stated elsewhere in this Agreement, the Manager has
exclusive control over the business of the Company (with all acts and decisions
being in its sole discretion except as specifically set forth in this
Agreement), including the power to assign duties, to determine how to invest the
Company's assets, to sign bills of sale, title documents, leases, notes,
security agreements, Mortgage Investments and contracts, and to assume direction
of the business operations. As Manager of the Company and its business, the
Manager has all duties generally associated with that position, including
dealing with Members, being responsible for all accounting, tax and legal
matters, performing internal reviews of the Company's investments and loans,
determining how and when to invest the Company's capital, and determining the
course of action to take for Company loans that are in default. The Manager also
has all of these powers for ancillary matters. Without limiting the generality
of the foregoing, the powers include the right (except as specifically set forth
in this Agreement, including under Section 3.2):
3.1.1 To evaluate potential Company investments and to expend the capital of the
Company in furtherance of the Company's business;
3.1.2 To acquire, hold, lease, sell, trade, exchange, or otherwise
dispose of all or any portion of Company property or any interest
therein at a price and upon the terms and conditions as the Manager may
deem proper;
3.1.3 To cause the Company to become a joint venturer, general or
limited partner or member of an entity formed to own, develop, operate
and dispose of properties owned or co-owned by the Company acquired
through foreclosure of a Mortgage Loan;
3.1.4 To manage, operate and develop Company property, or to employ and
supervise a property manager who may, or may not, be an Affiliate of the
Manager;
3.1.5 To borrow money from banks and other lending institutions for any
Company purpose, and as security therefor, to encumber Company property;
3.1.6 To repay in whole or in part, refinance, increase, modify, or
extend, any obligation, affecting Company property;
3.1.7 To employ from time to time, at the expense of the Company,
persons, including the Manager or its Affiliates, required for the
operation of the Company's business, including employees, agents,
independent contractors, brokers, accountants, attorneys, and others; to
enter into agreements and contracts with persons on terms and for
compensation that the Manager determines to be reasonable; and to give
receipts, releases, and discharges for all of the foregoing and any
matters incident thereto as the Manager may deem advisable or
appropriate; provided, however, that any agreement or contract between
the Company and the Manager or between the Company and an Affiliate of
the Manager shall contain a provision that the agreement or contract may
be terminated by the Company without penalty on sixty
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(60) days' written notice and without advance notice if the Manager or
Affiliate who is a party to the contract or agreement resigns or is
removed under the terms of this Agreement;
3.1.8 To maintain, at the expense of the Company, adequate records and
accounts of all operations and expenditures and furnish the Members with
annual statements of account as of the end of each calendar year,
together with all necessary tax-reporting information;
3.1.9 To purchase, at the expense of the Company, liability and other
insurance to protect the property of the Company and its business;
3.1.10 To refinance, recast, modify, consolidate, extend or permit the
assumption of any Mortgage Loan or other investment owned by the
Company;
3.1.11 To pay all expenses incurred in the operation of the Company;
3.1.12 To file tax returns on behalf of the Company and to make any and
all elections available under the Code;
3.1.13 To modify, delete, add to or correct from time to time any
provision of this Agreement as permitted under Section 15.4 hereof.
3.2 Limitations on Manager's Authority. The Manager has no authority to:
3.2.1 Do any act in contravention of this Agreement;
3.2.2 Do any act which would make it impossible to carry on the ordinary
business of the Company;
3.2.3 Confess a judgment against the Company;
3.2.4 Possess Company property or assign the rights of the Company in
property for other than a Company purpose;
3.2.5 Admit a person as a Manager without the prior affirmative vote or
consent of a Majority, or any higher vote as may be required by
applicable law;
3.2.6 Voluntarily withdraw as Manager without the prior affirmative vote
or consent of a Majority unless its withdrawal would neither affect the
tax status of the Company nor materially adversely affect the Members
(subject to any delay in effectiveness of the withdrawal as set forth
elsewhere herein);
3.2.7 Sell all or substantially all of the assets of the Company in one
or a series of related transactions that is not in the ordinary course
of business, without the prior affirmative vote or consent of a
Majority;
3.2.8 Amend this Agreement without the prior affirmative vote or consent
of a Majority, except as permitted by Section 15.4 of this Agreement;
3.2.9 Dissolve or terminate the Company without the prior affirmative
vote or consent of a Majority;
3.2.10 Cause the merger or other reorganization of the Company without
the prior affirmative vote or consent of a Majority;
3.2.11 Grant to any of its Affiliates an exclusive right to sell any
Company assets;
3.2.12 Receive or permit the Manager or any Affiliate of the Manager to
receive any insurance brokerage fee or write any insurance policy
covering the Company or any Company property;
3.2.13 Receive from the Company a rebate or participate in any
reciprocal business arrangement which would enable the Manager or any of
its Affiliates to do so;
3.2.14 Commingle the Company's assets with those of any other Person;
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3.2.15 Use or permit another Person to use the Company's assets in any manner,
except for the exclusive benefit of the Company;
3.2.16 Pay or award, directly or indirectly, any commissions or other
compensation to any Person engaged by a potential investor for
investment advice as an inducement to the advisor to advise the purchase
of Units; provided, however, that this clause shall not prohibit the
payment of Sales Commissions;
3.2.17 Make loans to the Manager or an Affiliate of the Manager; or
3.2.18 Pay, directly or indirectly, a commission or fee (except as
otherwise set forth in Article 14 hereof) to the Manager or any
Affiliate of the Manager in connection with the reinvestment or
distribution of the proceeds of a Capital Transaction.
3.3 Right to Purchase Receivables and Loans. As long as the requirements
of Article 4 are met and the Company adheres to the investment policy
described in the Prospectus, the Manager, in its sole discretion, may at
any time, but is not obligated to:
3.3.1 Purchase from the Company the interest receivable or principal on
delinquent Mortgage Loans held by the Company;
3.3.2 Purchase from a senior lien holder the interest receivable or
principal on mortgage loans senior to Mortgage Loans held by the
Company; and/or
3.3.3 Use its own monies to cover any other costs associated with
Mortgage Loans held by the Company such as property taxes, insurance and
legal expenses.
3.4 Extent of Manager's Obligation and Fiduciary Duty. The Manager shall
devote the portion of its time to the business of the Company as it
determines, in good faith, to be reasonably necessary to conduct the
Company's business. The Manager shall not be bound to devote all of its
business time to the affairs of the Company, and the Manager and its
Affiliates may engage for their own account and for the account of
others in any other business ventures and employments, including
ventures and employments having a business similar or identical or
competitive with the business of the Company. The Manager has fiduciary
responsibility for the safekeeping and use of all funds and assets of
the Company, whether or not in the Manager's possession or control, and
the Manager will not employ, or permit another to employ the Company's
funds or assets in any manner except for the exclusive benefit of the
Company. The Manager will not allow the assets of the Company to be
commingled with the assets of the Manager or any other Person. The
Company shall not permit a Member to contract away the fiduciary duty
owed to any Member by the Manager under common law. The Manager, for so
long as it owns any Units as a Member, hereby waives its right to vote
its Units and to have them considered as outstanding in any vote for
removal of the Manager or for amendment of this Agreement (except as
provided in Sections 3.1.13 and 15.4) or otherwise.
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3.5 Liability and Indemnification of Manager. Any right to indemnification
hereunder shall be subject to the following:
1. The Company shall not indemnify the Manager for any liability or loss
suffered by the Manager, nor shall the Manager be held harmless for any
loss or liability suffered by the Company, unless all of the following
conditions are met:
a. the Manager has determined, in good faith, that the course of conduct
which caused the loss or liability was in the best interest of the
Company;
b. the Manager was acting on behalf of or performing services for the
Company;
c. such liability or loss was not the result of the negligence or
misconduct by the Manager; and
d. such indemnification or agreement to hold harmless is recoverable
only out of the assets of the Company and not from the Members.
2. Notwithstanding anything to the contrary contained in subsection 1
above, the Manager (which shall include Affiliates only if such
Affiliates are performing services on behalf of the Company) and any
Person acting as a broker-dealer shall not be indemnified for any
losses, liabilities or expenses arising from an alleged violation of
federal or state securities laws unless the following conditions are
met:
a. there has been a successful adjudication on the merits of each count
involving alleged securities law violation as to the particular
indemnitee; or
b. such claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction as to the particular indemnitee; or
c. a court of competent jurisdiction has approved a settlement of the
claims against a particular indemnitee and has determined that
indemnification of the settlement and related costs should be made; and
d. in the case of subparagraph c of this paragraph, the court of law
considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and the position of
any state securities regulatory authority in which securities of the
Company were offered or sold as to indemnification for violations of
securities laws; provided that the court need only be advised of and
consider the positions of the securities regulatory authorities of those
states:
(1) which are specifically set forth in the Company agreement; and
(2) in which plaintiffs claim they were offered or sold Company
interests.
3. The Company may not incur the cost of that portion of liability
insurance which insures the Manager for any liability as to which the
Manager is prohibited from being indemnified under this subsection.
4. The provision of advancement from Company funds to the Manager or its
Affiliates for legal expenses and other costs incurred as a result of
any legal action is permissible if the following conditions are
satisfied:
a. the legal action relates to acts or omissions with respect to the
performance of duties or services on behalf of the Company;
b. the legal action is initiated by a third party who is not a Member,
or the legal action is initiated by a Member and a court of competent
jurisdiction specifically approves such advancement; and
c. the Manager or its Affiliates undertake to repay the advanced funds
to the Company in cases in which such Person is not entitled to
indemnification under paragraph 1 of this section 3.5.
3.6 Assignment by the Manager. The Manager's Interest in the Company may
be assigned at the discretion of the Manager, subject to Section 10.1.
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3.7 Removal of Manager. The Manager may be removed upon the following
conditions:
3.7.1 The Members may remove the Manager by written consent or vote of a
Majority (excluding any Interest of the Manager being removed). This
removal of the Manager, if there is no other Manager, shall not become
effective for at least 120 days following the consent or vote of the
Majority.
3.7.2 During the 120 day period described in Section 3.8.1, the Majority
(excluding any Interest of the removed Manager) shall have the right to
agree in writing to continue the business of the Company and, within six
months following the termination date of the last remaining Manager,
elect and admit a new Manager(s) who agree(s) to continue the existence
of the Company.
3.7.3 Substitution of a new Manager, if any, shall be effective upon
written acceptance of the duties and responsibilities of a Manager by
the new Manager. Upon effective substitution of a new Manager, this
Agreement shall remain in full force and effect, except for the change
in the Manager, and business of the Company shall be continued by the
new Manager. The new Manager shall thereupon execute, acknowledge and
file a certificate of amendment to the Articles of Organization of the
Company in the manner required by Section 26.221 of the Nevada Law.
3.7.4 Failure of a Majority to designate and admit a new Manager within
the time specified herein shall dissolve the Company, in accordance with
the provisions of Article 12 of this Agreement.
3.8 Right to Rely on Manager. Any person dealing with the Company may rely
(without duty of further inquiry) upon a certificate signed by the Manager as
to:
3.8.1 The identity of the Manager or any Member;
3.8.2 The existence or nonexistence of any fact or facts which
constitute a condition precedent to acts by the Manager or which are in
any further manner germane to the affairs of the Company;
3.8.3 The persons who are authorized to execute and deliver any
instrument or document of the Company; and
3.8.4 Any act or failure to act by the Company or any other matter
whatsoever involving the Company or any Member.
3.9 Transfer of the Control of the Manager. A sale or transfer of a controlling
interest in the Manager will not terminate the Company or be considered the
withdrawal or resignation of the Manager.
