As filed with the Securities and Exchange Commission on May 3, 1996
Registration No. 33-81896
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
POST-EFFECTIVE AMENDMENT NO. 2 TO THE
Form S-11
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
(Exact name of registrant as specified in governing instruments)
2221 Olympic Blvd., P.O. Box 2308
Walnut Creek, California 94595
(Address of principal executive offices)
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WILLIAM C. OWENS
President
Owens Financial Group, Inc.
2221 Olympic Blvd., P.O. Box 2308
Walnut Creek, California 94595
(Name and address of agent for service)
The Commission is requested to send copies of all communications to:
Barbara Finkle, Esq.
WENDEL, ROSEN, BLACK & DEAN
1111 Broadway, 24th Floor
Oakland, California 94607
<PAGE>
CROSS REFERENCE SHEET
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY FORM S-11
Item Number and Caption Location in Prospectus
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus Inside Front and Outside Back
Cover Pages
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges Summary of the Offering;Risk
Factors
4. Determination of Offering Price Front Cover Page
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
Financial Condition and Results of
Operations Management's Discussion and
Analysis of Financial
Condition and Results of
Operations
11. General Information as to Registrant Front Cover Page; Summary of
the Offering; Investor
Suitability Standards;
Rescission Offer;Risk Factors;
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations; Business;
Management; Summary of
Partnership Agreement;
Description of Units
12. Policy with Respect to Certain
Activities Business; Compensation of
General Partners and Their
Summary of Partnership
Agreement and Description
of Units; Reports to Limited
Partners
13. Investment Policies of Registrant Business;Certain Legal Aspects
of the Partnership's Mortgage
Investments; Summary of
Partnership Agreement and
Description of Units
14. Description of Real Estate Business
15. Operating Data *
16. Tax Treatment of Registrant and Its
Security Holders Federal Income Tax
Consequences
17. Market Price of and Dividends on
thE Registrant's Common Equity and
Related Stockholder Matters Summary of the Offering;
Summary of Partnership
Agreement and Description of
Units
18. Description of Registrant's Securities Investor Suitability
Standards; Summary of
Partnership Agreement and
Description of Units
19. Legal Proceedings *
20. Security Ownership of Certain Beneficial
Owners and Management Management
21. Directors and Executive Officers Management
22. Executive Compensation Management; Compensation of
the General Partners and
Their Affiliates
23. Certain Relationships and Related
TransactionS Conflicts of Interest,
Management; Business
24. Selection, Management and
Custody of Registrant's Investments Compensation of the General
Partners and Their Affiliates;
Business
25. Policies with Respect to Certain
Transactions Conflicts of Interest;
Business; Summary of
PartnershiP Agreement and
Description of Units
26. Limitations of Liability Fiduciary Responsibility
27. Financial Statements and Information Financial Statements;
Selected Financial Data;
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations
28. Interests of Named Experts and Counsel Legal Matters
29. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities Fiduciary Responsibility
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* Not Applicable
<PAGE>
PROSPECTUS DATED _______, 1996
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
$67,327,788
LIMITED PARTNERSHIP UNITS
$1.00 per Unit--2000 Units Minimum Investment ($2,000)
$250,000,000 Authorized Including Prior Subscriptions
Owens Mortgage Investment Fund, a California limited partnership (the
"Partnership") is a California limited partnership whose primary business is the
investment in first, second, third, wraparound, and construction mortgage loans
and loans secured by leasehold interest mortgages. Approximately 79% of the
Partnership's mortgage loans are secured by real property located in Northern
California. David Adler, David K. Machado, Milton N. Owens, William C. Owens,
Larry R. Schultz and Owens Financial Group, Inc. are the general partners of the
Partnership (collectively, the "General Partners"). The General Partners are
subject to various conflicts of interest and substantial fees will be paid to
them and their affiliated securities brokerage firm, Owens Securities Corp. See
"Compensation of General Partners and Their Affiliates" and "Conflicts of
Interest."
The General Partners, at their sole discretion, are, from time to time,
offering for sale to the public up to 63,327,788 Units (including reofferings of
Units repurchased from Limited Partners). As this is not the Partnership's first
offering of securities, this is not an "all or none" offering, nor must any
minimum number of Units be sold before the General Partners accept funds from
investors and admit them as Limited Partners. All of the proceeds of this
offering will be immediately available for investment. Certain expenses of the
offering will be advanced by the General Partners, who will be reimbursed from
revenues of the Partnership.
Units of limited partnership interest (the "Units") are being offered
to investors at a purchase price of $1.00 per Unit, and a minimum investment of
2,000 Units ($2,000). Purchasers of the Units will become and shall have the
rights of limited partners of the Partnership. See "Summary of Partnership
Agreement and Description of Units." There is no public market for the Units and
none is expected to develop. Accordingly, the Units should be purchased only as
a long-term investment. Units may only be transferred by written instrument
satisfactory to the General Partners, and are subject to other restrictions on
transfer. The Partnership will repurchase Units at $1.00 per Unit on at least 61
days notice, subject to availability of funds and limitations on amount. See
"Summary of Partnership Agreement and Description of Units."
<PAGE>
THIS OFFERING INVOLVES CERTAIN RISKS AND IS SUITABLE ONLY FOR INVESTORS OF
ADEQUATE MEANS. SUCH RISKS INCLUDE:
-- RISKS INHERENT IN REAL ESTATE FINANCING
-- GENERAL PARTNERS SUBJECT TO CONFLICTS OF INTEREST WITH LIMITED PARTNERS
-- CONCENTRATION OF LOANS IN NORTHERN CALIFORNIA
-- TOTAL RELIANCE ON GENERAL PARTNERS WHO ARE PAID SUBSTANTIAL FEES
-- NO PUBLIC MARKET FOR THE UNITS AND CASH REPURCHASE BY PARTNERSHIP AND
TRANSFERABILITY OF UNITS SUBJECT TO SUBSTANTIAL LIMITATIONS.
-- RESTRICTED VOTING RIGHTS OF LIMITED PARTNERS
-- DISTRIBUTIONS MAY NOT FOLLOW HISTORICAL LEVELSSEE "RISK FACTORS" AND
"INVESTOR SUITABILITY STANDARDS."
<PAGE>
THIS PARTNERSHIP DOES NOT OFFER TAX BENEFITS COMMONLY ASSOCIATED WITH TAX
SHELTER INVESTMENTS; PROSPECTIVE INVESTORS SEEKING SUBSTANTIAL TAX DEDUCTIONS
SHOULD FIND ALTERNATIVE INVESTMENTS. SEE "FEDERAL INCOME TAX CONSEQUENCES."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS REGISTRATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Price to Underwriting Discounts Proceeds to
Public(1) and Commissions(2) Partnership(3)
Per Unit. . . . . . . $ 1 $ 0 $ 1
Maximum Total . . . . $67,327,788 $ 0 $ 67,327,788
- --------------------
(1) Minimum Purchase: 2,000 Units. Units offered include reofferings of Units
repurchased from Limited Partners.
(2) Units will be offered and sold by Owens Securities Corp., an affiliate of
Owens Financial Group, Inc., the "Corporate General Partner," and a member
of the National Association of Securities Dealers, Inc. (NASD), on behalf
of the Partnership on a "best-efforts" basis and, at the option of the
Corporate General Partner, through other individuals who are officers or
directors of the Corporate General Partner. Selling commissions not to
exceed 4% of an amount equal to the gross proceeds from the sale of Units
may be paid by the Corporate General Partner to Owens Securities Corp. See
"Plan of Distribution." The Corporate General Partner will also reimburse
Owens Securities Corp. for certain expenses incurred in selling the Units.
Such reimbursement and commissions will be paid by the Corporate General
Partner (not to be reimbursed by the Partnership) and will not reduce the
amount of proceeds received by the Partnership from the sale of Units.
(3) All expenses of this offering, including legal and accounting expenses,
printing costs, and filing fees, but excluding sales commissions and sales
expenses, estimated to total $40,000, will be advanced by the Corporate
General Partner on behalf of the Partnership during the term of this
offering. The Partnership will reimburse the Corporate General Partner
therefor out of revenues. See "Compensation of the General Partners and
Their Affiliates."
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATIONS TO
THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY
OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN
INVESTMENT IN THIS PROGRAM IS NOT PERMITTED.
AVAILABLE INFORMATION
The Partnership is subject to the informational requirements of the
Securities and Exchange Act of 1934, as amended, and in accordance therewith
files reports and other information with the Commission. Reports and other
information filed by it can be inspected and copied at the public reference
facilities maintained by the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549; 230 South Dearborn Street, Chicago, Illinois 60604; and 75 Park
Place, New York, New York 10278. Copies of such material can be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. This Prospectus does not contain
all information set forth in Post-Effective Amendment No. 2 to the Registration
Statement on Form S-11 (No. 33-81896) and exhibits thereto which the Partnership
has filed with the Commission under the Securities Act of 1933, as amended and
to which reference is hereby made.
The General Partners will provide annual reports containing financial
statements audited by the Partnership's independent public accountants to each
Limited Partner within 120 days after the end of the Partnership's calendar
year, and will have available for review by each Limited Partner a copy of the
information specified by the Securities and Exchange Commission on Form 10-K.
Additionally, within a 60-day period after the end of the Partnership's calendar
year, each Limited Partner will be provided a report indicating the Partnership
information necessary for Federal income-tax purposes. See "Reports to Limited
Partners."
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, any securities other than the Units to which it relates, or an
offer of such Units to any person in any state or other jurisdiction in which
such offer or solicitation is unlawful.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and if given or made, such information and representations must not
be relied upon.