ARTICLE 4
INVESTMENT AND OPERATING POLICIES
4.1 Commitment of Capital Contributions. The Manager shall take all reasonable
steps to commit ninety-seven percent (97%) of Capital Contributions to
investments in Mortgage Loans, provided that under no circumstances may such
commitment decrease below the applicable percentage in the NASAA Guidelines. The
Company may invest in or purchase Mortgage Loans of such duration and on such
real property and with such additional security as the Manager in its sole
discretion shall determine, subject to Section 4.2. These Mortgage Loans may be
senior to other mortgage loans on the real property, or junior to other mortgage
loans on the real property, all in the sole discretion of the Manager.
4.2 Investment Policy. In making investments, the Manager shall follow the
investment policy described in the Prospectus.
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ARTICLE 5
CAPITAL CONTRIBUTIONS; LOANS TO COMPANY
5.1 Capital Contribution by Manager. The Manager (in its capacity as the Initial
Member) shall contribute to the capital of the Company such amount as it deems
appropriate; provided that the Manager shall be deemed to have contributed to
the capital of the Company an amount equal to expenses of the Company incurred
in connection with the Offering up to a maximum of $2,000,000, to the extent
such expenses are paid by the Manager to non-affiliated parties.
5.2 Contributions of Other Members. Members other than the Manager shall acquire
Units in accordance with the terms of the Subscription Agreement or any future
subscription materials approved by the Manager. The names, addresses, date of
admissions and Capital Contributions of the Members shall be set forth in a
schedule maintained by the Manager. The Manager shall update the schedule to
reflect the then-current ownership of Units (and Interests) without any further
need to obtain the consent of any Member, and the schedule, as revised from time
to time by the Manager, shall be presumed correct absent manifest error. Any
member shall have a right to inspect such schedule upon written request to the
Manager.
5.3 Interest. No interest shall be paid on, or in respect of, any contribution
to Company Capital by any Member, nor shall any Member have the right to demand
or receive cash or other property in return for the Member's Capital
Contribution, subject to Article 11 hereof.
5.4 Loans. Any Member or Affiliate of a Member may, with the written consent of
the Manager, lend or advance money to the Company. If the Manager or, with the
written consent of the Manager, any Member shall make any loans to the Company
or advance money on its behalf, the amount of any loan or advance shall not be
treated as a contribution to the capital of the Company, but shall be a debt due
from the Company. The amount of any loan or advance by a lending Member or an
Affiliate of a Member shall be repayable out of the Company's cash and shall
bear interest at a rate of not in excess of the lesser of (i) the prime rate
established, from time to time, by any major bank selected by the Manager for
loans to the bank's most creditworthy commercial borrowers, plus five percent
(5%) per annum, or (ii) the maximum rate permitted by applicable law. None of
the Members or their Affiliates shall be obligated to make any loan or advance
to the Company. This section shall be subject to the Company's Investment Policy
as it relates to transactions with the Manager or its Affiliates.
ARTICLE 6
VOTING AND OTHER RIGHTS OF MEMBERS
6.1 No Participation in Management. Except as expressly provided in this
Agreement, no Member shall take part in the conduct or control of the Company's
business or have any right or authority to act for or bind the Company.
6.2 Rights and Powers of Members. In addition to the rights of the Members to
remove and replace the Manager and as otherwise provided for in Section 3.2, the
Members shall have the right to vote upon and take any of the following actions
upon the approval of a Majority, without the concurrence of the Manager, and an
affirmative vote of a Majority shall be required to allow or direct the Manager
to:
6.2.1 Dissolve and windup the Company before the expiration of the term
of the Company;
6.2.2 Amend this Agreement, subject to the rights to the Manager granted
in Section 15.4 of this Agreement and subject also to the prior consent
of the Manager if either the distributions due to the Manager or the
duties of the Manager are affected;
6.2.3 Merge the Company or sell all or substantially all of the assets
of the Company, otherwise than in the ordinary course of its business.
6.2.4 Change the nature of the Company's business; and
6.2.5 Elect to continue the business of the Company other than in the
circumstances described in Section 3.8 of this Agreement.
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6.3 Meetings.
6.3.1 The Members may hold meetings of Members within or outside the
State of Nevada at any place selected by the Person or Persons calling
the meeting. If no other place is stated, meetings shall be held at the
Company's principal place of business as established in accordance with
Section 1.3 of this Agreement. The Members may approve by written
consent of a Majority any matter upon which the Members are entitled to
vote at a duly convened meeting of the Members, which consents will have
the same effect as a vote held at a duly convened meeting of the
Members.
6.3.2 The Manager, or Members representing more than ten percent (10%)
of the outstanding Interests for any matters on which the Members may
vote, may call a meeting of the Company. If Members representing the
requisite Interests present to the Manager a statement requesting a
Company meeting, or the Manager calls the meeting, the Manager shall fix
a date for a meeting and shall (within ten (10) days after receipt of a
statement, if applicable) give personal or mailed notice or notice by
any other means of written communication, addressed to each Member at
the respective address of the Member appearing on the books of the
Company or given to the Company for the purpose of notice, not less than
fifteen (15) or more than sixty (60) days before the date of the
meeting, to all Members of the date, place and time of the meeting and
the purpose for which it has been called. Unless otherwise specified,
all meetings of the Company shall be held at 2:00 p.m. local time at the
principal office of the Company.
6.3.3 Members may vote in person or by proxy. A Majority, whether
present in person or by proxy, shall constitute a quorum at any meeting
of Members. Any question relating to the Company which may be considered
and acted upon by the Members may be considered and acted upon by vote
at a Company meeting, and any vote required to be in writing shall be
deemed given if approved by a vote by written ballot.
6.4 Limited Liability of Members. Units are non-assessable. No Member
shall be personally liable for any of the expenses, liabilities, or
obligations of the Company or for any Losses beyond the amount of the
Member's Capital Contribution to the Company and the Member's share of
any undistributed net income and gains of the Company.
6.5 Access to Books and Records. The Members and their designated
representatives shall have access to certain books and records of the Company
during the Company's normal business hours. An alphabetical list of the names
and addresses of all Members together with the number of Units held by each of
them will be maintained as a part of the books and records of the Company. The
Company shall make the list available on request to any Member or his
representative for a stated purpose including, without limitation, matters
relating to Members' voting rights, tender offers, and the exercise of Members'
rights under federal proxy law. A copy of the Members list shall be mailed to
any Member requesting it within ten business days of the request, although the
Company may charge a reasonable amount for the copy. The Member list shall be
updated at least quarterly to reflect changes in the information contained
therein.
If the Manager neglects or refuses to exhibit, produce or mail a copy of the
Member list as requested, the Manager shall be liable to any Member requesting
the list for the costs, including attorney fees, incurred by that Member for
compelling the production of the list, and for actual damages suffered by the
Member by reason of the refusal or neglect. However, the Company need not
exhibit, produce or mail a copy of the Member list if the actual purpose and
reason for the request therefor is to secure the list or other information for
the purpose of selling the list or copies thereof, or of using it for a
commercial purpose other than in the interest of the Person as a Member in the
Company. The Manager may require the Person requesting the list to represent
that the list is not requested for any commercial purpose. The remedies provided
hereunder to Members requesting copies of the list are in addition to, and shall
not in any way limit, other remedies available to Members under federal or
Nevada law.
6.6 Representation of Company. Each of the Members hereby acknowledges and
agrees that the attorneys representing the Company and the Manager and its
Affiliates do not represent and shall not be deemed under the applicable codes
of professional responsibility to have represented or be representing any or all
of the Members in any respect at any time. Each of the Members further
acknowledges and agrees that the attorneys shall have no
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obligation to furnish the Members with any information or documents obtained,
received or created in connection with the representation of the Company, the
Manager and its Affiliates.
ARTICLE 7
PROFITS AND LOSSES; CASH DISTRIBUTIONS
7.1 Allocation of Profits and Losses. The Manager shall credit all Company
Profits to and charge all Company Losses against the Members in proportion to
their respective Interests. The Manager shall allocate to the Members all
Profits and Losses realized by the Company during any month as of the close of
business on the last day of each calendar month, in accordance with their
respective Interests and in proportion to the number of days during the month
that they owned the Interests (i.e., a weighted average Capital Account),
without regard to Profits and Losses realized for time periods within the month.
7.2 Net Income Available For Distribution. The Company shall distribute Net
Income Available for Distribution to Members according to the allocations
provided for in Section 7.1, in cash to those Members who have on file with the
Company their written election to receive cash distributions, as a pro rata
share of the total Net Income Available for Distribution. The Company shall make
these distributions monthly in proportion to the weighted average Capital
Account of each Member during the preceding calendar month.
7.3 Net Proceeds. Net Proceeds may also be distributed to Members in cash or
retained by the Company for other uses as set forth herein. Net Proceeds will be
deemed to be distributed to the Members upon receipt by the Company thereof,
regardless of whether any actual cash distributions of the Net Proceeds occur.
Immediately thereafter, there shall be a deemed recontribution by each Member to
the extent of the deemed distribution of Net Proceeds. The Company may use Net
Proceeds to make new loans, improve or maintain properties acquired by the
Company through foreclosure or to pay operating expenses. Distributions of Net
Proceeds shall be in accordance with the allocations provided for in Section 7.1
above.
7.4 Cash Distributions Upon Dissolution. Upon dissolution and winding up of the
Company, the Company shall thereafter distribute Net Income Available for
Distribution and Net Proceeds available for distribution, if any, to the Members
in accordance with the provisions of Section 12.3 of this Agreement.
7.5 Special Allocation Rules.
7.5.1 For purposes of this Agreement, a loss or allocation (or item
thereof) is attributable to non-recourse debt which is secured by
Company property to the extent of the excess of the outstanding
principal balance of the debt (excluding any portion of the principal
balance which would not be treated as an amount realized under Section
1001 of the Code and Treasury Regulation Section 1.1001-2 if the debt
were foreclosed upon) over the adjusted basis of the property. This
excess is called "Minimum Gain" (whether taxable as capital gain or as
ordinary income) as more explicitly set forth in Treasury Regulation
Sections 1.704-2(b)(2) and 1.704- 2(d). Notwithstanding any other
provision of Article 7, the allocation of loss or deduction (or item
thereof) attributable to non-recourse debt which is secured by Company
property will be allowed only to the extent that the allocation does not
cause the sum of the deficit Capital Account balances of the Members
receiving the allocations to exceed the Minimum Gain determined at the
end of the Company's taxable year to which the allocations relate. The
balance of the losses shall be allocated to the Manager. Any Member with
a deficit Capital Account balance resulting in whole or in part from
allocations of loss or deduction (or item thereof) attributable to
non-recourse debt which is secured by Company property shall, to the
extent possible, be allocated income or gain (or item thereof) in an
amount not less than the Minimum Gain at a time no later than the time
at which the Minimum Gain is reduced below the sum of the deficit
Capital Account balances. This section is intended and shall be
interpreted to comply with the requirements of Treasury Regulation
Section 1.704-2(f).
7.5.2 If any Member receives any adjustments, allocations or
distributions, not covered by Subsection 7.5.1, so as to result in a
deficit Capital Account, items of Company income and gain shall be
specially allocated to the Members in an amount and manner sufficient to
eliminate the deficit
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balances in his Capital Account created by the adjustments, allocations
or distributions as quickly as possible. This Section shall constitute a
qualified income offset under Treasury Regulation Section
1.704-1(b)(2)(ii).
7.5.3 For purposes of determining the Profits, Losses, Net Income
Available for Distribution or any other items allocable to any period,
these other items shall be determined on a daily, monthly, or other
basis, as determined by the Manager using any permissible method under
Section 706 of the Code and the Treasury Regulations thereunder.