<PAGE>
TABLE OF CONTENTS
Available Information 2
Summary of the Offering 5
Risk Factors 11
General 11
Risks of Real Estate Financing 11
Lack of Liquidity Risks 15
Risks of Limited Partner Status 16
Taxation Risks 16
Conflicts of Interest Risks 18
Competition Risks 18
Investor Suitability Standards 18
Notice to California Residents 20
How to Subscribe 20
Use of Proceeds 21
Capitalization tnership 22
Capital Contribution of the General Partners 22
Compensation of the General Partners and
Their Affiliates 22
Compensation and Reimbursement from the
Partnership 22
Compensation from Borrowers 23
Conflicts of Interest 24
Fiduciary Responsibility 26
Management 28
Management of the Partnership 28
Summary of Management Responsibilities 30
Offering and Organization 30
Research and Acquisition 30
Partnership Management 30
Mortgage Investments 30
Security Ownership of Certain Beneficial
Owners and Management 31
Selected Financial Data 32
Management's Discussion and Analysis of
Financial Condition and Results of Operations 33
Change in Policy 33
Results of Operations--For the Years
Ended December 31, 1995, 1994 and 1993 33
Portfolio Review--For the Years Ended
December 31, 1995, 1994 and 1993 34
Asset Quality 35
Liquidity and Capital Resources 35
Contingency Reserves 36
Current Economic Conditions 36
Business 36
Delinquencies 38
Real Estate Owned 41
Reserve for Loan Losses 44
Unsecured Loan to Corporate General Partner 44
Principal Investment Objectives 44
Types of Mortgage Loans 45
First Mortgage Loans 45
Second and Wraparound Mortgage Loans 45
Third Mortgage Loans 46
Construction Loans 46
Leasehold Interest Loans 46
Variable Rate Loans 46
Interest Rate Caps 47
Assumability 47
Prepayment Penalties 47
Balloon Payment 47
Equity Interests and Participation in Real Property 47
Standards for Mortgage Loans 47
Mortgage Loans to Affiliates 48
Purchase of Loans from Affiliates 48
Borrowing 48
Sale and Repayment of Mortgages 48
No Trust or Investment Company Activities 48
Miscellaneous Policies and Procedures 49
Competition and General Economic Conditions 49
Certain Legal Aspects of the Partnership's Mortgage
Investments 49
Introduction 49
General 49
Foreclosure 50
Antideficiency Legislation and Other Limitations
on Lenders 51
Junior Mortgage Loans; Rights of Senior Mortgagees 52
"Due-on-Sale" Clauses 53
Prepayment Charges 53
Late Charges and Additional Interest on Delinquent
Payments 54
Applicability of California Usury Law 54
Federal Income Tax Consequences 54
Taxation as a Partnership 55
General Principles of Partnership Taxation 57
Taxation of Non-Exempt Limited Partners 57
Tax Treatment of Tax-Exempt Entities 60
Partnership Tax Returns and Audits 61
Original Issue Discount Rules 61
Market Discount 62
Subsequent Purchasers 62
Taxation of Mortgage Loan Interest 62
Treatment of Compensation of General Partners 62
Allocations 63
Possible Legislative Tax Changes 63
State and Local Taxes 63
ERISA Considerations 63
Annual Valuation 64
Plan Assets Generally 64
Summary of Partnership Agreement and Description of
Units 65
Nature of the Partnership 65
The Responsibilities of the General Partners 65
Liabilities of Limited Partners--Nonassessability 65
Term and Dissolution 66
Meetings 66
Voting Rights 66
Status of Units 67
Distributions 67
Reinvestments 68
Assignment and Transfer of Units 68
Repurchase of Units, Withdrawal from Partnership 69
Special Power of Attorney 70
Reports to Limited Partners 70
Plan of Distribution 70
Legal Matters 71
Experts 71
Indemnification 71
Financial Statements F-1
Exhibits
A. Amended and Restated Limited Partnership
Agreement A-1
B. Subscription Agreement and Power of
Attorney B-1
<PAGE>
SUMMARY OF THE OFFERING
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus.
The Partnership; General Partners
Owens Mortgage Investment Fund, a California Limited Partnership (the
"Partnership"), is a California limited partnership organized in 1984. In
October 1992, the Partnership changed its name from Owens Mortgage Investment
Fund II to Owens Mortgage Investment Fund, a California Limited Partnership. The
address of the Partnership is P.O. Box 2308, 2221 Olympic Boulevard, Walnut
Creek, California 94595. The telephone number is (510) 935-3840.
David Adler, David K. Machado, Milton N. Owens, William C. Owens, Larry R.
Schultz and Owens Financial Group, Inc., (the "Corporate General Partner") are
the general partners of the Partnership (collectively, the "General Partners").
The General Partners are required to contribute to capital cash in the amount of
1/2 of 1% of the aggregate capital contributions of the Limited Partners. In
addition, the General Partners are entitled to a promotional interest of 1/2 of
1% thereof, as discussed below.
The Offering
The Partnership is offering on a continuous basis at the discretion of the
General Partners, units of limited partner interests (the "Units") in the
Partnership at $1.00 per Unit. As of December 31, 1995, there were outstanding
163,316,937 Units held by 2,496 Limited Partners. The Partnership is authorized
to have outstanding 250,000,000 Units. At times when there are not enough
suitable loans for the Partnership's funds, the General Partners may declare a
moratorium on the sale of Units to new investors, as was the case at times in
1991, 1992 , 1994 and 1995. See "Plan of Distribution".
Risk Factors
The purchase of the Units offered hereby may be considered speculative and
subject to a high degree of risk. Such risks include:
Risks Inherent in Real Estate Financing: such as
(1) Defaults by borrowers, in which case the Partnership would have to either
foreclose on the property securing the loan thereby assuming the risks,
including environmental risks, of real property ownership, or pursue other
costly remedies.
(2) Declining real estate values resulting in undercollateralized loans. When
the value of the collateral falls below the amount of the loan and any
senior loans, the Partnership may suffer a loss on the investment. Although
the Partnership maintains a provision for loan losses ($3,250,000 at
December 31, 1995), there can be no assurance that this amount will
continue to be adequate in the future.
(3) Increases in general market interest rates which could have an adverse
effect upon the relative yield to investors. If general market interest
rates were to increase substantially, the yield on the Partnership's then
existing mortgage investments may be lower than yields on other comparable
debt-related investments.
(4) Concentration of mortgages in Northern California. As of December 31, 1995,
79% of outstanding loans were secured by properties in the Northern
California area. If property values in the area decline more than
elsewhere, the concentration poses an added risk of loss on Partnership
investments. The values of commercial properties in Northern California
have generally decreased in recent years due to recessionary influences,
overbuilding of commercial properties, lack of finance capital, and the
relocation of businesses to other states with lower operating and
regulatory costs.
Lack of Liquidity Risks. Units may not be liquidated to cash as and when
desired because of prior notice and amount restrictions on repurchase by the
Partnership, restricted assignments and transfers, as well as the risk of
withdrawals by a substantial number of Limited Partners.
Risks of Distributions Being Adversely Affected. Distributions to Limited
Partners may be affected by prevailing interest rates, increases in delinquent
loans and/or foreclosures, changes in the General Partners' policy to advance
delinquent interest payments on loans originated prior to May 1, 1993, expenses
of the Partnership, including fees payable to the General Partners, reserves
determined by the General Partners and withdrawals if paid out of cash available
for distribution. For all these reasons future distributions may not be
comparable to those of the past.
No Public Market for Units and Substantial Restrictions on Transfer and
Repurchase. There is no public market for the Units and none is contemplated.
Transfers of Units are subject to substantial restrictions, including consent of
the General Partners to the admission as Limited Partner of the transferee. The
Partnership will repurchase Units, but such repurchases are subject to prior
notice, availability of cash funds, and limits on amount. See "Summary of
Partnership Agreement--Withdrawal from Partnership". Therefore, Limited Partners
may not be able to liquidate their investments as and when desired.
Total Reliance on General Partners--Conflicts of Interest Risks. The
General Partners have complete control of the affairs of the Partnership,
subject only to the few voting rights of the Limited Partners discussed below.
The General Partners and their affiliates are subject to various conflicts of
interest in managing the Partnership. Substantial fees are payable to the
General Partner that are not determined by arm's-length negotiation. The General
Partners are not required to devote all of their time to Partnership affairs and
may engage in business interests similar to that of the Partnership. The Limited
Partners, therefore, must rely on the good faith and integrity of the General
Partners.
Restricted Voting Rights of Limited Partners. The vote or consent of the
majority in interest of the Limited Partners is required only on the following
matters: certain amendments to the Partnership Agreement, dissolution of the
Partnership, removal and election of General Partners and on sale, pledge,
refinancing or exchange of substantially all assets of the Partnership. On all
other matters the General Partners have absolute control. A meeting of Limited
Partners may be called by one or more Limited Partners holding more than 10% of
the Units outstanding.
See "Risk Factors".
Repurchase of Units
The Partnership will repurchase the Units at $1.00 per Unit, subject to
availability of funds, at least 61 but no more than 91 days following receipt of
written notice from the Limited Partner, up to a maximum of $75,000 per quarter
for each Limited Partner ($100,000 for an estate). No more than 10% of the then
outstanding Units may be repurchased by the Partnership in any calendar year.
Business of the Partnership
The Partnership invests in first, second, third, wraparound and
construction mortgage loans and loans on leasehold interest mortgages. All of
the loans invested in by the Partnership are either arranged or purchased by the
Corporate General Partner. The Partnership's mortgage loans are secured by
mortgages on unimproved as well as improved real property and nonincome
producing as well as income-producing real property such as apartments, shopping
centers, office buildings, and other commercial or industrial properties. The
General Partners have the power, subject to the provisions of the Partnership
Agreement, to change the Partnership's investment objectives.
As of December 31, 1995, the Partnership held investments in 238 mortgage
loans, including 186 first mortgage loans secured by fee or leasehold interests
in real property. Based on the aggregate principal amount of these 238 loans
($151,351,000 as of December 31, 1995), 90% represents first mortgage loans and
79% represents loans secured by properties located in Northern California. Loans
secured by income producing properties account for 94% of the aggregate
principal amount of loans outstanding at December 31, 1995, and loans secured by
unimproved and single family residences account for the remaining 6%.
At December 31, 1995, $41,499,000 (27%) of the outstanding aggregate
principal amount represents loans that will mature on or before December 31,
1996, and $14,700,000 (9.7%) represents loans that are past-maturity (i.e., the
loan has matured and remains unpaid). A substantial portion of these
past-maturity loans are delinquent (i.e., payment is more than 90 days past
due).
As of December 31, 1995, the Partnership had invested in construction loans
in the aggregate principal amount of $1,655,000, and had $11,981,000 of loans
partially secured by a leasehold interest. The Partnership has other assets
($17,301,000 at December 31, 1995) in addition to its mortgage investments,
consisting principally of funds held in conjunction with contingency reserve
requirements, cash pending investment, real estate owned, and unsecured notes
due from the Corporate General Partner. No single Partnership loan may exceed
10% of the total Partnership assets as of the date the loan is made.
See "Business."
Delinquencies
As of December 31, 1995, the Partnership's portfolio includes $12,037,000
(compared with $12,849,000 as of December 31, 1994) of loans delinquent over 90
days, representing 8% of the Partnership's investment in mortgage loans. The
balance of delinquent loans at December 31, 1995, includes $3,199,000 (compared
with $7,963,000 as of December 31, 1994) of loans in the process of foreclosure,
of which $854,000 (compared with $1,387,000 as of December 31, 1994) involves
loans to borrowers who are in bankruptcy. See "Business -- Delinquencies."
Although not obligated to do so, the Corporate General Partner has elected
to make interest payments with respect to certain loans delinquent greater than
90 days with an aggregate principal balance of $3,728,000, which were originated
by the Corporate General Partner prior to May 1, 1993. At December 31, 1995, the
net amount of interest advanced by the Corporate General Partner on these loans
totals approximately $275,000. The Partnership has no obligation to repay such
amounts. Of loans originated prior to May 1, 1993, and held by the Partnership,
$5,052,000 represents delinquent loans at December 31, 1995, for which the
delinquent payments are not being advanced by the Corporate General Partner.
There is no assurance that the Corporate General Partner will continue to make
interest payments to the Partnership on any delinquent loans originated prior to
May 1, 1993. If the Corporate General Partner should discontinue making
delinquent payments on such loans, there could be a material decrease in
distributions. See "Business -- Delinquencies."
The Corporate General Partner does not advance delinquent interest or
principal to the Partnership with respect to any loan originated subsequent to
May 1, 1993. At December 31, 1995, the Partnership held $3,257,000 in loans
originated on or after May 1, 1993 which were delinquent for more than 90 days
and for which the Corporate General Partner was not advancing delinquent
interest to the Partnership. See "Business--Delinquencies".