7.5.4 Notwithstanding Sections 7.1 and 7.2 hereof, (i) Net Losses, if
any, allocable to the period before the admission of any additional
Members under Section 5.2 hereof shall be allocated ninety-nine (99.0%)
to the Manager and one percent (1.0%) to the Initial Member, and Net
Income during that same period, if any, shall be allocated to the
Manager, and (ii) Profits or Losses allocable to the period commencing
with the admission of any additional Members and all subsequent periods
shall be allocated under Section 7.1.
7.5.5 Except as otherwise provided in this Agreement, all items of
Company income, gain, loss, deduction, and any other allocations not
otherwise provided for shall be divided among the Members in the same
proportions as they share Net Income or Net Losses, as the case may be,
for the year.
7.6 Code Section 704(c) Allocations.
7.6.1 Income, gains, losses and deductions, as determined for Federal
income tax purposes, for any Company asset which has a Gross Asset Value
that differs from its adjusted basis for Federal income tax purposes
shall, solely for Federal income tax purposes, be allocated among the
Members so as to take account of any variation between the adjusted
basis of the Company asset to the Company for Federal income tax
purposes and its initial Gross Asset Value in accordance with Code
Section 704(c) and the Treasury Regulations thereunder. In furtherance
of the foregoing, it is understood and agreed that any income, gain,
loss, or deduction attributable to Code Section 704(c) property shall be
allocated to the Members in accordance with the traditional method of
making Code Section 704(c) allocations, in accordance with Treasury
Regulation ss.1.704-3(b).
7.6.2 If the Gross Asset Value of any Company asset is adjusted under
and under Section 2.16, subsequent allocations of income, gain, losses
and deductions, as determined for Federal income tax purposes, for the
Company asset shall, solely for Federal income tax purposes, take
account of any variation between the adjusted basis of the Company asset
for Federal income tax purposes and its Gross Asset Value in the same
manner as under Code Section 704(c) and the Treasury Regulations
thereunder.
7.6.3 Allocations under this Section 7.6 are solely for purposes of
Federal, state and local income taxes and shall not affect, or in any
way be taken into account in computing, any Member's Capital Account.
7.6.4 Except as otherwise set forth in this Agreement, any elections or
other decisions relating to allocations under this Section 7.6 shall be
made by the Manager, with the review and concurrence of the Company's
accountants, in a manner that reasonably reflects the purpose and
intention of this Agreement.
7.7 Intent of Allocations. It is the intent of the Company that this
Agreement comply with the safe harbor test set out in Treasury
Regulation Sections 1.704-1(b)(2)(ii)(d) and 1.704-2 and the
requirements of those Sections, including the qualified income offset
and minimum gain charge-back, which are hereby incorporated by
reference. If, for whatever reasons, the Company is advised by counsel
or its accountants that the allocation provisions of this Agreement are
unlikely to be respected for federal income tax purposes, the Manager is
granted the authority to amend the allocation provisions of this
Agreement, to the minimum extent deemed necessary by counsel or its
accountants to effect the plan of Allocations and Distributions provided
in this Agreement. The
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Manager shall have the discretion to adopt and revise rules, conventions and
procedures as it believes appropriate for the admission of Members to reflect
Members' interests in the Company at the close of the years.
7.8 Quarterly Valuation of Assets. For each of the Company's Mortgage
Investments and other investments, the Manager shall review the investments at
the end of each calendar quarter and determine if a Writedown is required with
respect thereto. The Manager shall cause the Company's accountants, within
thirty (30) days of the end of each calendar quarter, to verify that the
Manager's determination was made in compliance with generally accepted
accounting principles. Any Writedown of an asset resulting from the valuation
shall be effective on the last day of the respective calendar quarter during the
term of this Agreement.
ARTICLE 8
DISTRIBUTION REINVESTMENT PLAN
8.1 Members' Reinvested Distributions. A Member may elect to participate in the
Company's Distribution Reinvestment Plan (the "Plan") at the time of his
purchase of Units, by electing to do so in the Subscription Agreement executed
by the Member. The Member's participation in the Plan commences after the
Company has accepted the Member's Subscription Agreement. Subsequently, a Member
may revoke any previous election or make a new election to participate in the
Plan by sending written notice to the Company. The notice shall be effective for
the month in which the notice is received, if received at least ten (10) days
before the end of the calendar month. Otherwise the notice is effective the
following month.
8.2 Purchase of Additional Units. Under the Plan, participating Members use
distributions to purchase additional Units at ten dollars ($10.00) per Unit. The
Manager will credit Units purchased under the Plan to the Member's Capital
Account as of the first day of the month following the month in which the
Reinvested Distribution is made. If a Member revokes a previous election to
participate in the Plan, subsequent to the month in which the Company receives
the revocation notice, the Company shall make distributions in cash to the
Member instead of reinvesting the distributions in additional in Units.
8.3 Statement of Account. Within 30 days after the Reinvested Distributions have
been credited to Members participating in the Plan, the Manager will mail to
participating Members a statement of account describing the Reinvested
Distributions received, the number of incremental Units purchased, the purchase
price per Unit (if other than ten dollars ($10.00) per Unit), and the total
number of Units held by the Member. Before the Members' reinvestment of
distributions in the Company, the Manager will also mail an updated Prospectus
or other updated disclosure document to each Member that fully describes the
Plan, including the minimum investment amount, the type or source of proceeds
which may be reinvested and the tax consequences of the reinvestment to the
Members.
8.4 Continued Suitability Requirements. Each Member who is a participant in the
Plan must continue to meet the investor suitability standards described in the
Subscription Agreement and Prospectus (subject to minimum requirements of
applicable securities laws) to continue to participate in reinvestments. It is
the responsibility of each Member to notify the Manager promptly if he no longer
meets the suitability standards set forth in the Prospectus for a purchase of
Units in the Offering. The Members acknowledge that the Company is relying on
this notice in issuing the Units, and each Member shall indemnify the Company if
he fails to so notify the Company and the Company suffers any damages, losses or
expenses, or any action or proceeding is brought against the Company due to the
issuance of Units to the Member.
8.5 Changes or Termination of the Plan. The terms and conditions of the Plan may
be amended, supplemented, suspended or terminated for any reason by the Manager
at any time by mailing notice thereof at least thirty (30) days before the
effective date of the action to each participating Member at his last address of
record.
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ARTICLE 9
BOOKS AND RECORDS, REPORTS AND RETURNS
9.1 Books and Records. The Manager shall cause the Company to keep the
following:
9.1.1 Complete books and records of account in which shall be entered
fully and accurately all transactions and other matters relating to the
Company;
9.1.2 A current list setting forth the full name and last known business
or residence address of the Manager and each Member which shall be
listed in alphabetical order and stating his respective Capital
Contribution to the Company and share in Profits and Losses;
9.1.3 A copy of the filed Articles of Organization, and all amendments
thereto;
9.1.4 Copies of the Company's federal, state and local income tax
returns and reports, if any, for the six (6) most recent years;
9.1.5 Copies of this Agreement, including all amendments thereto; and
9.1.6 The financial statements of the Company for the three (3) most
recent years.
All books and records shall be maintained at the Company's principal
place of business and shall be available for inspection and copying by,
and at the sole expense of, any Member, or any Member's duly authorized
representatives, during the Company's normal business hours.
9.2 Annual Statements.
9.2.1 The Manager shall cause to be prepared at least annually, at the
Company's expense, audited financial statements prepared in accordance
with generally accepted accounting principles and accompanied by a
report thereon containing an opinion of an independent certified public
accountant. The financial statements will include: an audited balance
sheet, statements of income or loss, Members' equity, and a statement of
cash flows.
9.2.2 The Company's accounts will itemize the costs of any verification
performed by them and may be reimbursed to the Manager by the Company
only to the extent that the reimbursement when added to the costs for
administrative services rendered does not exceed the competitive rate
for the services as determined in the above paragraph.
9.2.3 Notwithstanding the 120-day period specified in Section 9.2.1
above, the Manager shall cause to be prepared and distributed to the
Members not later than 75 days after the close of each fiscal year of
the Company all Company information necessary in the preparation of the
Members' federal income tax returns. Such information will include:
(a) a statement as to any transactions with the Manager or its
Affiliates, and of fees, commissions, compensation and other benefits
paid or accrued to the Manager or its Affiliates from the Company for
the fiscal year completed, showing the amount paid or accrued to each
recipient and the respective services performed; and
(b) a report identifying distributions from (i) Cash Flow during that
year, (ii) Cash Flow for prior years that had been held as reserves,
(iii) Net Proceeds, (iv) lease payments on net leases with builders and
sellers, and (v) reserves from the gross proceeds of the Offering
originally obtained from the Members. Copies of the aforementioned
financial statements and reports shall be distributed to each Member
within 120 days after the close of each taxable year of the Company.
9.3 Special and Quarterly Reports.
9.3.1 For each quarter in which the Company bought or invested in a
Mortgage Loan or it or a borrower incurred origination or evaluation
fees, and for so long as the proceeds of the Offering are not fully
committed and/or returned to investors, at the Company's expense, the
Manager shall cause
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to be prepared a special report (which may be included in the
quarterly report described below) which shall contain a
statement listing:
(a) the amount of the Mortgage Loans purchased or invested in;
(b) the material terms of the loans;
(c) the identity of the borrower; and
(d) the real property securing the Mortgage Loan and the
appraised value of that real property.
Copies of the statements shall be distributed to each Member
within sixty (60) days after the end of the quarterly period.
9.3.2 The Manager will supply to each Member the information
required by Form 10-Q (if Form 10-Q is required to be filed with
the Securities and Exchange Commission) within 45 days of the
end of each quarterly period.
9.3.3 If the Company is registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended, the Manager shall
cause to be prepared, at Company expense, a quarterly report for
each of the first three quarters in each fiscal year containing
unaudited financial statements (consisting of a balance sheet, a
statement of income or loss and a statement of cash flow) and a
statement of other pertinent information regarding the Company
and its activities during the period covered by the report.
Copies of the statements and other pertinent information shall
be distributed to each Member within 60 days after the close of
each quarter. This report may be combined with the delivery of
information described in the immediately preceding Section
9.3.2, subject to the 45-day period described therein.
9.4 Filings. The Manager, at Company expense, shall cause the
income tax returns for the Company to be prepared and timely
filed with the appropriate authorities. The Manager, at Company
expense, shall also cause to be prepared and timely filed with
and/or delivered to appropriate federal and state regulatory and
administrative bodies and/or the Members applicable, all reports
required to be filed with or delivered to those entities or
Members under applicable law, including those described in the
Company's undertakings in any securities filing. The reports
shall be prepared using the accounting or reporting basis
required by the relevant regulatory bodies. The Company will
provide a copy of the reports to each Member who requests one,
without expense to the Member. The Manager, at Company expense,
shall file, with the Administrators for the states in which this
Company is registered, as required by these states, a copy of
each report referred to this Article 9.
9.5 Suitability Requirements. The Manager, at Company expense, shall maintain
for a period of at least six years a record of the documentation indicating that
a Member complies with the suitability standards set forth in the Prospectus.
9.6 Fiscal Matters.
9.6.1 Fiscal Year. The Company has previously adopted the Fiscal Year
for tax and accounting purposes. Subject to the provisions of Section
706 of the Code and approval by the Internal Revenue Service and the
applicable state taxing authorities, in the Manager's sole discretion
and without the approval of a Majority, from time to time the Manager
may change the Company's fiscal year to a period to be determined by the
Manager.
9.6.2 Method of Accounting. The Company shall continue to use the
accrual method of accounting for both income tax purposes and financial
reporting purposes.
9.6.3 Adjustment of Tax Basis. Upon the transfer of an interest in the
Company, the Company may, at the sole discretion of the Manager, elect
under Code Section 754, to adjust the basis of the Company property as
allowed by Sections 734(b) and 743(b) thereof.
9.6.4 Tax Matters Partner. The Manager shall act as the "Tax Matters
Partner" ( "TMP ") and shall have all the powers and duties assigned to
the TMP under Sections 6221 through 6234 of the Code and the Treasury
Regulations thereunder. The Members agree to perform all acts necessary
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under Section 6231 of the Code and Treasury Regulations thereunder to
designate the Manager as the TMP.
ARTICLE 10
TRANSFER OF COMPANY INTERESTS
10.1 Interest of Manager. A successor or additional Manager may be admitted to
the Company as follows:
10.1.1 With the consent of all Managers (should there be any manager
other than the Manager) and a Majority, a manager may at any time
designate one or more Persons to be a successor to it or to be an
additional manager, in each case with the participation in the Manager's
Interest as they may agree upon, so long as the Company and the Members
shall not be adversely affected thereby.
10.1.2 Upon any sale or transfer of a manager's Interest, if there is an
additional or successor manager of the Company, the successor manager
shall succeed to all the powers, rights, duties and obligations of the
assigning Manager hereunder, and the assigning Manager shall thereupon
be irrevocably released and discharged from any further liabilities or
obligations of or to the Company or the Members accruing after the date
of the transfer. The sale, assignment or transfer of all or any portion
of the outstanding stock of the Manager, or of any interest therein, or
an assignment of the Manager's Interests for security purposes only,
shall not be deemed to be a sale or transfer of the Manager's Interests
subject to the provisions of this Section 10.1.
10.2 Transfer of Member's Interest. To the extent any of the following
restrictions is not necessary to the Company, in the discretion of the
Manager reasonably exercised, the Manager may eliminate or modify any
restriction. Subject to the immediately preceding sentence, no assignee
of the whole or any portion of a Member's Interest in the Company shall
have the right to become a substituted Member in place of his assignor,
unless the following conditions are first met:
10.2.1 No Member may transfer a fractional Unit, and no Member may
transfer Units where, as a result of the transfer, the Member would
thereafter, own fewer than two hundred (200) Units, except where the
transfer occurs by operation of law;
10.2.2 The assignor shall designate its intention in a written
instrument of assignment, which shall be in a form and substance
reasonably satisfactory to the Manager;
10.2.3 The transferring Member shall first obtain written consent of the
Manager to the substitution. The Manager shall not unreasonably withhold
its consent, but the Manager will withhold its consent to the extent
necessary to prohibit transfers that could cause us to be classified as
a publicly traded partnership. The Manager will also withhold consent if
it determines that the sale or transfer will otherwise jeopardize the
continued ability of the Company to qualify as a "partnership" for
federal income tax purposes or that the sale or transfer may violate any
applicable securities laws (including any investment suitability
standards);
10.2.4 The assignor and assignee named therein shall execute and
acknowledge any other instruments as the Manager may deem necessary or
desirable to effect the substitution, including, but not limited to, a
power of attorney;
10.2.5 The assignee shall accept, adopt and approve in writing all of
the terms and provisions of this Agreement as the same may have been
amended;
10.2.6 The assignee shall pay or, at the election of the Manager,
obligate himself to pay all reasonable expenses connected with the
substitution, including but not limited to reasonable attorneys' fees
associated therewith; and
10.2.7 The Company has received, if required by the Manager, a legal
opinion satisfactory to the Manager that the transfer will not violate
the registration provisions of the Securities Act of
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1933, as amended, or any applicable state securities laws, which opinion
shall be furnished at the Member's expense.
Assignments complying with the above shall be recognized by the Company not
later than the last day of the calendar month in which the written notice of
assignment is received by the Company.
10.3 Further Restrictions on Transfers. Notwithstanding any provision to the
contrary contained in this Agreement, the following restrictions shall also
apply to any and all proposed sales, assignments and transfer of Interests, and
any proposed sale, assignment or transfer in violation of same shall be void and
of no effect:
10.3.1 No Member shall make any transfer or assignment of all or any
part of his Interest if said transfer or assignment would, when
considered with all other transfers during the same applicable twelve
month period, cause a termination of the Company for federal or Nevada
state income tax (if any) purposes;
10.3.2 Notice to California residents:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE
OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
10.3.3 Appropriate legends (including the legend above) under applicable
securities laws shall be affixed to certificates evidencing the Units
and issued or transferred to purchasers in other states.
10.3.4 No Member shall make any transfer or assignment of all or any of
his Interest if the Manager determines that the transfer or assignment
would result in the Company being classified as a "publicly traded
partnership" with the meaning of Section 7704(b) of the Code or
Regulations. To prevent that:
(a) The Manager will not permit trading of Units on an established
securities market within the meaning of Section 7704(b);
(b) The Manager will prohibit any transfer of Units which would cause
the sum of percentage interest in Company capital or profits represented
by Interests that are sold or otherwise disposed of during any taxable
year of the Company to exceed two percent (2%) of the total Interests in
Company capital or profits; and
(c) The Manager will not permit any withdrawal of Units except in
compliance with the provisions of this Agreement.
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ARTICLE 11
DEATH, LEGAL INCOMPETENCY, OR WITHDRAWAL OF A MEMBER;
WITHDRAWAL OF THE MANAGER
11.1 Effect of Death or Legal Incompetency of a Member on the Company. The death
or legal incompetency of a Member shall not cause a dissolution of the Company
or entitle the Member or his estate to a return of his Capital Account.
11.2 Rights of Personal Representative. On the death or legal incompetency of a
Member, his personal representative shall have all the rights of that Member for
the purpose of settling his estate or managing his property, including the
rights of assignment and withdrawal.
11.3 Withdrawal of Members Other than Managers. With the sole discretion of the
Manager reasonably exercised, the Manager may modify, eliminate or waive any
such limitation on the withdrawal rights of a member as set forth below, on a
case by case basis or by class so long as the modifying, waiving, or elimination
of the limitation does not: (a) adversely effect rights of the other members as
a whole; or (b) result in the Company being classified as a "publicly traded
partnership" within the meaning of Section 7704(b) of the Code of Regulations.
To withdraw, or partially withdraw from the Company, a Member must give written
notice thereof to the Manager and may thereafter obtain the return, in cash, of
his Capital Account, or the portion thereof as to which he requests withdrawal,
within sixty-one (61) to ninety-one (91) days after written notice of withdrawal
is delivered to the Manager, subject to the following limitations:
11.3.1 Except with regard to the right of the personal representative of
a deceased Member under Section 11.2 above, no notice of withdrawal
shall be honored and no withdrawal made of or for any Units until the
expiration of at least one year from the date of purchase of those Units
in the Offering, other than purchases by way of automatic reinvestment
of Company distributions described in Article 8 of this Agreement;
11.3.2 To assure that the payments to a Member or his representative do
not impair the capital or the operation of the Company, any cash
payments in return of an outstanding Capital Account shall be made by
the Company only from Net Proceeds and Capital Contributions;
11.3.3 The Member shall have the right to receive distributions of cash
from their Capital Accounts only to the extent that funds described in
Subsection 11.3.2 are available; the Manager shall not be required to
establish a reserve fund for the purpose of funding the payments; the
Manager shall not be required to use any other sources of Company funds
other than those set forth in Section 11.3.2; the Manager shall not be
required to sell or otherwise liquidate any portion of the Company's
Mortgage Investments or any other asset in order to make a cash
distribution of any Capital Account under this Section 11.3;
11.3.4 Subject to Section 7.3, during the ninety (90) days following
receipt of written notice of withdrawal from a Member, the Manager shall
not refinance any loans of the Company or reinvest any Net Proceeds or
Capital Contributions in new loans or other non-liquid investment unless
and until the Company has sufficient funds available in cash to
distribute to the withdrawing Member the amount that he is withdrawing
from his Capital Account;
11.3.5 Subject to the restrictions on withdrawal contained in this
Agreement, the amount to be distributed to any withdrawing Member shall
be an amount equal to the amount of the Member's Capital Account as of
the date of the distribution, as to which the Member has given a notice
of withdrawal under this Section 11.3, notwithstanding that the amount
may be greater or lesser than the Member's proportionate share of the
current fair market value of the Company's net assets;
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11.3.6 In no event shall the Manager permit the withdrawal during any
calendar year of total amounts from the Capital Accounts of members that
exceeds fifteen percent (15%) of the aggregate Interests, except upon
the vote of the Members to dissolve the Company under this Agreement;
11.3.7 Requests by Members for withdrawal will be honored in the order
in which they are received by the Manager. If any request may not be
honored, due to any limitations imposed by this Section 11.3 (except the
one year holding limitation set forth in Subsection 11.3.1), the Manager
will so notify the requesting Member in writing, whose request, if not
withdrawn by the Member, will be honored if and when the limitation no
longer is imposed; and
11.3.8 If a Member's Capital Account would have a balance of less than
two thousand dollars ($2,000) following a requested withdrawal, the
Manager, at its discretion, may distribute to the Member the entire
balance in the account.
11.4 Withdrawal by Manager. The Manager may withdraw from the Company
upon not less than 120 days written notice of the same to all Members,
but only with the affirmative vote or consent of a Majority, as noted in
Section 3.2. The withdrawing Manager shall not be liable for any debts,
obligations or other responsibilities of the Company or this Agreement
arising after the effective date of the withdrawal.
11.5 Payment to Terminated Manager. If the business of the Company is continued
as provided elsewhere in this Agreement upon the withdrawal, removal,
dissolution, or bankruptcy of the Manager, then the Company shall pay to the
Manager a sum equal to all amounts then accrued and owing to the Manager. The
Company may terminate the Manager's interest in the Company by paying an amount
equal to the then-present fair market value of the Manager's interest in the
Company, which the Company and Manager acknowledge is the outstanding Capital
Account as of the date of the removal, withdrawal, dissolution or bankruptcy. If
the business of the Company is not so continued, then the Manager shall receive
from the Company the sums it would have received in the course of dissolving the
Company and winding up its affairs, as provided in Section 12.2 below.
The method of payment to any terminated Manager must be fair and must protect
the solvency and liquidity of the program. Where the termination is voluntary,
the method of payment will be deemed presumptively fair where it provides for a
non-interest bearing unsecured promissory note with principal payable, if at
all, from distributions which the terminated Manager otherwise would have
received under this Agreement had the Manager not terminated. Where the
termination is involuntary, the method of payment will be deemed presumptively
fair where it provides for an interest bearing promissory note coming due in no
less than five years with equal installments each year.
ARTICLE 12
DISSOLUTION OF THE COMPANY
12.1 Events Causing Dissolution. The Company shall dissolve upon occurrence of
the earlier of the following events:
12.1.1 The expiration of the term of the Company as stated in Section 1.6 of
this Agreement;
12.1.2 Upon the written consent of the Manager and any other Person who
is then a manager, and the affirmative vote or consent of a Majority;
12.1.3 The withdrawal, removal, dissolution or bankruptcy of the
Manager, unless, if there is no remaining manager, a Majority agree in
writing to continue the business of the Company and, within six months
after the last remaining manager has ceased to be a manager, admit one
or more managers who agree to such election and join the Company as
managers.