The Corporate General Partner has in the past chosen to purchase certain
loans from the Partnership at the time of foreclosure of such loans, at the
unpaid principal amount thereof and accrued interest in order to prevent the
Partnership from suffering a loss upon such foreclosure. However, as of May 1,
1993, the Corporate General Partner changed its policy and ceased purchasing
Partnership loans subject to foreclosure, thus allowing the Partnership to
acquire title to real property through foreclosure. See
"Business--Delinquencies".
As of December 31, 1995, the Partnership held title to 11 separate
properties on which it had loans totaling $6,016,000 prior to foreclosure. One
of these properties generated revenue in 1995. However, taken together, the
properties are generating an operating loss. See "Business--Real Estate Owned".
Loan Loss Reserve
A loan loss reserve of $3,250,000 is maintained in the financial statements
of the Partnership as of December 31, 1995. See "Business--Delinquencies".
Compensation of General Partners
The General Partners receive substantial compensation, not determined by
arm's-length negotiations, in various forms from the Partnership and from its
borrowers.
--From the Partnership the Corporate General Partner receives management
fees, investment evaluation fees, a promotional interest in the Partnership and
reimbursement for certain expenses incurred on behalf of the Partnership, as
more fully described below.
Management Fees -- The Corporate General Partner is entitled to be paid for
services rendered as manager of the Partnership, a management fee, payable
monthly, of up to 2-3/4% per annum of the average unpaid balance of the
Partnership's mortgage loans at the end of each of the 12 months in the current
calendar year. The maximum allowable management fee is reduced to 1-3/4% per
annum if the Corporate General Partner has not during the preceding calendar
year (1) advanced its own funds to cover delinquent interest or principal
payments on one or more mortgage loans held by the Partnership; (2) advanced its
own funds to cover costs associated with one or more delinquent loans held by
the Partnership; or (3) purchased any such defaulted loans from the Partnership.
Investment Evaluation Fees on Resale of Existing Loans -- When market
conditions provide the opportunity, the Corporate General Partner may purchase
an existing loan or package of loans for the Partnership, and resell such loan
or loans to the Partnership at a higher price than its cost as compensation for
its services rendered in obtaining such loans. Although paid by the Partnership
, such fees, which may be substantial, are like the investment evaluation and
servicing fees paid by borrowers on new loans.
Promotional Interest -- The Corporate General Partner is entitled to
receive an interest in the Partnership equal to 1/2 of 1% of the aggregate
Limited Partner contributions as additional compensation for services rendered
to the Partnership. The Corporate General Partner does not contribute any cash
for this promotional interest, but is required to contribute cash to the capital
of the Partnership in the amount of 1/2 of 1% of the aggregate capital
contributions of the Limited Partners, and together with its promotional
interest, the Corporate General Partner has a Partnership interest equal to 1%
of the Limited Partners' contributions.
--From borrowers the Corporate General Partner receives investment
evaluation fees, servicing fees and late payment charges. Within the limits of
competitive and economic conditions, and subject to the 1/4 of 1% limit on
servicing fees, the Corporate General Partner has the power to vary the relative
amounts of investment evaluation and servicing fees.
Investment Evaluation Fees -- Also called mortgage placement fees or
points, investment evaluation fees are compensation for the evaluation,
origination, extension and refinancing of loans for the borrowers. The amount of
such fees is determined by competitive conditions, and may have a direct effect
on the interest rate borrowers are willing to pay the Partnership. Such fees may
vary and are primarily paid by borrowers.
Servicing Fees -- The Corporate General Partner has serviced all of the
mortgage investments held by the Partnership and expects to continue this
policy. The Partnership Agreement permits the Corporate General Partner to
receive from the borrower an annual fee for such servicing, up to 1/4 of 1% of
the total mortgage investments held by the Partnership. Payment of this fee, in
effect, lowers the interest rate obtained by the Partnership for such loans.
Late Payment Charges -- Late payment charges are paid to the Corporate
General Partner from payments made by borrowers.
The following table summarizes compensation and reimbursements paid to the
General Partners for the year ended December 31, 1995, showing approximate
actual amounts and the maximum allowable amounts for management and servicing
fees:
Year Ended
December 31, 1995
Maximum
Form of Compensation Actual Allowable
PAID BY PARTNERSHIP
Management Fees $1,432,000 $4,117,000
Promotional Interest 69,000 69,000
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Subtotal $1,501,000 $4,186,000
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Reimbursement of Operating Expenses 352,000 352,000
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Total $1,853,000 $4,538,000
========= =========
PAID BY BORROWERS
Investment Evaluation Fees $1,865,000 $1,865,000
Servicing Fees 371,000 374,000
Late Payment Charges 152,000 152,000
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Total $2,388,000 $2,391,000
========= =========
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See "Compensation of General Partners and Their Affiliates".
Investor Suitability Standards
Investors are required by the Partnership and by State regulations to meet
minimum standards of net worth and income. Units will only be sold to investors
who have a minimum net worth (exclusive of home, home furnishings and cars) of
$30,000 ($50,000 in the State of Washington) and a minimum gross income of
$30,000 per year ($50,000 in the State of Washington); or in the alternative a
net worth of at least $75,000 ($150,000 in the State of Washington). Investment
in the Partnership is suitable only for persons and entities of adequate means.
See "Investor Suitability Standards".
Use of Proceeds
The Partnership intends to use all of the proceeds of the offering for
mortgage loan investments and cash reserves. All expenses of the offering will
be advanced by the General Partners, who will be reimbursed from Partnership
revenues. See "Use of Proceeds".
Distributions
All cash available for distribution is paid monthly in the ratio of the
Partners' respective capital contributions to all Partners' contributions (.99%
to the Corporate General Partner and 99.01% to the Limited Partners) as of the
last day of the calendar month preceding the month in which the distribution is
made. Cash available for distribution means the excess of cash revenues after
expenses and amounts set aside as reserves by the General Partners. If such
expenses and reserves exceed such revenues no distribution are payable.
Distributions may, at the option of the Limited Partners, be paid in cash or in
additional Units valued at $1.00 per Unit. See "Summary of Partnership Agreement
and Description of Units-Distributions, Reinvestments".
Reports to Limited Partners
Within 60 days after the end of each year the General Partners will deliver
to each Limited Partner such information as is necessary for the preparation by
each Limited Partner of the federal income tax return. Within 120 days after the
end of each year, the General Partners will make available to each Limited
Partner an annual report, including audited financial statements of the
Partnership and a report on the compensation paid to the General Partners.
Tax Considerations
The Units do not provide tax deductions associated with tax shelter
investments. No Internal Revenue Service (the "IRS") ruling has been obtained,
however, the Partnership has been advised that it is a partnership rather than
an association taxable as a corporation for federal income tax purposes. See
"Federal Income Tax Consequences" herein for discussion of this and other tax
issues affecting individuals and other entities, including tax-exempt entities.
Investors are urged to consult their tax advisors with respect to their own tax
situation and possible changes in applicable law and regulations.
Termination of the Partnership
The Amended and Restated Limited Partnership Agreement of the Partnership
(the "Partnership Agreement") provides that the existence of the Partnership
will continue until December 31, 2034, unless sooner terminated.
Partnership Agreement
In addition to provisions heretofore discussed in this summary, the
Partnership Agreement provides that: (a) a Limited Partner may not be assessed
for additional contributions; (b) each Unit is fully paid and nonassessable and
all Units have equal rights and (c) each Limited Partner has the option of
reinvesting distributions in additional Units in lieu of cash payments. See
"Summary of Partnership Agreement and Description of Units" and Exhibit A.
Glossary of Terms
For definitions of certain terms used in this Prospectus, see Article II of
the Partnership Agreement (Exhibit A).
RISK FACTORS
The purchase of the Units offered hereby may be considered speculative and
subject to a high degree of risk. In addition to the factors set forth elsewhere
in this Prospectus, prospective investors should consider the following:
GENERAL. The risks associated with investing in the Partnership depend upon
various factors, over some of which the Partnership has no control, such as
trends in the economy, general interest rates, income tax laws, governmental
regulations, and the availability of satisfactory investment opportunities.
Also, a Limited Partner cannot properly evaluate whether to invest in the
Partnership without careful analysis of such Limited Partner's own investment
objectives. Accordingly, it is important for each Limited Partner to discuss
investment in the Partnership with such Limited Partner's own professional
advisors.
RISKS OF REAL ESTATE FINANCING. The Partnership invests in mortgage loans
secured by real property and loans on leasehold interest mortgages. Therefore,
it is subject to the risks usually associated with real estate financings, such
as the following:
Risks of Default. Real estate financing transactions are subject to the
risk of default by the borrowers, in which event the Partnership would have the
added responsibility of foreclosing on or pursuing other remedies concerning the
underlying properties in order to protect the value of its investment. Two major
risks of real estate investments are the possibility that the properties will
not generate income sufficient to meet operating expenses and debt service, and
that income and capital appreciation will be less than anticipated or less than
other competitive investments. Because the Partnership's investments may entitle
the Partnership to share in the cash flow and/or appreciation in value of the
mortgaged properties, such investments will be subject to the general risks
inherent in the ownership of real property, including the borrower's ability to
meet its mortgage loan or lease payments, reduction in rental income due to
inability to maintain occupancy levels, adverse economic conditions, adverse
local conditions such as changes in zoning laws, changes in real estate tax
provisions, acts of God, changes in environmental laws and possible governmental
policies pertaining to rent control, or water or energy shortages. The
Partnership has made investments pursuant to which the Partnership will receive
both fixed interest and variable interest. The Partnership's income will be
dependent upon the success of the management and operation of the mortgaged
properties by the borrowers, the market values of the properties, and the
ability of the borrower to meet repayment obligations.
As of December 31, 1995, the Partnership's portfolio includes $12,037,000
(compared with $12,849,000 as of December 31, 1994) of loans delinquent over 90
days, representing 8% of the Partnership's investment in mortgage loans. The
balance of delinquent loans at December 31, 1995, includes $3,199,000 (compared
with $7,963,000 at December 31, 1994) in the process of foreclosure, of which
$854,000 (compared with $1,387,000 as of December 31, 1994) involves loans to
borrowers in bankruptcy (See "Business--Delinquencies").
As of December 31, 1995, the Partnership has $1,665,000 in construction
mortgage loans. In making such loans, the Partnership is subject to greater risk
than making mortgage investments secured by properties with operating histories.
In order to reduce this risk, the Partnership may require the borrowers on such
loans to have obtained commitments for permanent loans and to obtain completion
or performance bonds or provide other satisfactory arrangements to ensure
completion of the improvement. In addition, the Partnership will generally not
disburse the proceeds of a permanent mortgage loan until construction of the
improvements has been completed. Construction loans are loans made for the
renovation of developed property and for the development of undeveloped
property.
As of December 31, 1995, the Partnership has also invested $11,981,000 in
loans that are partially secured by a leasehold interest. The Partnership, in
making loans on leasehold interest mortgages, is subject to greater risk than
making mortgage investments secured by fee ownerships in real property. A loan
secured by a leasehold interest is secured by a lessee's leasehold interest in
real property that is owned by a third party. To the extent that the Partnership
invests in leasehold mortgage loans as to which the lessors have not
subordinated their fee interests in the real properties to the lien of the
Partnership's mortgages, a default by a lessee in its payments under the lease
to the lessor may result in the Partnership's losing all or part of its
investment.
The risk of real estate lending increases the more the amount of the loan
is relative to the value of the property. The Partnership relies on the
borrower's credit, on the value of the real estate or of the leasehold interest,
and on the properties' potential for generating cash flow for repayment of the
mortgage investment. The Partnership obtains independent appraisals of the fair
market value of the properties upon which its mortgage investments are made.
However, since appraisals are only estimates of value, there can be no assurance
that in the event of a default, the Partnership will realize an amount equal to
the value determined by such appraisals. In those cases where the mortgage loan
is not a personal (recourse) obligation of the borrower, the Partnership will be
required to rely for its security solely on the value of its interest in the
underlying property, which value may be affected by general or local economic
conditions, neighborhood values, interest rates, real estate tax rates, and
other operating expenses, the possibility of competitive overbuilding and other
factors which are beyond the control of the General Partners. Even a recourse
loan may be uncollectible as to the amount of the deficiency representing the
difference between the value of the property and the amount of the loan, if the
borrower is unable to pay the deficiency out of other assets.
In the event of a default by a borrower which requires the Partnership to
foreclose upon the property or pursue other remedies in order to protect the
Partnership's interest, the General Partners will attempt to locate a purchaser
for the property upon such terms as the General Partners deem acceptable.
However, there can be no assurance that the amount realized upon such sale will
result in recovery of the Partnership's investment. Also, in the event the
Partnership is forced to operate properties for a period of time prior to
foreclosure in order to protect the Partnership's interest, the Partnership may
be required to invest additional sums to maintain and manage the property. If
the Partnership acquires a property upon foreclosure, the Partnership likely
will incur additional costs from operating the property which may adversely
affect the return to the Limited Partners.
Second and third mortgage loans and wraparound mortgage loans will be
subject to greater risks than first mortgage loans because such investments are
subordinate to the liens of senior mortgages. All mortgage loans, including
first mortgage loans, may, in certain circumstances, be subordinate to
mechanics, materialmen's or governmental liens. The Partnership may, if it has
the legal right to do so, elect to make payments on a prior lien (including a
senior mortgage) in the event of a default by the borrower, in order to prevent
a default on such lien or to discharge it entirely if such payments are not made
on the senior loan. The Partnership could incur losses upon a foreclosure of the
property by the senior lien-holder. It is possible that the total amount which
may be recovered by the Partnership upon foreclosure may be less than the total
amount of its investment, with resultant losses to the Partnership. In the event
that the Partnership forecloses upon a junior or wraparound mortgage loan after
a default by the borrower, it is possible that a "due on sale" clause contained
in a senior mortgage, which accelerates the outstanding principal balance under
such senior mortgage, may be deemed to apply, increasing the risk of an
insufficient amount of funds being available to the Partnership after a
foreclosure sale to protect its interests.
Risks Associated With Corporate General Partner's Ceasing Payments Related
to Delinquent Loans. Historically, the Partnership suffered no material losses
on delinquencies, defaults or foreclosures because of the prior practice of the
Corporate General Partner to advance delinquent payments not made by the
borrowers and to purchase loans from the Partnership which are at risk of
causing a loss for the Partnership. However, the Corporate General Partner
changed its policy effective May 1, 1993, and no longer advances payments on
loans originated on or after that date. In addition, the Corporate General
Partner generally does not purchase loans from the Partnership in anticipation
of foreclosure. With respect to loans originated prior to May 1, 1993, and held
by the Partnership, the Corporate General Partner only makes such advances of
interest or principal with respect to certain of the pre-May 1, 1993 loans.
Accordingly, there is an increased risk to the Partnership of suffering material
losses through delinquencies, defaults and foreclosures, which, in turn, may
adversely impact distributions to the Limited Partners. Further, if the
Corporate General Partner should cease its practice of advancing payments on any
additional loans originated prior to May 1, 1993, if there is an increase in
delinquent payments on loans originated on or after May 1, 1993, or if there is
an increase of loans held by the Partnership that are foreclosed on,
distributions to the Limited Partners in the future could be materially
adversely affected.
Loans originated on or after May 1, 1993, total approximately $106,864,000
as of December 31, 1995. The Partnership maintains a loan loss reserve in its
financial statements in the amount of $3,250,000 as of December 31, 1995.
However, there can be no assurance that this reserve will be adequate to cover
actual losses suffered by the Partnership. See "Business--Delinquencies," and
"Use of Proceeds"--Note 2.
Risks of Becoming Undersecured. The Partnership generally does not make
first mortgage loans that exceed 80% of the appraised value of improved
residential real property, 50% of the appraised value of unimproved real
property, and 70% of the appraised value of commercial property. Second and wrap
around mortgage loans, when added to the existing indebtedness, generally do not
exceed 70% of the appraised value of the property. Third mortgage loans, when
added to the existing indebtedness, generally do not exceed 65% of the appraised
value of the mortgaged property. However, if the value of the property declines
to a value below the amount of the Partnership's loan, together with all senior
loans, the Partnership's loan could become undercollateralized. This would
result in a risk of loss for the Partnership if the borrower defaults on the
loan. These historic loan-to-value ratios are generally followed by the
Corporate General Partner in evaluating loan requests, although the Corporate
General Partner has the sole discretion to determine the terms and requirements
of any Partnership loan.
The majority of loans in the Partnership's portfolio mature in a period of
1-7 years. As a consequence, the Corporate General Partner, rather than
regularly examining the maintenance of acceptable loan-to-value ratios and
taking other actions typical of institutional lenders, instead performs internal
reviews on loans where, for example, payments have become delinquent, or there
is an indication of possible devaluation of the property securing the loan. Such
review includes a physical evaluation of the property and examination of vacancy
factors for the specific property as well as the area in which the property is
located, the financial stability of the borrower, and the property's tenant mix.
Although there can be no assurances that such procedures are adequate, the
General Partners believe that the Partnership's loans are in general adequately
secured. See "Business-- Delinquencies."
Risks Related to Changes in Market Rates. As approximately 45% of the loans
in which the Partnership is invested and in which the Partnership expects to
invest in the future are fixed-rate loans, changes in general market interest
rates could have an adverse effect upon the relative yield to Limited Partners.
If general market rates were to increase substantially, the yield on then
existing mortgage investments held by the Partnership and bearing fixed interest
rates may be lower than yields generated by comparable debt-related investments.
If general market rates were to decrease substantially, the yield on then
existing mortgage investments with variable interest rates, as well as future
mortgage investments of the Partnership may decrease. This risk increases as the
terms of loans in which the Partnership has invested increase and the amount of
Partnership funds available for new investment by the Partnership decreases.
Risks Related to Concentration of Mortgages in Northern California. The
aggregate principal amount of mortgage loans secured by real property located in
Northern California as of December 31, 1995, was approximately $120,744,000.
This represented 79% of the total mortgage loans held by the Partnership at that
date. Such concentration increases the risk of delinquent loans when Northern
California real estate conditions are weaker than those in the rest of the
country. The Northern California economy has been affected in the past few years
by the generally prevailing recessionary influences which have caused an overall
reduction in values of real property. Values have been reduced further by an
overbuilding of commercial properties and the relocation of existing businesses
to locations outside of California. Overbuilding of commercial properties has
not been unique to Northern California as many other urban locations have
experienced the same. The relocation of existing businesses to locations outside
of Northern California has been due to a number of factors including employment
and property costs, state income and franchise taxes and a relatively strict
regulatory environment. These factors combined have increased the amount of
available commercial real property in excess of increases in demand and thereby
reduced the values of such properties. Recently, the amount of available
commercial real property appears to have leveled off. This has been due to a
marked decrease in the development of new commercial space resulting from the
overbuilding of such space, and the relative unavailability of mortgage capital
for such development. In addition, the Savings and Loan Association problems in
California which were widespread during the last decade have resulted in
stringent lending restrictions on banks and Savings and Loan Associations by
both federal and state regulators. Lower real estate values and restrictions on
lending may increase the risks of investments in mortgages secured by real
estate by having the effect of decreasing the pool of money available to
refinance existing loans or fund new loans. This increases the risk that a
borrower looking for longer term financing than an existing loan offers will be
unable to refinance said loan and thus is more likely to default thereunder.
Currently, however, the Partnership generally restricts its investments in first
mortgage loans to 70% of the current value of the secured commercial (80% of the
secured, residential property), property and 50% in the case of undeveloped and
leasehold interest property. The General Partners believe that the Partnership
investments in Northern California are in general adequately secured.
Risks of Ownership and Development of Real Property and Equity or Cash Flow
Participation. When the Partnership acquires any equity or leasehold interest in
real property by direct investment, foreclosure or otherwise, the Partnership is
exposed to the risks of liability incident to real property ownership or
tenancy. Owners of real property may be subject to liability for injury to
persons and property occurring on the real property or in connection with the
activity conducted thereon, and liability for noncompliance with governmental
regulations. If the Partnership shares in the appreciation of mortgaged property
or in its cash flow, the borrower or creditors of the borrower, or both, may
seek to recharacterize the Partnership's loan to the borrower as an equity
interest of the Partnership in the mortgaged property. If a borrower or any of
its other creditors is successful in this regard, the Partnership's capacity to
exercise rights under its mortgage may be jeopardized, and the Partnership's
claim for repayment may be subordinated to the claims of other creditors of the
borrower. Similarly, controls customarily imposed by lenders in participation
loans may increase the risk of claims of lender liability for the acts or
omissions of the borrower. Although the Partnership will attempt to structure
the loans which it makes to reduce the risk of all such claims, there can be no
assurance that such claims will not be successful.
In addition, when the Partnership is involved in the development of real
property through the acquisition of entitlements on real property or the process
of improving or constructing real property, the Partnership is exposed to
various risks associated with such processes. These risks include but are not
limited to the risks of not obtaining necessary entitlements to development,
variations in building costs due to local laws and other factors, variations
affecting lease absorption or sales such as interest rates, economic factors,
tax laws, supply of competitive product, etc. and general liability risks
associated with construction.
Environmental Risks. When the Partnership takes an equity interest in, or
the management control of, any real property, or forecloses on any of the
mortgage loans, it is considered the owner of the real property securing such
loans. When foreclosure on a mortgage loan becomes necessary, and the
Partnership acquires record ownership of the property through foreclosure sale
to protect its investment, the Partnership conducts its management of the
property primarily to protect its security interest in the property. The
Partnership does not and will not participate in the on-site management of any
facility on the property in order to minimize the potential for liability for
cleanup of any environmental contamination under applicable federal, state, or
local laws, ordinances or regulations, except where may be required by law.