12.2 Winding Up. Upon the occurrence of an event of dissolution, the
Company shall immediately be dissolved, but shall continue until its
affairs have been wound up according to the provisions of the Nevada
Statutes. Upon dissolution of the Company, unless the business of the
Company is continued as provided above, the Manager will wind up the
Company's affairs as follows:
12.2.1 No new Mortgage Investments shall be invested in or purchased;
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12.2.2 The Manager(s) shall liquidate the assets of the Company as
promptly as is consistent with recovering the fair market value thereof,
either by sale to third parties or by servicing the Company's
outstanding Mortgage Investments in accordance with their terms;
12.2.3 All sums of cash held by the Company as of the date of
dissolution, together with all sums of cash received by the Company
during the winding up process from any source whatsoever, shall be
distributed in accordance with Section 12.3 below.
12.3 Order of Distribution of Assets. If the Company is dissolved under
Section 12.1 above, the assets of the Company shall be distributed in
accordance with Nevada Statutes Section 86.521.
12.4 No Recourse to Manager. Upon dissolution and winding up under the Nevada
Statutes, each Member shall look solely to the assets of the Company for the
return of his Capital Account, and if the Company assets remaining after the
payment or discharge of the debts and liabilities of the Company are
insufficient to return the amounts of the Capital Account of Members, Members
shall have no recourse against the Manager or any other Member. The winding-up
of the affairs of the Company and the distribution of its assets shall be
conducted exclusively by the Manager. The Manager is hereby authorized to do any
and all acts and things authorized by law for these purposes. If the Manager
becomes insolvent or bankrupt, dissolves, withdraws or is removed by the
Members, the winding-up of the affairs of the Company and the distribution of
its assets shall be conducted by the person or entity selected by a vote of a
Majority, which person or entity is hereby authorized to do any and all acts and
things authorized by law for such purposes.
12.5 Compliance With Timing Requirements of Regulations. If the Company is
"liquidated" within the meaning of Treasury Regulation Section 1.704-
1(b)(2)(ii)(g):
12.5.1 Distributions shall be made under this Article 12 (if such
liquidation constitutes a dissolution of the Company) or Article 7
hereof (if it does not) to the Manager and Members who have positive
Capital Accounts in compliance with Treasury Regulation Section
1.704-1(b)(2)(ii)(b)(2); and
12.5.2 if the Manager's Capital Account has a deficit balance (after
giving effect to all contributions, distributions, and allocations for
all taxable years, including the year during which such liquidation
occurs), the Manager shall contribute to the capital of the Company the
amount necessary to restore such deficit balance to zero in compliance
with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(3).
ARTICLE 13
ROLL-UPS
13.1 Roll-Up Transactions: Appraisal. If the Company proposes to enter into a
Roll-Up transaction, an appraisal of all Company assets shall be obtained from a
competent, Independent Expert. If the appraisal will be included in a Prospectus
to offer the securities of a Roll-Up entity to the Members, the appraisal shall
be filed with the Securities and Exchange Commission and the states as an
exhibit to the Registration Statement for that offering. The Independent Expert
will appraise the assets of the Company on a consistent basis, and conduct the
appraisal based on an evaluation of the Company's assets as of a date
immediately before the announcement of the proposed Roll-Up. In performing the
appraisal, the Independent Expert shall assume an orderly liquidation of the
Company's assets over a 12-month period. The terms of the engagement of the
Independent Expert shall clearly state that the engagement is for the benefit of
the Company and its Members. The Company shall include a summary of the
Independent Expert's appraisal, indicating all material assumptions underlying
the appraisal, in a report to the Members regarding the proposed Roll-Up.
13.2 Members' Rights in a Roll-Up. If a Roll-Up is effected as to the Company,
the Roll-Up Entity making the offer to the Company shall offer to each Member
who votes against the Roll-Up the choice of
13.2.1 accepting the securities of the Roll-Up Entity that were offered in the
proposed Roll-Up, or
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13.2.2 either (a) remaining as a Member of the Company and preserving
its interests therein unchanged; or (b) receiving cash in an amount
equal to the Member's pro-rata share of the appraised Net Asset Value of
the Company.
13.3 Limitations on Roll-Ups. The Company's ability to participate in a
Roll-Up is also subject to the following:
13.3.1 The Company shall not participate in any proposed Roll-Up which
would result in Members having voting rights in the Roll-Up Entity which
are less than those provided in Section 6.2 of this Agreement.
13.3.2 If the Roll-Up Entity is a corporation, the voting rights of the
Members shall correspond to the voting rights provided in this Agreement
to the extent reasonably possible.
13.3.3 The Company will not participate in any proposed Roll-Up which
includes provisions which would operate to materially impede or
frustrate the accumulation of shares, units or other equity interests,
however denominated, by any purchaser of the securities of the Roll-Up
Entity (except to the minimum necessary to preserve the tax status of
the Roll-Up Entity).
13.3.4 The Company will not participate in any proposed Roll-Up which
would limit the ability of a Member to exercise the voting rights of the
securities of the Roll-Up Entity on the basis of the value of the
Interest held by the Member.
13.3.5 The Company will not participate in any proposed Roll-Up in which
the Members' rights as securities holders to access the records of the
Roll-Up Entity will be less than those provided for in this Agreement or
in which any of the costs of the Roll-Up transaction would be borne by
the Company if the Roll-Up is not approved by necessary vote of the
Members.
ARTICLE 14
COMPENSATION TO THE MANAGER AND ITS AFFILIATES
The Company shall pay the Manager the compensation and permit the Manager to
charge and collect the fees and other amounts from borrowers as set forth in the
Prospectus. In addition to the foregoing, under no circumstances may the Manager
receive any compensation not permitted under the NASAA Guidelines. The Company
shall pay the Manager an annual management fee up to 0.25% of the aggregate
Capital Contributions. No additional reimbursement shall be paid to the Manager
or its Affiliates for any general or administrative overhead expenses incurred
by the Manager or its Affiliates or for any other expenses they may incur.
ARTICLE 15
MISCELLANEOUS
15.1 Covenant to Sign Documents. Each Member covenants, for himself and his
successors and assigns, to execute, with acknowledgment or verification, if
required, any and all certificates, documents and other writings which may be
necessary or expedient to form the Company and to achieve its purposes,
including, without limitation, any amendments to the Articles of Organization
and any filings, records or publications necessary or appropriate under the laws
of any jurisdiction in which the Company shall conduct its business.
15.2 Notices. Except as otherwise expressly provided for in this Agreement, all
notices which any Member may desire or may be required to give any other Members
shall be in writing and shall be deemed duly given when delivered personally or
when deposited in the United States mail, first-class postage pre-paid. Notices
to Members shall be addressed to the Members at the last address shown on the
Company records. Notices to the Manager or to the Company shall be delivered to
the Company's principal place of business, as set forth in Section 1.3 above or
as hereafter changed as provided herein.
15.3 Right to Engage in Competing Business. Nothing contained in this Agreement
shall preclude any Member from purchasing or lending money upon the security of
any other property or rights therein, or in any
A-24
<PAGE> 122
manner investing in, participating in, developing or managing any other venture
of any kind, without notice to the other Members, without participation by the
other Members, and without liability to them or any of them. Each Member waives
any right he may have against the Manager for using for its own benefit
information received as a consequence of the Manager's management of the affairs
of the Company. This Section 15.3 shall be subject in its entirety to the
fiduciary duty of the Manager set forth in Section 3.4.
15.4 Amendment. This Agreement is subject to amendment by the affirmative vote
of a Majority in accordance with Section 6.2; provided, however, that no
amendment shall be permitted if the effect of such amendment would be to
increase the duties or liabilities of any Member or materially adversely affect
any Member's interest in Profits, Losses, Company assets, distributions,
management rights or voting rights, except as agreed by that Member. In
addition, and notwithstanding anything to the contrary contained in this
Agreement, the Manager shall have the right to amend this Agreement, without the
vote or consent of any of the Members, if, in the reasonable judgment of the
Manager, such amendment does not adversely affect the rights of the Members,
including, without limitation, an amendment:
15.4.1 to grant to Members (and not solely the Manager in its capacity
as a Member) additional rights, remedies, powers or authority that may
lawfully be granted to or conferred upon them;
15.4.2 to cure any ambiguity, to correct or supplement any provision
which may be inconsistent with any other provision, or to make any other
provisions for matters or questions arising under this Agreement which
will not be inconsistent with the provisions of this Agreement;
15.4.3 to conform this Agreement to applicable laws and regulations,
including without limitation, federal and state securities and tax laws
and regulations, and the NASAA Guidelines;
15.4.4 in the form of a revision to or updating of Schedule A in
accordance with Section 5.2 hereof; and
15.4.5 to elect for the Company to be governed by any successor Nevada
statute governing limited liability companies.
The Manager shall notify the Members within a reasonable time of the adoption of
any amendment.
15.5 Entire Agreement. This Agreement constitutes the entire Agreement between
the parties and supersedes any and all prior agreements and representations,
either oral or in writing, between the parties hereto regarding the subject
matter contained herein.
15.6 Waiver. No waiver by any party hereto or any breach of, or default under,
any provision of this Agreement by any party shall be construed or deemed a
waiver of any breach of or default under any other provision of this Agreement,
and shall not preclude any party from exercising or asserting any rights under
this Agreement for any future breach or default of the same provision of this
Agreement.
15.7 Severability. If any term, provision, covenant or condition of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the provisions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
15.8 Application of Nevada law. This Agreement and the application or
interpretation thereof shall be governed, construed, and enforced exclusively by
its terms and by the law of the State of Nevada.
15.9 Captions. Section titles or captions contained in this Agreement are
inserted only as a matter of convenience and for reference and in no way define,
limit, extend or describe the scope of this Agreement.
15.10 Number and Gender. Whenever the singular form is used in this Agreement it
includes the plural when required by the context, and the masculine gender shall
include the feminine and neuter genders.
15.11 Counterparts. This Agreement may be executed in counterparts, any or all
of which may be signed by Manager on behalf of the Members as their
attorney-in-fact.
15.12 Waiver of Action for Partition. Each of the parties hereto irrevocably
waives during the term of the Company any right that it may have to maintain any
action for partition for any property of the Company.
A-25
<PAGE> 123
15.13 Defined Terms. All terms used in this Agreement which are defined in the
Prospectus shall have the meanings assigned to them in said Prospectus, unless
this Agreement shall provide for a specific definition in Article 2.
15.14 Binding on Assignees. Each and all of the covenants, terms, provisions and
agreements herein contained shall be binding upon and inure to the benefit of
the successors and assigns of the respective parties hereto, subject to the
provisions of Section 10.2, which control the assignment or other transfer of
Company Interests.
A-26
<PAGE> 124
EXHIBIT B
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, AN INVESTOR IS NOT WAIVING
ANY RIGHTS UNDER THE FEDERAL SECURITIES LAWS.
SUBSCRIPTION INSTRUCTIONS
A. Completion of Subscription Agreement
(1) Subscription and related undertakings, representations and
warranties: Please read carefully pages B-1 to B-4.
- Initial the representation contained in Section 6(c) on page
B-2.
- Indicate in section 13 on page B-3 whether you want to reinvest
distributions by purchasing additional Units.
- Indicate in section 14 on page B-4 how you will own the Units.
(2) Questionnaire(s):
- Individual Subscribers. Complete page B-5.
- Entities other than Employee Benefit Plans. Complete page B-6.
- Employee Benefit Plans. Complete pages B-7 and B-8.
(3) Registration Information. Complete all information on page B-9.
(4) Signature Page. Complete and sign page B-10.
(5) Existing Members Only (for use after initial acquisition of Units).
After acquiring Units, you only have to complete the one page form
entitled "Additional Subscription Request" at page B-11.