There can be no assurance that the Partnership either as an owner or lender
would not incur full recourse liability for the entire cost of any such removal
and cleanup, or that the cost of such removal and cleanup would not exceed the
value of the property. In addition, the Partnership could incur liability to
tenants and other users of the affected property, or users of neighboring
property, including liability for consequential damages. The Partnership would
also be exposed to risk of lost revenues during any cleanup, and to the risk of
lower lease rates or decreased occupancy if the existence of such substances or
sources on the property becomes known. If the Partnership fails to remove the
substances or sources and clean up the property, it is possible that federal,
state, or local environmental agencies could perform such removal and cleanup,
and impose and subsequently foreclose liens on the property for the cost
thereof. The Partnership may find it difficult or impossible to sell the
property prior to or following any such cleanup. If such substances are
discovered after the Partnership sells the property, the Partnership could be
liable to the purchaser thereof under federal, state or local laws. In such
case, the Partnership could also be subject to the costs described above. If
toxic or hazardous substances are present on real property, the Partnership may
be responsible for the costs of removal or treatment of the substance. As owner,
the Partnership may also incur liability to users of the property or users of
neighboring property for bodily injury arising from exposure to such substances.
If the Partnership is required to incur such costs or satisfy such liabilities,
this could have a material adverse effect on Partnership profitability.
Additionally, if a borrower is required to incur such costs or satisfy such
liabilities, this could result in the borrower's inability to repay its loan
from the Partnership.
Uninsured Losses. The General Partners require that borrowers carry, for
the benefit of the Partnership, comprehensive fire and casualty insurance on the
properties securing the Partnership's loans, in an amount to be determined by
the General Partners. However, there are certain types of losses (generally of a
catastrophic nature) which are either uninsurable or not economically insurable,
such as losses due to earthquakes, floods, or mudslides. If any such disaster
occurs, the Partnership may suffer a loss of principal and interest on the loan
secured by the uninsured property. It is also possible for a borrower to allow
the insurance to lapse, and if notice of said lapse is delayed, insurance
obtained to cover the gap might not cover losses. Furthermore, it is possible
that the insurance coverage would not be adequate to cover the value of the
property. Notwithstanding the above, the General Partners intend to conduct the
Partnership's business in such a manner as to minimize these risks. Unspecified
Investment Risks. The Partnership assets are presently invested primarily in an
existing pool of mortgages. Such mortgages are summarized under the caption
"Business." However, the Partnership has not identified the mortgage loans in
which it will invest the proceeds of this offering. It is anticipated that the
Partnership will continue to invest in additional mortgage loans. Limited
Partners, however, have no advance information concerning particular investments
that the Partnership may make and must rely solely upon the judgment and
abilities of the General Partners. The General Partners have complete discretion
in investing the proceeds from the sale of Units.
Usury Risks. State usury laws establish restrictions in certain
circumstances that prohibit lenders from charging interest on loans at rates
which exceed the maximum rates permitted by such laws. Severe penalties,
including loss of interest and treble damages, may be imposed upon persons who
violate these usury laws. The Partnership's loans secured by real property
located in California are all originated through individuals or entities
licensed by the State of California as real estate brokers and thus generally
exempt from the usury laws of the State of California. To the extent the
Partnership makes or acquires loans originated in and/or secured by property
located outside of California, the Corporate General Partner will utilize
persons or otherwise take actions that the Corporate General Partner believes
will keep such loans from being usurious under applicable usury laws. The
Corporate General Partner does not believe that any of the Partnership's current
loans, including loans secured by property outside of California, are usurious,
but there can be no assurance that some of the interest charges and fees which
the Partnership receives on its investments may not be held to be usurious.
LACK OF LIQUIDITY RISKS. Limited Partners should be aware that their Units
may not be liquidated to cash as and when desired because of the restrictions,
discussed below, on repurchase of Units by the Partnership, on assignments and
transfers of Units as well as the risks of withdrawals by a substantial number
of Limited Partners.
Risks of Restrictions on Repurchase of Units. The Partnership will
repurchase the Units at $1.00 per Unit, subject to availability of funds, within
61 to 91 days after receipt of written notice from the Limited Partner, up to a
maximum of $75,000 per calendar quarter for each Limited Partner ($100,000 for a
deceased Limited Partner), provided, however, that no more than 10% of the then
outstanding Units are repurchased in any calendar year. A substantial decline in
sales of new Units or the availability of Partnership funds could over time
materially and adversely affect the ability of a Limited Partner to withdraw
from the Partnership. As a result investors will not be able to liquidate their
investments at will.
Risks of Limited Transferability of Units. Notwithstanding the fact that
the Units are being registered, such Units have limited transferability. There
is no public market for the Units and it is not expected that any such market
will develop. There are substantial restrictions upon the transfer or assignment
of the Units, including the requirement that the General Partners consent to any
transferee's or assignee's becoming a substituted Limited Partner. The General
Partners may restrict the transfer of Units so that the Partnership will not be
deemed to be a publicly-traded partnership. In addition, restrictions on
transfer may be imposed by the Commissioner of Corporations of the State of
California or under other state securities laws. Consequently, holders of Units
may not be able to liquidate their investment in the event of an emergency and
the Units may not be readily accepted as collateral for loans. Further, if a
transfer or assignment is made despite the lack of a public market and the other
transfer restrictions referred to above, depreciation deductions and gain or
loss on sale of any Partnership assets allocable to a subsequent purchaser of
the Units would be determined by the Partnership's tax basis in such assets
without reference to such purchaser's basis in the Units. This may be another
deterrent to transferability of the Units. See "Federal Tax
Consequences--Subsequent Purchasers".
Risks to Limited Partners of Substantial Withdrawals by Other Limited
Partners. If a substantial number of Limited Partners seek to withdraw their
Partnership interests, the Partnership and the remaining Limited Partners may be
subject to certain risks, including the risk that the capital base and funds of
the Partnership available for reinvestment will be reduced or eliminated,
possibly affecting the ability of the Partnership to diversify its loan
portfolio. Distributions of cash available for distribution may be reduced or
suspended during any period that the Partnership is required to fund
withdrawals, and the Partnership may have insufficient funds to pay all
withdrawal requests. However, see "Summary of the Partnership and Description of
Units--Withdrawal from Partnership," for limitations on the right of withdrawal
by Limited Partners.
RISKS OF LIMITED PARTNER STATUS. The Limited Partners do not have a voice
in management decisions of the Partnership and can exercise only a limited
participation in the affairs of the Partnership.
Rights of Limited Partners Restricted. The Limited Partners have voting
rights that provide that a majority in interest of the Limited Partners may
dissolve the Partnership, remove and replace the General Partners, amend the
Limited Partnership Agreement, and approve a sale, exchange, pledge, or
refinancing of all or substantially all of the assets of the Partnership.
However, all other decisions with respect to the management of the Partnership,
including the determination as to which investments to make, will be made by the
General Partners or their Affiliates. Accordingly, no person should invest in
the Partnership unless such person is willing to entrust all aspects of the
management of the Partnership to the General Partners.
Limited Partners Not Independently Represented. The Limited Partners are
not represented by independent counsel. Thus, the terms and conditions of the
Partnership's offering were not the result of arm's-length negotiations. Counsel
to the Partnership and to the General Partners is and may continue to be the
same.
Risks of Distributions Being Adversely Affected by Profitability, Reserves
and Withdrawals. Despite its record of profitability (see "Selected Financial
Data"), there can be no assurance that operations of the Partnership will always
be profitable. Distributions are affected by many factors, including changes in
the general economy, the real estate market, prevailing interest rates and fees
paid to the General Partners. Distributions to Limited Partners of cash
available for distribution are made monthly out of revenues from investments,
which are affected by prevailing interest rates, and after provision for
expenses, including fees payable to the Corporate General Partners, and
reserves. The need for, and the amount of, reserves (other than cash reserves
required by Article VI.7 of the Partnership Agreement), is determined by the
Corporate General Partner. To the extent reserves for losses are established by
the General Partners in the financial statements of the Partnership,
distributions to Limited Partners may be decreased in the same amount.
Substantial increases in withdrawals by Limited Partners, if paid out of cash
available for distribution, could also reduce distributions. For all these
reasons, there is no assurance that future distributions to Limited Partners
will be made or that they will be comparable to those of the past.
TAXATION RISKS. The tax consequences of investing in the Partnership may
differ materially depending on whether the Limited Partner is an individual
taxpayer, corporation, trust, partnership or tax-exempt entity. Therefore,
Limited Partners should discuss investment in the Partnership, including the
following taxation risks, with their own tax advisor.
Risks of Taxation as a Partnership. The Partnership will not apply for a
ruling from the IRS that the Partnership will be classified as a partnership
rather than as an association taxable as a corporation, and such a ruling could
not be obtained if requested. The Partnership has been advised, however, that it
is more likely than not that the Partnership will be classified as a partnership
rather than as an association for federal income tax purposes. Such
determination of the Partnership's status is based upon a review of existing
laws, regulations and published authority, all of which are subject to change.
There can be no assurance that the Partnership will be treated as a partnership
for tax purposes or that such status might not be lost because of future changes
in applicable laws or regulations. Even if an entity is classified as a
partnership rather than as an association, it may still be taxed as a
corporation if it is a "publicly traded partnership." There is no opinion of tax
counsel concerning whether the Partnership will be considered a publicly traded
partnership, taxable as a corporation. See "Federal Income Tax
Consequences--Taxation as a Partnership."
If the Partnership were taxable as a corporation, the Partnership would be
subject to federal income tax on any taxable income at regular corporate tax
rates. The Limited Partners would not be entitled to take into account their
distributive share of the Partnership's deductions or credits, and would be
subject to tax on their share of the Partnership's income to the extent
distributed either as dividends out of current or accumulated earnings and
profits or as taxable gain in excess of the tax basis of their Units.
Classification of the Partnership as an entity taxable as a corporation would
result in a reduction in yield and cash flow, if any, to a Limited Partner on
its investment. See "Federal Income Tax Consequences--Taxation as a
Partnership," and "--Taxation of Nonexempt Limited Partners."
Other Risks Related to Tax Aspects. In evaluating an investment in the
Partnership, a Limited Partner should consider all of the tax consequences
thereof, including, but not limited to: (i) the possibility that the Partnership
might not be considered to be engaged in a trade or business, with the result
that income or loss of the Partnership will be considered portfolio income or
loss and an individual Limited Partner's share of expenses of the Partnership
will be "miscellaneous itemized deductions," deductible only to the extent all
miscellaneous itemized deductions exceed 2% of the Limited Partner's adjusted
gross income (subject to certain additional limitations in the case of certain
high-income taxpayers); (ii) the possibility that interest incurred to carry
Units may not be deductible under the "investment interest" limitation of
Section 163(d) of the Internal Revenue Code of 1986, as amended ("Code") (see
"Federal Income Tax Consequences--Limitation on the Deductibility of Interest");
(iii) the possibility that an audit of the Partnership's information returns may
result in the disallowance of certain deductions, an increase in the
Partnership's gross income, and an audit of the income tax returns of the
Limited Partners (which could result in adjustments to the Limited Partners'
nonpartnership items of income, deductions or credits, and the imposition of
penalties and interest relating to such adjustments and additional expenses in
connection with filing amended income tax returns) (see "Federal Income Tax
Consequences--Partnership Tax Returns and Audits"); (iv) if the Partnership
makes any loan in which it participates in the appreciation of the mortgaged
property or in the cash flow from the operations thereof, the Internal Revenue
Service (the "IRS") may attempt to recharacterize the entire loan as an equity
interest in the mortgaged property--there can be no assurance that the IRS will
not be successful in this regard (See "Federal Income Tax Consequences--Taxation
of Mortgage Loan Interest"); (v) the possibility that state or local income tax
treatment may not be similar to federal income tax treatment (see "Federal
Income Tax Consequences--State and Local Taxation"); and (vi) with respect to
tax-exempt entities investing in the Partnership, the possibility that all or a
portion of the income from the Partnership may be deemed "unrelated trade or
business income" subject to tax (see "Federal Income Tax Consequences--Tax
Treatment of Tax-Exempt Entities").
Risks of Investment by Tax-Exempt Entities. Prospective investors which are
qualified employee benefit plans and individual retirement accounts ("Qualified
Plans") should consider a number of factors which may affect their decision to
invest in the Partnership, including whether an investment in the Fund would
comply with the "prudent man" rule of the Employee Retirement Income Security
Act of 1974 ("ERISA"); whether an investment in the Partnership would be
consistent with the requirement that the assets of a Qualified Plan be invested
in a diversified manner; and whether an investment in the Partnership would be
consistent with the liquidity needs of the prospective investor. The resolution
of these issues could vary for each Qualified Plan considering an investment in
the Partnership, depending upon, among other factors, the exact composition of
the assets owned by the Qualified Plan. In addition, the Partnership does not
intend to provide investors with annual appraisals of Units or Partnership
assets. The General Partners, however, will furnish their best estimates of the
value of the Units or the Partnership assets, if requested to do so by any
Limited Partner. Each Qualified Plan contemplating an investment in the
Partnership should consider the impact that such an investment will have on the
requirement that the Plan revalue its assets on at least an annual basis. (See
"Federal Income Tax Consequences--Tax Treatment of Tax-Exempt Entities").
CONFLICTS OF INTEREST RISKS. The General Partners and their Affiliates may
be subject to various conflicts of interest in managing the Partnership and in
acquiring and managing investments for the Partnership. Substantial fees are
payable to the Corporate General Partner that are not determined by arm's-length
negotiations. See "Compensation of the General Partners and Their Affiliates,"
"Conflicts of Interest," "Fiduciary Responsibility" and "Business."
Payment of Fees to General Partners. The investment evaluation fee payable
to the Corporate General Partner is generally payable up front from payments
made by the third party borrower. The servicing fee paid annually to the
Corporate General Partner by borrowers, reduces the interest rate realized by
the Partnership on the related loans, and thus affects yield to the Partnership.
Management fees and investment evaluation fees for existing loans sold to the
Partnership payable to the Corporate General Partner by the Partnership, the
amounts of which are determined to some extent by the Corporate General Partner,
are obligations of the Partnership. Accordingly, the Corporate General Partner
may continue to receive these fees even if the Partnership is generating
insufficient income to make distributions to the Limited Partners. The
determination of the amount of investment evaluation fees for new and existing
loans is made by the General Partners based on competitive market conditions.
Such fees affect the yield to the Partnership and distributions to Limited
Partners. Therefore, the General Partners have a conflict of interest with the
Limited Partners with respect to such fees. See "Conflicts of Interest" and
"Compensation of the General Partners and their Affiliates."
General Partners Not Full Time. The Partnership does not have its own
officers, directors, or employees. The General Partners supervise and control
the business affairs of the Partnership, locate investment opportunities for the
Partnership and render certain other services. The General Partners devote to
the Partnership's affairs only such time as may be reasonably necessary to
conduct its business. The General Partners are and may be general partners of
other partnerships and have other business interests of significance. See
"Management."
COMPETITION RISKS. The mortgage lending business is highly
competitive, and the Partnership competes with numerous established entities,
some of whom have more financial resources and experience in the mortgage
lending business than the General Partners. The Partnership encounters
significant competition from banks, insurance companies, savings and loan
associations, mortgage bankers, pension funds, real estate investment trusts,
and other lenders with objectives similar in whole or in part to those of the
Partnership. An increase in the availability of funds may increase competition
for the making of mortgage loans and may reduce the yields available thereon.
INVESTOR SUITABILITY STANDARDS
The Partnership has established certain suitability standards and minimum
investment requirements for potential purchasers of Units which are set forth
below. In addition, the Partnership, as well as certain states, have placed
certain restrictions on the resale or transfer of Units.
The General Partners have established procedures to ensure that each
investor meets the suitability standards. In particular, the General Partners
have set forth in the Subscription Agreement the required suitability standards
and asked questions therein designed to determine that each investor is aware of
and meets the suitability standards. The General Partners have established
methods to carefully review and screen all Subscription Agreements, and to pull
out and reject Subscription Agreements from investors not meeting the
suitability standards. The proposed selling group agreements require
participating broker/dealers to diligently make inquiries as required by law of
all prospective investors in order to ascertain whether a purchase of Units is
suitable for the investor, and to promptly transmit to the Partnership all fully
completed Subscription Agreements.
Units represent a long-term investment without liquidity. Investors may not
be able to liquidate their investment in the event of an emergency or for any
other reason. Units will be sold only to an investor who has, and who also
represents in the Subscription Agreement set forth hereto as Exhibit "B" that
he, she or it has, either: (i) a net worth (exclusive of home, home furnishings
and automobiles) of at least $30,000 ($50,000 in the state of Washington) plus a
minimum annual gross income of at least $30,000 ($50,000 in the state of
Washington) or, in the alternative, (ii) a minimum net worth of $75,000
($150,000 in the state of Washington) (exclusive of home, home furnishings and
automobiles) irrespective of annual gross income; or (iii) in the case of
purchases by fiduciary accounts, one of the foregoing conditions is met by the
fiduciary, by the fiduciary account, or by the donor who directly or indirectly
supplies or supplied the funds for the purchase of Units. In the case of gifts
to minors, such conditions must be met by the custodian or the donor who
directly or indirectly supplies or supplied the funds. The minimum initial
number of Units which an investor may purchase is two thousand Units ($2,000).
Under the laws of certain states, the holder of Units may transfer such
Units only to persons who meet similar suitability standards. Investors should
carefully read the requirements in connection with resales of Units set forth in
"Summary of Partnership Agreement and Description of Units--Assignment of Units"
and in the Subscription Agreement. See also "Risk Factors--Limited
Transferability of Units."
Investment in the Partnership involves certain risks and, accordingly, is
suitable only for entities or persons of adequate means. Due to the nature of
the Partnership's investments, it is likely that all or substantially all of the
income of the Partnership will be taxable to the Limited Partners as ordinary
income. See "Federal Income Tax Consequences." The Units may, therefore, be
suitable for: a corporate pension or profit sharing plan ("Corporate Plan"); a
Keogh Plan account ("Keogh Plan") (Corporate Plans and Keogh Plans are referred
to herein, collectively, as "Qualified Plans"); an Individual Retirement Account
("IRA"); other entities exempt from federal income taxation such as endowment
funds 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); and persons seeking
current taxable income. It should be noted, however, that an investment in the
Partnership will not, in and of itself, create an IRA for an investor and that,
in order to create an IRA, an investor must himself comply with the provisions
of Section 408 of the Internal Revenue Code of 1986, as amended.
The investment objectives and policies of the Partnership have been
designed to make the Units suitable investments for employee benefit plans under
current law. In this regard, the Employee Retirement Income Security Act of 1974
("ERISA") provides a comprehensive regulatory scheme for "plan assets." In
accordance with final Regulations published by the Department of Labor in the
Federal Register on November 13, 1986, the General Partner intends to manage the
Partnership in such a way so as to assure that an investment in the Partnership
by a Qualified Plan will not, solely by reason of such investment, be considered
to be an investment in the underlying assets of the Partnership so as to make
the assets of the Partnership "plan assets." The final Regulations are also
applicable to an IRA. See "Risk Factors--Investment by Tax-Exempt Entities."
The General Partners are not permitted to allow the purchase of Units with
assets of any Qualified Plans if the General Partners (i) have investment
discretion with respect to the assets of the Qualified Plan invested in the
Partnership, or (ii) regularly give individualized investment advice that serves
as the primary basis for the investment decisions made with respect to such
assets. This prohibition is designed to prevent violation of certain provisions
of ERISA.
EACH PROSPECTIVE INVESTOR SHOULD OBTAIN THE ADVICE OF SUCH ATTORNEY, TAX
ADVISOR, AND BUSINESS ADVISOR WITH RESPECT TO THE LEGAL, TAX AND BUSINESS
ASPECTS OF THIS INVESTMENT PRIOR TO SUBSCRIBING FOR UNITS.
NOTICE TO CALIFORNIA RESIDENTS
ALL CERTIFICATES REPRESENTING UNITS RESULTING FROM ANY OFFER SALES IN
CALIFORNIA 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 THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT
OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S
RULES.
A copy of the applicable rule of the California Commission of Corporations
is furnished to each California investor on acceptance of the investor's
subscription by the General Partners.
HOW TO SUBSCRIBE
Each person wishing to subscribe for Units should carefully review this
Prospectus, detach, complete and sign the Subscription Agreement attached as
Exhibit "B" to this Prospectus, and deliver it to Owens Securities Corp., P.O.
Box 2308, 2221 Olympic Blvd., Walnut Creek, CA 94595 together with a check in
the full amount of his or her subscription payable to "Owens Mortgage Investment
Fund." Additional copies of the Subscription Agreement may be obtained from
Owens Securities Corp.
<PAGE>
USE OF PROCEEDS
The Partnership has not identified the mortgage loans in which it will
invest the proceeds of this offering, although it is anticipated that the
Partnership will continue to invest in additional mortgage loans of the kind
that are now in its portfolio. See "Business". Limited Partners, however, have
no advance information concerning particular investments that the Partnership
may make and must rely solely upon the judgment and abilities of the General
Partners. Subject to certain limitations set forth in the Partnership Agreement,
the General Partners have complete discretion in investing the proceeds from the
sale of Units.
There is no assurance that Units will be sold or that any or all of the
proceeds will be received. If only minimal proceeds are received, the
Partnership would continue to operate with its current portfolio of mortgage
loans for some time without, in the judgment of the General Partners, any
materially adverse foreseeable effects. However, in the course of time,
depending on the rates of withdrawal by Limited Partners and principal payments
on loans by borrowers, withdrawals by Limited Partners' could be restricted due
to lack of liquidity. The following table sets forth the application of the
proceeds of the sale of the maximum number of Units being offered hereby.
Pending investment in such mortgage loans, the Partnership may invest funds in
short-term liquid investments such as U.S. Treasury bills, notes or bonds, or
certificates of deposit.
Maximum Offering
(67,327,788 Units to be Sold)
------------------------------------------
Percent of
Amount Offering
Gross Proceeds $ 67,327,788 100.0%
Less:
Offering Expenses(1) $ 0 0.0%
----------- -----
Proceeds Available for Investment $ 67,327,788 100.0%
Less:
Cash Reserves(2) $ 1,009,917 1.5%
----------- -----
Cash Available for Investment in
Mortgage Loans $ 66,317,871 98.5%
=========== =====
- --------
(1) To be advanced by the General Partners. Such expenses are not expected to
exceed $40,000 for this offering. The Partnership will reimburse the
General Partners for offering expenses advanced, out of revenues and not
from the proceeds of the offering.