B. Payment. All subscriptions should be for at least $2,000, corresponding
to a minimum of 200 Units.
<TABLE>
<CAPTION>
IF YOU ARE PURCHASING UNITS DURING THE IF YOU ARE PURCHASING UNITS FOLLOWING THE
COURSE OF THE MINIMUM OFFERING PERIOD OF THE MINIMUM OFFERING
-------------------------------------- -----------------------------------------
<S> <C> <C>
Payment by Bank Check or Make payable to order of, Make payable to the order of "Vestin Fund II, LLC"
Certified Check: as Escrow Agent"
Payment by Wire Transfer: , as Escrow Agent for Vestin Fund II, LLC
Vestin Fund II, LLC Account Account No.____________
No.___________ Bank Routing No. 121201694
Bank Routing No. 122401778
</TABLE>
C. Questions. If you have any questions in completing this Subscription
Agreement, please call Vestin Capital Inc. at (702) 876-1143.
D. Return of Documents. The Subscription Agreement should be returned to the
following address:
Vestin Mortgage, Inc.
2901 El Camino Avenue, Suite 206
Las Vegas, NV 89102
<PAGE> 125
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, AN INVESTOR IS NOT WAIVING
ANY RIGHTS UNDER THE FEDERAL SECURITIES LAWS.
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
VESTIN FUND II, LLC
1. SUBSCRIPTION. The undersigned investor ("Investor") hereby applies to become
a member in Vestin Fund II, LLC, a Nevada limited liability Company (the
"Company"). The Investor subscribes $ for the purchase of units of
limited liability interest in the Company (the "Units"), the price being $10.00
per Unit (with a 200 Unit minimum purchase). The undersigned agrees to purchase
the number of Units stated above in accordance with the terms and conditions of
the Operating Agreement (the "Operating Agreement"), a copy of which is found at
Exhibit A of the Prospectus of the Company to which this agreement forms Exhibit
B (the "Prospectus"). The Units which the Investor offers to purchase shall not
be deemed issued to, or owned by, the Investor until: (a) the Investor has fully
paid by certified or bank check or by wire transfer for such Units, and (b) the
Manager has in its sole discretion accepted all or any portion of Investor's
offer of purchase.
2. PAYMENT OF SUBSCRIPTION. The amount of the Investor's subscription set forth
above either (a) has already been delivered by wire transfer, to the account set
forth below, or (b) is enclosed in the form of a certified or bank check.
The Investor hereby authorizes and directs Vestin Capital, Inc. to deliver this
Subscription Agreement to the Manager. The undersigned hereby directs,
____________________ as Escrow Agent (the "Bank") to pay to the Company the
funds delivered by the Investor for the Units, to the extent the Investor's
subscription has been accepted, subject to the Bank's receiving the Minimum
Proceeds described in Section 3 below. The Investor acknowledges that the
Manager can accept or reject all or any part of this subscription in its sole
discretion, and that this offering may be terminated at any time by the Manager.
If the Investor's subscription is rejected in part, the funds delivered
herewith, to the extent the application is so rejected, will be returned to
Investor as soon as practicable without interest or deduction, except to the
extent of any interest actually earned.
3. As described in the Prospectus under "Plan of Distribution," payments for
Units will be held by the Bank in a segregated account (the "Escrow Account")
until the Bank has received payment for subscriptions accepted by the Company
for not fewer than 150,000 Units (the "Minimum Offering"), corresponding to not
less than an aggregate of $1,500,000 in subscription payments (the "Minimum
Proceeds").
4. If the Minimum Proceeds have not been received by the Bank on or before the
end of the Bank's business day on December 31, 2001, the Bank will promptly
return your payments in full, without interest, to you at the address shown on
the Subscription Agreement Signature Page.
5. If the Minimum Proceeds have been received by the Bank on or before December
31, 2001, the offering by the Company will continue, without use of the Bank or
any escrow agent, to seek to distribute a total of 50,000,000 Units for
$500,000,000. The Escrow Account will be closed upon the Bank's distribution of
funds either (a) to the Company after the Bank receives the Minimum Proceeds, or
(b) to the Investors, in accordance with Section 4. Proceeds from sales of Units
in the offering following the close of the Escrow Account will be paid directly
to the Company for its use as described in the Prospectus under "Use of
Proceeds."
6. REPRESENTATIONS BY THE INVESTOR. The Units as an investment involve a high
degree of risk. Please read the "Risk Factors" beginning on page 7 of the
Prospectus. In connection with the Investor's investment described in Section 1
of this Agreement, the Investor represents and warrants to the Company and any
relevant broker-dealers that the Investor:
(a) has received the Prospectus;
(b) understands that no federal or state agency has made any finding or
determination as to the fairness for public investment in, nor any
recommendation nor endorsement of, the Units;
(c) ILLIQUID INVESTMENT: understands that there will be no public market
for the Units, that there are substantial restrictions on repurchase,
sale, assignment or transfer of the Units, and that it may not be
possible readily to liquidate this investment;
PLEASE CONFIRM THE REPRESENTATION SET FORTH IN SECTION 6(C) BY PLACING YOUR
INITIALS HERE: ______
(d) meets the following criteria:
(i) if financial suitability standards (i.e., based on net worth or
income levels) are provided in Appendix A to this Subscription Agreement
for the state in which the Investor is domiciled, the undersigned meets
those financial suitability standards;
(ii) IF NO FINANCIAL SUITABILITY STANDARDS ARE INCLUDED IN APPENDIX A
FOR THE STATE IN WHICH THE INVESTOR IS DOMICILED, ONE OF THE FOLLOWING IS TRUE:
(A) the undersigned has a minimum net worth (exclusive of home,
furnishings, and automobiles) of $45,000, and an annual gross income of
at least $45,000;
B-2
<PAGE> 126
(B) the undersigned has a minimum net worth (exclusive of home,
furnishings, and automobiles) of $150,000; or
(C) the undersigned is purchasing in a fiduciary capacity for a
person meeting the requirements of either (i) or (ii) above; or
(D) is under no disability with respect to entering into a
contractual relationship with the Company, and, if the Investor
is an individual, has attained the age of majority (as
established in the state in which domiciled);
(E) if a trustee, is the trustee for the trust on behalf of
which it is purchasing the Units, and has due authority to
purchase Units on behalf of the trust;
(F) fully indemnifies and holds harmless the Company, the
Manager, and its affiliates from any and all claims, actions,
causes of action, damages, and expenses (including legal fees
and expenses) whatsoever which may result from a breach of any
of the representations by Investor contained herein;
(G) has investment objectives that correspond to those stated in
the Prospectus, i.e., to preserve the capital of the Company and
to provide monthly distributions of cash to the members;
(H) understands that the Company intends to be taxed as an
association (partnership) and not as a corporation, and that,
among other things, this may result in taxes being payable by
the Investor even though the Company may not have distributed
cash to the Investor.
(I) understands that an investment in the Company will not, in
itself, create a retirement plan (as defined in the Internal
Revenue Code of 1986, as amended) for any investor and that, in
order to create a retirement plan, an investor must comply with
all applicable provisions of the Code.
7. PURCHASE BY FIDUCIARY. If the Investor is purchasing the Units subscribed for
hereby in a fiduciary capacity, the above representations and warranties are to
be deemed to have been made on behalf of the person(s) for whom the Investor is
so purchasing except that such person(s) need not be over 18 years of age.
8. ADOPTION OF OPERATING AGREEMENT. The Investor hereby adopts, accepts, and
agrees to be bound by all terms and provisions of the Operating Agreement
(Exhibit A to the Prospectus) and to perform all obligations therein imposed
upon a member with respect to Units to be purchased. By signing and completing
the signature page of this Subscription Agreement, the undersigned agrees to
become a Member in the Company upon acceptance of this Subscription Agreement by
the Manager on behalf of the Company, and to pay the subscription price in full.
9. LIMITATION ON ASSIGNMENT. The Investor acknowledges that the Units may be
assigned only as provided in the Operating Agreement and further acknowledges
the restrictions on the Company's repurchase or the Investor's resale, transfer,
or assignment of the Units set forth in the Operating Agreement and as described
in the Prospectus.
10. SPECIAL POWER OF ATTORNEY. The Investor hereby makes, constitutes, and
appoints the Manager of the Company to be such person's true and lawful
attorney-in-fact with full power and authority for him, and in his name, place
and stead, to execute, acknowledge, publish and file, as necessary or
appropriate:
(a) the Operating Agreement and the Articles of Organization, as well as
any and all amendments thereto required under the laws of the State of
Nevada or of any other state or which the Manager deems advisable to
prepare, execute and file;
(b) any other certificate, instrument or document, including Fictitious
Business Name Statements, which may be required to be filed by the
Company by any governmental agency or by the laws of any state or other
jurisdiction in which the Company is doing or intends to do business, or
which the Manager deems advisable to file; and
(c) any documents which may be required to effect the continuation of
the Company, the admission of an additional or substituted member, or
the dissolution and termination of the Company, provided
B-3
<PAGE> 127
such continuation, admission, or dissolution and termination are in accordance
with the terms of the Operating Agreement.
The foregoing grant of authority:
(i) is a Special Power of Attorney coupled with an interest, is
irrevocable, survives the death of the Investor and shall not be
affected by the subsequent incapacity of the Investor;
(ii) may be exercised by the Manager for each member by a
facsimile signature of or on behalf of the Manager or by listing
all of the members and by executing any instrument with a single
signature of or on behalf of the Manager, acting as
attorney-in-fact for all of them; and
(iii) shall survive the delivery of an assignment by a member of
the whole or any portion of his interest; except that where the
assignee thereof has been approved by the Manager for admission
to the Company as a substituted member, the Special Power of
Attorney shall survive the delivery of such assignment for the
sole purpose of enabling such person to execute, acknowledge,
and file any instrument necessary to effect such substitution.
9. NOTIFICATION OF MANAGER. The Investor agrees to notify the
Manager immediately if any of the foregoing statements made
herein shall become untrue.
11. OPERATING AGREEMENT GOVERNS. In the event of any conflict between the
provisions of the Operating Agreement and any instrument or document executed,
acknowledged, filed or recorded by the Manager pursuant to this special power of
attorney, the Operating Agreement will govern.
12. REINVESTMENT OF DISTRIBUTIONS. The Company maintains a Distribution
Reinvestment Plan (the "Plan") under which distributions of income of the
Company may be reinvested for the purchase of additional Units, rather than
being received in cash. See Prospectus, under "Summary of Operating Agreement,
Rights of Members and Description of Units---Distribution Reinvestment Plan." So
long as Investor meets the suitability standards established by the Company and
by the securities law administrator of the state in which Investor is domiciled,
and subject to possible suspension or termination of the Plan by the Manager, as
set forth in the Operating Agreement, the Investor will continue to participate
in the Plan. The Investor may change his election at any time by written notice
to the Company. Please choose one or the other of the two options by a check
mark in the appropriate blank. If you check neither blank, you will be
considered to have elected to receive your distributions in cash (Option B).
_____ A. Investor elects to participate in the Plan and receive
additional Units rather than cash as distributions of Net Income from
the Company.
_____ B. Investor elects not to participate in the Plan and to receive
distributions of Net Income in cash.
13. OWNERSHIP OF UNITS. The Investor's Units will be owned and should be
shown on the Company's records as follows:
Check one: [ ] Individual Ownership
[ ] Joint Tenants with Right of Survivorship
(all parties must sign)
[ ] Tenants in Common (all parties must sign)
[ ] Community Property (one signature required)
[ ] Custodian
[ ] Trustee
[ ] Corporation
[ ] Partnership
[ ] Nonprofit Organization
If you have any questions in completing this Subscription Agreement, please call
Vestin Capital, Inc. at
(702) 876-1143
or Vestin Mortgage, Inc. at
(702) 227-0965
B-4
<PAGE> 128
INDIVIDUAL INVESTORS MUST COMPLETE THIS PAGE
Name:
----------------------------------------------------
Date of Birth
--------------------------------------------
Occupation
-----------------------------------------------
Marital Status (check one) Single ____ Married ____
Citizenship U.S. ____ Other ____
Investment Objective:
Preservation of capital and monthly income distributions
(check)
Other (please explain)
-----------------------------------
Investor's Financial Status and Suitability:
Investor's Net Worth, exclusive of home, furnishings, and automobiles (check
appropriate range):
<TABLE>
<S> <C> <C>
___ under $45,000 ___ $45,000-$49,999 ___ $50,000-$59,999
___ $60,000-$64,999 ___ $65,000-$124,999 ___ $125,000-$149,999
___ $150,000-$199,999 ___ $200,000-$224,999 ___ $225,000-$249,999
___ $250,000 or greater
Investor's Annual Income (check appropriate range)
___ under $45,000 ___ $45,000-$49,999 ___ $50,000-$59,999
___ $60,000-$64,999 ___ $65,000-$124,999 ___ $125,000-$149,999
___ $150,000-$199,999 ___ $200,000-$224,999 ___ $225,000-$249,999
___ $250,000 or greater
</TABLE>
Describe your investments in the last five years and discuss who made the
relevant investment decisions (you, your financial adviser, broker, accountant
or attorney): __________________________________________________________________
Please provide any other information that would help the Manager determine
whether the Investor has sufficient knowledge and experience in financial and
business matters to evaluate the merits and risks of an investment in the Units.
Are you subject to any regulatory or other constraints that may preclude or
limit your participation in any potential Company investment?
[ ] YES [ ] NO
If yes, please describe:
--------------------------------------------------------
--------------------------------------------------------------------------------
B-5
<PAGE> 129
LEGAL ENTITIES (NON-BENEFIT PLANS)
TO COMPLETE THIS PAGE
Name of Investor:
---------------------------------------------------------------
Type of Legal Entity:
______ corporation (if so, provide jurisdiction of incorporation) __________
______ partnership or limited liability company
(provide jurisdiction of organization)
----------------------------------------------------------------------------
______ trust (provide state in which formed and date of trust indenture) ___
______ other (describe) ____________________________________________________
Principal place of business ____________________________________________________
Investment Objective:
Preservation of capital and monthly income distributions ______ (check)
Other (please explain)
------------------------------------------------------
Total assets (as indicated on the most recent balance sheet)
of the Investor: $___________
Describe the Investor's investments in the last five years and discuss who made
the relevant investment decisions (director, officer, financial adviser, broker,
accountant or attorney): _______________________________________________________
Please provide any other information that would help the Manager determine
whether the Investor has sufficient knowledge and experience in financial and
business matters to evaluate the merits and risks of an investment in the Units.
Is the Investor subject to any regulatory or other constraints that may preclude
or limit the Investor's participation in any potential Company investment?
[ ] YES [ ] NO
If yes, please describe:
--------------------------------------------------------
B-6
<PAGE> 130
EMPLOYEE BENEFIT PLANS
TO COMPLETE PAGES B-7 AND B-8
Name of Investor (the "Plan"):
--------------------------------------------------
Investment Objective:
Preservation of capital and monthly income distributions ______ (check)
Other (please explain)
------------------------------------------------------
Total assets (as indicated on the most recent balance sheet)
of the Investor: $______________
Does this investment exceed 10% of the Plan's assets?
[ ] YES [ ] NO
Is the Plan an "employee benefit plan" within the meaning of Title I of ERISA
(an "ERISA Plan") with a fiduciary as defined in Section 3(21) of ERISA which is
a bank, insurance company or registered investment adviser (other than an
affiliate of the Manager), which fiduciary will decide whether to purchase
Units?
[ ] YES [ ] NO
If yes, provide details
-----------------------------------------------------
Is the Plan an employee benefit plan other than an ERISA plan?
[ ] YES [ ] NO
If yes, provide details as to the nature of the Plan (IRA, Keogh, etc.) and
the person making investment decisions on behalf of the Plan __________________
Does the Plan permit participants to direct the investment of the contributions
made to the Plan on their behalf?
[ ] YES [ ] NO
Additional Plan Representations and Warranties:
The undersigned authorized signatory of the Plan hereby represents and warrants
on behalf of the Plan that the answers to the following questions are true:
Does the Manager or any of its employees or affiliates manage any part of the
Plan's investment portfolio on a discretionary basis?
[ ] YES [ ] NO
Does the Manager or any of its employees or affiliates regularly give
investment advice to the Plan?
[ ] YES [ ] NO
Does the Manager or any of its employees or affiliates have an agreement
or understanding, written or unwritten, with the investment director of
the Plan under which the latter receives information, recommendations
and advice concerning investments which are used as a primary basis for
the Plan's investment decisions?
[ ] YES [ ] NO
Does the Manager or any of its employees or affiliates have an agreement
or understanding, written or unwritten, with the investment director of
the Plan under which the latter receives individualized investment
advice concerning the Plan's assets?
[ ] YES [ ] NO
B-7
<PAGE> 131
IF THE ANSWER TO ANY OF THESE IS "YES," INDICATE WHETHER ALL OF THE
REPRESENTATIONS AND WARRANTIES BELOW ARE TRUE BY INITIALING BELOW.
The investment director of the Plan has studied the Prospectus and has
made an independent decision to purchase Units solely on the basis
thereof and without reliance on any other information or statements as
to the appropriateness of this investment for the Plan.
All the obligations and requirements of ERISA, including prudence and
diversification, with respect to the investment of "plan assets" in the
Company have been considered by the investment director of the Plan.
The investment director and, if different, authorized signatory of the
Plan understand that neither the Manager nor any of its affiliates: (a)
has exercised any investment discretion or control with respect to the
Plan's purchase of any Units, (b) have authority, responsibility to
give, or have given individualized investment advice with respect to the
Plan's purchase of any Units, or (c) are employers maintaining or
contributing to such Plan.
An investment in the Company conforms in all respects to the governing
documents of the Plan.
The person executing this Subscription Agreement on behalf of the Plan
is a "fiduciary" of such Plan and trust and/or custodial account (within
the meaning of Section 3(21)(A) of ERISA); the execution and delivery of
this Subscription Agreement with respect to the Plan and trust and/or
custodial account have been duly authorized; and investment in the
Company conforms in all respect to laws applicable to the Plan and to
the Plan documents; and in making this investment, the Plan, its
fiduciaries and its investment director are aware of, and have taken
into consideration, among other things, risk return factors and the
anticipated effect of an investment in the Company on the
diversification, liquidity and cash flow needs of the Plan and the
projected effect of the investment in meeting the Plan's funding
objectives and have concluded that this investment is a prudent one.
The Plan's governing documents do not prohibit the Company from
investing in specific securities or issues, including, but not limited
to, securities which would be deemed to be "employer securities" with
respect to the Plan as defined in Section 407 of ERISA.
The Plan's proxy voting guidelines do not apply to securities held by
the Company.
The Plan, its investment director and, if different, the person
executing this Subscription Agreement fully understand the tax
considerations and risks of this investment.
ARE THE FOREGOING REPRESENTATIONS AND WARRANTIES TRUE?
[ ] YES [ ] NO
Please provide any other information that would help the Manager
determine whether the Investor has sufficient knowledge and experience
in financial and business matters to evaluate the merits and risks of an
investment in the Units.
B-8
<PAGE> 132
REGISTRATION INFORMATION FOR THE INTERESTS
$
(Subscriber Name(s)) (Subscription Amount)
(Street Address) (State/Zip Code)
(Telephone and Facsimile Numbers) (e-mail---Optional)
The full address to which any communications, distribution checks, and
redemption checks, if applicable, should be sent (if different from registered
address furnished in response to the preceding requirement) is:
(Name (s))
(Street Address) (City) (State/Country)
(Telephone and Facsimile Numbers) (e-mail---optional)
If the proceeds of distributions or redemptions, if any, are to be wired rather
than sent by check, the account to which such proceeds should be wired is:
(Name of Financial Instution)
(Routing ABA Number---if a Bank)
(Address of Financial Institution)
(Financial Institution Account Name and Number)
_________________________________________U.S. Citizen or Resident [ ] YES [ ] NO
Social Security No./EIN (Entity)
_________________________________________ Existing Partner [ ] YES [ ] NO
Plan Number (if applicable)
B-9
<PAGE> 133
SIGNATURE PAGE
BEFORE SIGNING THIS PAGE, HAVE YOU: (a) initialed the representation contained
in Section 6(c) on page B-2, (b) indicated in section 13 on page B-4 whether you
want to reinvest distributions by purchasing additional Units, and (c) indicated
in section 14 on page B-4 how you will own the Units? If not, please do so.
<TABLE>
<S> <C>
INDIVIDUAL(S):
Date:
-------------------------------------------------------------------------------- ------------------
(Signature of Subscriber)
(Print Name of Subscriber)
Date:
-------------------------------------------------------------------------------- ------------------
(Signature of Co-Subscriber)
(Print Name of Co-Subscriber)
ENTITIES (other than Plans):
(Print Name of Subscriber)
By: Date:
-------------------------------------------------------------------------------- ------------------
(Signature of Authorized Signatory)
(Print Name and Title of Signatory)
By: Date:
-------------------------------------------------------------------------------- ------------------
(Signature of Required Authorized Co-Signatory)
(Print Name and Title of Co-Signatory)
Plan Entities: Date:
-------------------------------------------------------------------------------- ------------------
(Signature of Individual Plan Participant) (Print Name)
Date:
-------------------------------------------------------------------------------- ------------------
(Signature of Custodian or Trustee) (Print Name)
Date:
-------------------------------------------------------------------------------- ------------------
(Signature of Other Authorized Signatory) (Print Name)
</TABLE>
FOR USE BY THE COMPANY ONLY
Subscription has been: [ ] Accepted [ ] Accepted in Part [ ] Rejected [ ] Other
Subscription Amount: $_________________________________ Dated:_________________
Signed: Vestin Mortgage, Inc., Manager
By:
--------------------------------------------
Name:
Title:
B-10
<PAGE> 134
ADDITIONAL SUBSCRIPTION REQUEST
(To Be Completed By Existing Investors Instead of Subscription Agreement)
Name of Investment Fund:
--------------------------------------------------------
Name of Subscriber(s):
----------------------------------------------------------
Additional Subscription Amount: $
-----------------------------------------------
The undersigned hereby subscribes for the additional amount set forth above upon
the terms and conditions described in the Confidential Private Offering
Memorandum. The undersigned restates all of the covenants, representations and
warranties made in the undersigned's original Subscription Agreement as if they
were made on the date hereof and certifies that all of the financial information
set forth in the undersigned's original Subscription Agreement remains accurate
and complete on the date hereof.