(2) The Partnership has established and will continue to have cash contingency
reserves in an aggregate amount of at least 1-1/2% of the gross proceeds of
the offering. This reserve is used as appropriate, to pay expenses in
excess of revenues, satisfy obligations of underlying securities and expend
money to satisfy unforeseen obligations of the Partnership. The General
Partners are required to contribute to capital cash in the amount of 1/2 of
1% of the aggregate capital contributions of the Limited Partners. This
capital contribution is available as an additional contingency reserve
making the total cash reserves equal to 2% of the aggregate capital
contributions of the Partnership.
(3) The Partnership has not determined a maximum amount of proceeds to be
allocated to the various types of mortgage loans to be made or invested in
by the Partnership. Each loan presented to the Partnership is reviewed to
determine if it meets the criteria established by the Partnership. See
"Business--Principal Investment Objectives." The Partnership intends to
continue its current policies concerning investment of the proceeds of this
offering. The majority of the funds committed to investment by the
Partnership are, and, in the future are expected to be, in first mortgage
loans on income-producing properties. See "Business." The Partnership does
not anticipate using any of the proceeds of this offering to acquire assets
otherwise than in the ordinary course of its business.
CAPITALIZATION OF PARTNERSHIP
The capitalization of the Partnership as of December 31, 1995, and as
adjusted to give effect to the sale of the maximum number of Units offered
hereby, excluding the cash and promotional contributions of the General
Partners, is as follows:
Actual As Adjusted(1)
Units ($1.00 per Unit) $164,744,443 $232,032,231
- -------------
(1) Amounts after deduction of certain offering expenses aggregating
$40,000 and reimbursed by the Partnership to the Corporate General Partners out
of revenues. See "Plan of Distribution."
CAPITAL CONTRIBUTION OF THE GENERAL PARTNERS
The General Partners are required to contribute to capital cash in the
amount of 1/2 of 1% of the aggregate capital contributions of the Limited
Partners and, as of December 31, 1995, have contributed cash aggregating
$829,028. In addition, the General Partners are entitled to an additional
interest in the form of a promotional interest of 1/2 of 1% of the aggregate
capital contributions of the Limited Partners and, as of December 31, 1995, had
been credited with promotional interests aggregating $829,028.
COMPENSATION OF THE GENERAL PARTNERS AND THEIR AFFILIATES
The General Partners and their affiliates receive various forms of
compensation and reimbursement of expenses from the Partnership and from
payments by borrowers under mortgage loans held by the Partnership.
Compensation and Reimbursement from the Partnership
Management Fees. The Partnership Agreement authorizes the payment by the
Partnership to the Corporate General Partner, who acts as manager of the
Partnership, of a management fee, payable monthly, of up to 2-3/4% per year of
the average unpaid balance of the Partnership's mortgage loans at the end of
each of the 12 months in the current calendar year. The Corporate General
Partner is entitled to receive a management fee on all loans, including those
that are delinquent. This it believes is justified by the added effort and costs
associated with such loans, including legal fees. The maximum allowable
management fee is reduced to 1-3/4% per year if the Corporate General Partner
has not provided during the preceding calendar year any of the following
discretionary services: (1) advanced its own funds to the Partnership or any
senior lienholder to cover delinquent interest or principal payments on mortgage
loans held by the Partnership; (2) advanced its own funds to cover any other
costs associated with delinquent loans held by the Partnership, such as property
taxes, insurance and legal expense; or (3) purchased any such defaulted loans
from the Partnership.
Investment Evaluation Fees on Resale of Existing Loans. Customarily the
Partnership acquires loans for its portfolio by funding new or refinanced loans.
On such transactions the Corporate General Partner receives from the borrower
payments of investment evaluation and ongoing servicing fees. Occasionally,
however, the Corporate General Partner is able to purchase and sell to the
Partnership existing mortgage notes that meet the Partnership's investment
requirements. In such instances, the Corporate General Partner was compensated
by the Partnership in amounts equal to the difference between the purchase price
paid by the Partnership and that paid by the Corporate General Partner. However,
since June, 1992, there have been no such purchases and sales of loans to the
Partnership whereby the Partnership has paid investment evaluation fees to the
Corporate General Partner, and the Corporate General Partner does not anticipate
any such transactions in the future.
Promotional Interest. The Corporate General Partner contributes cash to the
capital of the Partnership in the amount of 1/2 of 1% of the aggregate capital
contributions of the Limited Partners, and together with its promotional
interest, the Corporate General Partner has a Partnership interest equal to 1%
of the Limited Partners' contributions. The promotional interest of the
Corporate General Partner of up to 1/2 of 1%, for which the Corporate General
Partner has not contributed cash, is potential additional compensation to the
Corporate General Partner. For example, should the Partnership generate an
annual yield on Partnership capital of the Limited Partners of 10%, the
Corporate General Partner would receive additional distributions on its
promotional interest of up to approximately $125,000 per year if $250,000,000 of
Units are outstanding. If the Partnership should be liquidated, the Corporate
General Partner would receive up to $1,250,000 in capital distributions without
having made an equivalent cash contribution as a result of its promotional
interest. Such capital distributions, however, will be made only after the
Limited Partners have received 100% of their capital contributions.
Reimbursement of Offering Expenses. The Corporate General Partner is
reimbursed by the Partnership out of revenues for certain offering expenses
incurred by them in connection with the registration, qualification and sale of
the Units.
Reimbursement of Other Expenses. The Corporate General Partner is
reimbursed by the Partnership for the actual cost to the Corporate General
Partner of goods and materials used for or by the Partnership and obtained from
unaffiliated entities, and actual cost of services of nonmanagement and
nonsupervisory personnel related to the administration of the Partnership
(subject to certain limitations contained in the Partnership Agreement).
Compensation from Borrowers
In addition to compensation from the Partnership, the General Partners also
receive compensation from payments by borrowers.
Investment Evaluation Fees. These fees, also called mortgage placement fees
or points, are paid to the General Partners from payments by the borrowers under
loans held by the Partnership. Such fees are compensation for the evaluation,
origination, extension and refinancing of loans for the borrowers. The amount of
such fees is determined by competitive conditions, and may have a direct effect
on the interest rate borrowers are willing to pay the Partnership.
Servicing Fees. The Corporate General Partner has serviced all of the
mortgage investments held by the Partnership and expects to continue this
policy. The Partnership Agreement permits the Corporate General Partner to
receive an annual fee for such servicing, up to 1/4 of 1% of the total mortgage
investments held by the Partnership. Although the servicing fees are paid by
borrowers and not by the Partnership, the amount of such fees will reduce the
interest rates obtained on Partnership loans by up to 1/4 of 1% and may thus be
deemed to have been paid by the Partnership.
The servicing fee is computed on an annual basis and paid to the Corporate
General Partner on a monthly basis. The Corporate General Partner may change the
amount of the servicing fee from time to time as long as this fee does not
exceed the allowable limit of 1/4 of 1%.
Late Payment Charges. Late payment charges are paid to the Corporate
General Partner from payments made by borrowers when the Corporate General
Partner has advanced the delinquent amount to the Partnership.
The following table summarizes the forms and amounts of compensation and
reimbursed expenses paid to the General Partners or their affiliates for the
year ended December 31, 1995, showing actual amounts and the maximum allowable
amounts for management and servicing fees. See discussion below in this Section.
No other compensation was paid to the General Partners during such periods. Such
fees were established by the General Partners and were not determined by
arm's-length negotiation.
Year Ended
December 31, 1995
Maximum
Form of Compensation Actual Allowable
PAID BY PARTNERSHIP
Management Fees $ 1,432,000 $ 4,117,000
Promotional Interest 69,000 69,000
--------- ---------
Subtotal $ 1,501,000 $ 4,186,000
--------- ---------
Reimbursement of Other Expense $ 352,000 $ 352,000
--------- ---------
Total $ 1,853,000 $ 4,538,000
========= ==========
PAID BY BORROWERS
Investment Evaluation Fees $ 1,865,000 $ 1,865,000
Servicing Fees 371,000 374,000
Late Payment Charges 152,000 152,000
--------- ---------
Total $ 2,388,000 $ 2,391,000
========= =========
Aggregate actual compensation paid by the Partnership and by borrowers to
the General Partners during 1995, exclusive of expense reimbursement, was
$3,889,000 or 2.4% of year end Partners' capital. If the maximum amounts had
been paid to the General Partners during 1995, the aggregate amount of
compensation, excluding reimbursements, would have been $6,577,000 or 4.0% of
year-end partners' capital. The increase in pro forma compensation for 1995
would have reduced net income allocated to Limited Partners by approximately
20%.
The General Partners believe that the overall compensation payable to the
Corporate General Partner is commensurate with the services provided. However,
in order to maintain a competitive yield for the Partnership, the General
Partners in the past have chosen not to take the maximum allowable compensation,
but there is no assurance that such practice will continue.
CONFLICTS OF INTEREST
The Partnership and its Limited Partners are subject to various conflicts
of interest arising out of their relationship with the General Partners. These
conflicts include, but are not limited to, the following:
Receipt of Investment Evaluation Fees, Servicing Fees and Management Fees.
For the evaluation, origination, extension and refinancing of Partnership
mortgage loans, the Corporate General Partner generally receives mortgage
placement or investment evaluation fees (points) from borrowers. For the
servicing of mortgage loans made or invested in by the Partnership the Corporate
General Partner also receives from the borrowers a servicing fee of up to 1/4 of
1% per annum of the unpaid principal balance of such loans. These mortgage
placement fees and servicing fees may have a direct effect upon the interest
rate that borrowers are willing to pay to the Partnership, as such fees are a
cost of the loan made by the Partnership. If mortgage placement fees charged by
the Corporate General Partner are lower than those customarily charged for
similar services at the time of loan origination, it is possible that a higher
interest rate could be obtained on the Partnership's loans. Alternatively, if
such mortgage placement fees are higher than those customarily charged for
similar services, it is possible that a lower interest rate might be obtained on
such loans.
The Corporate General Partner may also earn compensation when it sells
mortgages to the Partnership for an amount greater than the purchase price, but
in no event greater than the face value of the mortgage. These fees have a
direct effect upon the yield that the Partnership earns on the mortgage. Limited
Partners must rely upon the General Partners to honor their fiduciary duty and
protect their interests in the making of and investing in mortgage loans.
The amount of the Management Fees paid by the Partnership to the Corporate
General Partner is determined by the General Partners up to the maximum amount
permitted under the Partnership Agreement. The higher the percentage paid to the
Corporate General Partner, the lower the annual yield on capital of the Limited
Partners.
Purchase of Delinquent Loans. See "Business--Delinquencies" for a
discussion of the agreement between the Corporate General Partner and the
Partnership concerning the Corporate General Partner's purchase of the
Partnership's interest in certain delinquent or defaulted loans.
Assignment of General Partners Interest. By Assignment dated January 29,
1987, David Adler, Gerald D. Gains, David K. Machado, Milton N. Owens, William
C. Owens, Larry R. Schultz and Lorraine Spingolo assigned to the Corporate
General Partner all of their interest in any present or future promotional
allowance from the Partnership, effective as of January 1, 1987. Pursuant to
this Assignment, the Corporate General Partner has received distributions from
the Partnership in the amount of $660,783 as of December 31, 1995. Each of these
present or former individual General Partners of the Partnership, except Gerald
D. Gains and Lorraine Spingolo, are shareholders of the Corporate General
Partner.