INDIVIDUAL SIGNATURES:
_________________________________ Date: ___________ (Signature of Subscriber)
_________________________________ Date: ___________ (Signature of Co-Subscriber)
ENTITY AND PLAN SIGNATURES:
By: Date:
-------------------------------------------------- ------------------
(Signature of Authorized Signatory)
(Print Name and Title of Signatory)
By: Date:
-------------------------------------------------- ------------------
(Signature of Required Authorized Co-Signatory)
(Print Name and Title of Co-Signatory)
FOR USE BY THE COMPANY ONLY
Subscription has been: [ ] Accepted [ ] Accepted in Part [ ] Rejected [ ] Other
Additional Subscription Amount Accepted $
---------------------------------------
Dated:
--------------------------------------------
Signed: Vestin Mortgage, Inc., Manager
By:
--------------------------------------------
Name:
Title:
B-11
<PAGE> 135
APPENDIX A
STATE REGULATIONS
("Blue Sky" Law)
Various states have established suitability standards for individual investors
and subsequent transferees different from and/or in addition to those set by the
Company. These requirements are set forth below:
<TABLE>
<CAPTION>
State Suitability Standards Requirements
----- --------------------- ------------
<S> <C> <C>
NV Same as in body of agreement. Minimum investment is $5,000 ($2,000 for IRAs).
OH, PA Same as in body of agreement, except that We will make no sales in these states
in addition, the amount an Investor pays until we receive proceeds of at least
for units may not exceed 10% of the $5,000,000. PENNSYLVANIA RESIDENTS:
Investor's net worth (without including BECAUSE THE MINIMUM CLOSING AMOUNT IS
the Investor's home, home furnishings and LESS THAN $10,000,000, INVESTORS ARE
automobiles) CAUTIONED TO CAREFULLY EVALUATE THE
COMPANY'S ABILITY TO FULLY ACCOMPLISH
ITS STATED OBJECTIVES AND TO INQUIRE AS TO
THE CURRENT DOLLAR VOLUME OF PROGRAM
SUBSCRIPTIONS.
AZ, AK, Investors must have either (i) a minimum The following may appear on
CA, IA, net worth (without including an Investor's certificates issued to California
MA, MS, home, home furnishings, and automobiles) residents: IT IS UNLAWFUL TO
MO, TN of $60,000, and an annual gross income of CONSUMMATE A SALE OR TRANSFER OF THIS
at least $60,000; or (ii) minimum net SECURITY, OR ANY INTEREST THEREIN, OR
worth (exclusive of home, furnishings, and TO RECEIVE ANY CONSIDERATION
automobiles) of $225,000 or (iii) are THEREFOR, WITHOUT THE PRIOR WRITTEN
purchasing in a fiduciary capacity for a CONSENT OF THE COMMISSIONER OF
person meeting the requirements of either CORPORATIONS OF THE STATE OF
(i) or (ii) above. CALIFORNIA, EXCEPT AS PERMITTED IN
THE COMMISSIONER'S RULES. There are
restrictions on the transfer of the
Units in California, which are set
forth in the statute included in
Appendix B on the following two
pages.
ME Investors must have either (i) a minimum
net worth (without including an
Investor's home, home furnishings, and
automobiles) of $50,000, and an annual
gross income of at least $50,000; or (ii)
minimum net worth (exclusive of home,
furnishings, and automobiles) of $200,000
or (iii) are purchasing in a fiduciary
capacity for a person meeting the
requirements of either (i) or (ii) above.
</TABLE>
B-12
<PAGE> 136
<TABLE>
<CAPTION>
State Suitability Standards Requirements
----- --------------------- ------------
<S> <C> <C>
SC Investors must have either (i) a minimum
net worth (without including an
Investor's home, home furnishings, and
automobiles) of $65,000, and an annual
gross income of at least $65,000; or (ii)
minimum net worth (exclusive of home,
furnishings, and automobiles) of $150,000
or (iii) are purchasing in a fiduciary
capacity for a person meeting the
requirements of either (i) or (ii) above.
NH Investors must have either (i) a minimum
net worth (without including an
Investor's home, home furnishings, and
automobiles) of $125,000, and an annual
gross income of at least $50,000; or (ii)
minimum net worth (exclusive of home,
furnishings, and automobiles) of $250,000
or (iii) are purchasing in a fiduciary
capacity for a person meeting the
requirements of either (i) or (ii) above.
DC, LA, These jurisdictions do not have
NE, ND, quantified suitability requirements.
RI Accordingly, in addition to assuring
compliance with the guidelines set forth in the body of this
agreement, dealers are instructed to review, and investors
should provide any other relevant information that they
believe is necessary to making an assessment of suitability.
</TABLE>
B-13
<PAGE> 137
APPENDIX B
RESTRICTIONS ON TRANSFER SET FORTH
IN RULE 260.141.11 OF
THE CALIFORNIA CODE OF REGULATIONS TITLE 10, CHAPTER 3 (The "Code ")
(a) The issuer of any security upon which a restriction on transfer has
been imposed pursuant to Section 260.102.6, 260.141.10 or 260.534 shall
cause a copy of this section to be delivered to each issuee or
transferee of such security.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the
prior written consent of the Commissioner (until this condition is
removed pursuant to Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of the
Code or Section 260.105.14 of these rules;
(4) to the transferors ancestors, descendants or spouse or any custodian
or trustee for the account of the transferor or the transferors
ancestors, descendants or spouse; or to a transferee by a trustee or
custodian for the account of the transferee or the transferees
ancestors, descendants or spouse;
(5) to the holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either acting
as such or as a finder) to a resident of a foreign state, territory or
country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign
state, territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate
or group;
(9) if the interest sold or transferred is a pledge or other lien given
by the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule is not
required;
(10) by way of a sale qualified under Sections 25111, 25112, or 25113,
or 25121 of the Code, of the securities to be transferred, provided that
no order under Section 25140 or Subdivision (a) of Section 25143 is in
effect with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such corporation,
or by a wholly owned subsidiary of a corporation to such corporation;
(12) by way of an exchange qualified under Section 25111, 25112, or
25113 of the Code, provided that no order under Section 25140 or
Subdivision (a) of Section 25148 is in effect with respect to such
qualification;
(13) between residents of foreign states, territories or countries who
are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or
to the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or
to the administrator of the unclaimed property law of another state, if,
in either such case, such person (i) discloses to potential
B-14
<PAGE> 138
purchasers at the sale that transfer of the securities is
restricted under this rule, (ii) delivers to each purchaser a
copy of this rule, and (iii) advises the Commissioner of the
name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does
not involve a change in the beneficial ownership of the
securities, provided that any such transfer is on the condition
that any certificate evidencing the security issued to such
transferee shall contain the legend required by this section.
(c) The certificate representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any
transfer thereof, shall bear on their face a legend, prominently stamped
or printed thereon in capital letters of not less than 10-point size,
reading as follows:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONERS RULES.
B-15
<PAGE> 139
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution.
The expenses incurred and estimated to be incurred in connection with this
offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee $132.000
National Association of Securities Dealers, Inc. Filing Fee 50,500
Blue Sky Fees 30,000
Accounting Fees and Expenses 80,000
Legal Fees and Expenses 350,000
Printing Fees and Expenses 100,000
Mailing 75,000
Miscellaneous 82,500
Total $900,000
</TABLE>
Item 32. Sales to Special Parties
Not applicable.
Item 33. Recent Sales of Unregistered Securities
Not applicable.
Item 34. Indemnification of Directors and Officers
Indemnification of the Partners and any officer, director, employee, agent,
subsidiary or assign thereof, is provided for in Section 3.5 of the operating
agreement, which is included as Exhibit A to the Prospectus.
Item 35. Treatment of Proceeds from Stock Being Registered
Not applicable
Item 36. Financial Statements and Exhibits
(a) Financial Statements: See "Index to Financial Statements"
and the financial statements appearing thereafter in Part I of
this registration statement.
(b) Exhibits:
1.1 Dealer Manager Agreement
1.2 Selected Dealer Agreement
3 Articles of Organization
4.1 Operating agreement of Registrant (included as
Exhibit A to the Prospectus)
4.2 Subscription Agreement and Power of Attorney
(included as Exhibit B to the Prospectus)
5.1 Opinion of Berkley, Gordon, Levine, Goldstein &
Garfinkel, LLP with respect to legality of the
securities*
8 Opinion of Wendel, Rosen, Black & Dean, LLP with
respect to federal income tax matters*
10.1 _________ Escrow Agreement*
II-1
<PAGE> 140
23.1 Consent of Berkley, Gordon, Levine, Goldstein &
Garfinkel, LLP (contained in Exhibit 5.1)*
23.2 Consent of Wendel, Rosen, Black & Dean, LLP
(contained in Exhibit 8)*
23.3 Consent of Grant Thornton LLP (Vestin Fund II,
LLC)
24 Power of Attorney*
27 Financial Data Schedule*
* to be filed by amendment
Item 37. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include therein any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in any such prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase of decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration
statement.
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide
offering thereof.
(3) That all post-effective amendments will comply with the applicable
forms, rules and regulations of the Securities and Exchange Commission
in effect at the time such post-effective amendments are filed.
(4) To remove from regulation by means of post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(5) To send to each limited partner at least on an annual basis a
detailed statement of any transactions with the Manager or its
affiliates, and of fees, commissions, compensation and other benefits
paid, or accrued to the Manager or its affiliates for the fiscal year
completed, showing the amount paid or accrued to each recipient and the
services performed.
(6) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for
II-2
<PAGE> 141
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(7) To provide to the Members the financial statements required by Form
10-K for the first full year of operations of the Company.
(8) To file a sticker supplement pursuant to Rule 424(c) under the Act
during the distribution period describing each property not identified
in the prospectus at such time as there arises a reasonable probability
that such property will be acquired and to consolidate all such stickers
into a post-effective amendment filed at least once every three months,
with the information contained in such amendment provided simultaneously
to the existing members. Each sticker supplement should disclose all
compensation and fees received by the Manager and its affiliates in
connection with any such acquisition. The post-effective amendment shall
include audited financial statements meeting the requirements of Rule
3-14 of Regulation S-X only for properties acquired during the
distribution period.
(9) To file, after the end of the distribution period, a current report
on Form 8-K containing the financial statements and any additional
information required by Rule 3-14 of Regulation S-X, to reflect each
commitment (i.e., the signing of a binding purchase agreement) made
after the end of the distribution period involving the use of 10 percent
or more (on a cumulative basis) of the net proceeds of the offering and
to provide the information contained in such report to the members at
least once each quarter after the distribution period of the offering
has ended.
[The remainder of this page intentionally left blank]
II-3
<PAGE> 142
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Registration Statement on Form S-11 and has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Las Vegas, Nevada, on
December 21, 2000.
VESTIN FUND II, LLC
By: Vestin Mortgage, Inc., its sole manager
By: /s/ Stephen Byrne
-------------------------------------------------------------
Stephen Byrne
Director and President
(Principal Officer of Manager)
By: /s/ Lance Bradford
-------------------------------------------------------------
Lance Bradford
Director, Secretary and Treasurer
(Chief Accounting Officer of the Manager)
By: /s/ Michael Shustek
-------------------------------------------------------------
Michael Shustek
Director of the Manager
II-4
<PAGE> 143
VESTIN FUND II, LLC
A Nevada Limited Liability Company
INDEX TO EXHIBITS
1.1 Form of Dealer Manager Agreement
1.2 Form of Selected Dealer Agreement
3 Articles of Organization
4.1 Operating Agreement (included as Exhibit A to the Prospectus)
4.2 Subscription Agreement and Power of Attorney (included as Exhibit B to
the Prospectus)
5.1 Opinion of Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP, with
respect to the legality of the securities*
8 Opinion of Wendel, Rosen, Black & Dean, LLP with respect to federal
income tax matters*
10.1 _________ Escrow Agreement*
23.1 Consent of Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP
(contained in Exhibit 5.1)*
23.2 Consent of Wendel, Rosen, Black & Dean, LLP (contained in Exhibit 8)*
23.3 Consent of Grant Thornton LLP (Vestin Fund II, LLC)
24 Power of Attorney*
27 Financial Data Schedule*
* to be filed by amendment