Other Mortgage Lending Activities. The General Partners may form additional
limited partnerships and other entities in the future to engage in activities
similar to and with the same investment objectives as those of the Partnership.
The General Partners may be engaged in sponsoring other such entities at
approximately the same time as the Partnership's securities are being offered or
its investments are being made. The General Partners also originate, sell and
service loans for individuals or unaffiliated entity investors. These activities
may cause conflicts of interest between such activities and the Partnership, and
the duties of the General Partners concerning such activities and the
Partnership. The General Partners will attempt to minimize any conflicts of
interest that may arise among these various activities.
Competition by the Partnership with Other Entities for Management Services.
The Partnership does not have independent management and relies on the General
Partners for the operation of its business and the management of its loan
portfolio. The General Partners devote only so much of their time to the
business of the Partnership as in their judgment is reasonably required. The
General Partners have conflicts of interest in allocating time, services, and
functions between the Partnership and other present and future entities which
the General Partners have organized or may in the future organize or with which
they are or may be affiliated, as well as other business ventures in which they
are or may be involved. The General Partners are engaged and in the future may
be engaged for their own accounts, or for the accounts of others, in other
business ventures, and neither the Partnership nor any Limited Partner is or
will be entitled to any interest in such other ventures.
Receipt of Compensation by the General Partners. The compensation payable
to the General Partners was not determined by arm's-length negotiations.
Legal Representation. The Partnership and the General Partners are
currently represented by the same counsel. The Partnership does not have
independent legal counsel. If a conflict of interest should arise from such dual
representation, appropriate consideration will be given to the extent to which
the interests of the Partnership may diverge from those of the General Partners,
and, if necessary, separate counsel will be obtained for the Partnership and the
General Partners.
Acquisition of Loans from General Partners or Affiliates. The Corporate
General Partner typically locates each loan made or invested in by the
Partnership and negotiates the terms of each loan on a loan-by-loan basis.
Generally, the Partnership will invest in loans together with the Corporate
General Partner or other Affiliates. On occasion, the Partnership may acquire a
loan from the Corporate General Partner or Affiliates. In acquiring such loans,
the Corporate General Partner will first make a determination that the loan is
suitable for investment by the Partnership. In making such determination, the
Corporate General Partner will follow the same principles it follows in making
or investing in other loans. Among the factors that would cause the investment
to be unsuitable would be: (i) it is not the type of mortgage loan in which the
Partnership invests; (ii) the loan-to-value ratio does not meet the standards
set up by the Partnership; (iii) the investment would not satisfy the
Partnership's investment criteria; or (iv) the method for making the mortgage
loan cannot be structured to meet the Partnership's principal lending criteria.
Loans from the Corporate General Partner or Affiliates may be acquired at a
discount of the face value based upon the effective yield of the note.
All decisions regarding mortgage loans to be made or invested in by the
Partnership are made by at least two members of a committee of officers of the
Corporate General Partner comprised of David Adler, Milton Owens, William Owens,
Larry Schultz, who are also General Partners, and William Dutra, a
Vice-President of the Corporate General Partner.
Investing in Loans With General Partners or Affiliates. The Partnership is
prohibited by Section IX.4 of the Partnership Agreement from making mortgage
loans to the General Partners or Affiliates. However, the Partnership may invest
in mortgages acquired by the General Partners or Affiliates. The Partnership's
portion of the total mortgage loan may be smaller or greater than the portion of
the loan made by such General Partner or Affiliates, but will generally be on
terms substantially similar to the terms of the Partnership's investment. Such
an investment would be made after a determination by the Corporate General
Partner that the entire loan is in an amount greater than would be suitable for
the Partnership to make on its own. However, investors should be aware that
investing with the General Partners or Affiliates could result in a conflict of
interest between the Partnership and the General Partners or Affiliates in the
event that the borrower defaults on the loan and both the Partnership and the
General Partners or Affiliates protect their own interest in the loan and in the
underlying security.
Mortgage Loans to Affiliates. The Partnership will not invest in mortgage
loans to any of the General Partners, Affiliates of the General Partners, or any
limited partnership or entity affiliated with or organized by the General
Partners. However, the Partnership may have an investment in a mortgage loan to
the General Partners when the Corporate General Partner assumes by foreclosure
the obligations of the borrower under a mortgage loan.
Right of General Partners to Engage in Competitive Business. The General
Partners will only devote such time to the Partnership as they, in their own
discretion, deem necessary to conduct the Partnership business. All Limited
Partners should be aware of Section IV.3 of the Partnership Agreement, which
provides that the General Partners and Affiliates have the right to engage in
other business (including, but not limited to, acting as partner in other
partnerships formed for the purpose of making or investing in mortgage loans
similar to those made or invested in by the Partnership), and to compete,
directly or indirectly, with the business of the Partnership, and neither the
Partnership nor any Limited Partners shall have any rights or claims as a result
of such activities.
FIDUCIARY RESPONSIBILITY
The General Partners are accountable to the Partnership as fiduciaries, and
consequently must exercise good faith and integrity with respect to Partnership
affairs, must not take advantage of the Limited Partners, must make full
disclosure in their dealings with the Partnership, and must account to the
Partnership for any benefit or profit derived by them from any transaction
connected with the Partnership without the consent of the Limited Partners. The
Partnership Agreement provides that the General Partners and their Affiliates
may engage in activities similar to or identical with the business of the
Partnership. Presently none of the General Partners or their Affiliates acts for
its own account or as general partner of a mortgage loan investment business.
However, the Corporate General Partner at times arranges and services trust deed
investments for other investors. When they act in such capacity, they have a
fiduciary duty to each entity, and are bound to treat each fairly and with equal
access to investment opportunities.
Based upon the present state of the law and statutes, regulations, rules,
and applicable decisions by the courts, it appears that: (i) the Limited
Partners have the right, subject to the provisions of applicable procedural
rules and statutes, to bring Partnership class actions to enforce rights of all
Limited Partners similarly situated, and to bring Partnership derivative actions
to enforce rights of the Partnership including, in each case, rights under
certain rules and regulations of the Securities and Exchange Commission; and
(ii) Limited Partners who have suffered losses in connection with the purchase
or sale of their interests in the Partnership due to the breach of a fiduciary
duty by a General Partner in connection with such purchase or sale, including
misapplication by a General Partner of the proceeds from the sale of interests
in the Partnership, may have a right to recover such losses from the General
Partner in an action based upon Rule 10b-5 under the Securities Exchange Act of
1934, as amended. Limited Partners also have the right to bring an action
against a General Partner for breach of fiduciary duty under California law.
However, California law allows indemnification and limitation of liability in
certain instances.
The Partnership Agreement provides that the General Partners shall not be
liable to the Partnership or the Limited Partners for the performance of any act
or for any failure to act, so long as such act or failure to act was done in
good faith to promote the best interests of the Partnership and so long as they
were not guilty of negligence or misconduct. Accordingly, a Limited Partner may
have a more limited right of action against the General Partners than he would
have had in the absence of such limitation in the Partnership Agreement.
The Partnership Agreement also provides that, to the extent permitted by
law, the Partnership shall indemnify the General Partners against liability and
related expenses (including attorneys' fees) relating to the performance or
nonperformance of any act concerning the activities of the Partnership, except
in the case where the General Partners are guilty of bad faith, negligence,
misconduct or reckless disregard of duty, provided such act or omission was done
in good faith to promote the best interest of the Partnership. Such
indemnification is recoverable from the assets of the Partnership, but not from
the Limited Partners. A successful claim for such indemnification would deplete
Partnership assets by the amount paid. The Partnership Agreement also provides
that, notwithstanding the above-referenced provisions, neither the General
Partners nor any officer, director, employee, agent, subsidiary, or assignee of
the General Partners or of the Partnership shall be indemnified from any
liability, loss or damage incurred by any of them in connection with (i) any
claim or settlement involving allegations that the Securities Act of 1933, as
amended, or any state securities act was violated by the General Partners or by
any such other persons or entity, except as permitted by certain regulatory
agencies or (ii) any liability imposed by law including liability for fraud, bad
faith, or negligence.
This is a rapidly developing and changing area of the law and Limited
Partners who have questions concerning the duties of a General Partner or who
believe that a breach of fiduciary duty by a General Partner has occurred should
consult their own legal counsel.
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, INDEMNIFICATION
FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF 1933 IS UNENFORCEABLE
BECAUSE IT IS CONTRARY TO PUBLIC POLICY.
MANAGEMENT
Management of the Partnership
The General Partners of the Partnership are David Adler, David K. Machado,
Milton N. Owens, William C. Owens, Larry R. Schultz and Owens Financial Group,
Inc., a California Corporation, the Corporate General Partner. The General
Partners' principal place of business is located at 2221 Olympic Blvd., Walnut
Creek, CA 94595. Their telephone number is (510) 935-3840.
The Corporate General Partner manages and controls the affairs of the
Partnership and has general responsibility and final authority in all matters
affecting the Partnership's business. Such duties include dealings with Limited
Partners, accounting, tax and legal matters, communications and filings with
regulatory agencies and all other needed management duties. The Corporate
General Partner may also, at its sole discretion and subject to change at any
time, (1) advance its own funds to the Partnership or to any senior lienholder
to cover delinquent interest or principal payments on mortgage loans held by the
Partnership, (2) advance its own funds to cover any other costs associated with
delinquent loans held by the Partnership including, but not limited to, property
taxes, insurance and legal expense or (3) purchase such defaulted loans at their
book value from the Partnership. See "Business--Delinquencies". In order to
assure that the Limited Partners will not have personal liability as General
Partners, Limited Partners have no right to participate in the management or
control of the Partnership's business or affairs other than to exercise the
limited voting rights provided for in the Partnership Agreement. The Corporate
General Partner has primary responsibility for the initial selection, evaluation
and negotiation of mortgage investments for the Partnership. The Corporate
General Partner provides all executive, supervisory and certain administrative
services for the Partnership's operations, including servicing the mortgage
loans made by the Partnership.
The books and records of the Partnership are maintained by the Corporate
General Partner, subject to audit by independent certified public accountants.
Purchasers of Units will have no right to participate in the management of the
Partnership, and it is not intended that there will be meetings of Limited
Partners.
David Adler, Milton N. Owens, William C. Owens, Larry R. Schultz and David
K. Machado are the five individual General Partners of the Partnership. The
individual General Partners, with the exception of David K. Machado, are also
officers and directors of the Corporate General Partner. The individual General
Partners have a net worth ranging from $1,500,000 to over $5,000,000, and the
Corporate General Partner has a net worth of approximately $5,100,000 as of
December 31, 1995. There is set forth below certain information about the
General Partners and other employees of the Corporate General Partner that are
actively involved in the administration and investment activity of the
Partnership.
David Adler, General Partner, age 75, became Vice Chairman of the Corporate
General Partner in April 1996. From 1981 to April 1996, he served as President
and Chief Executive Officer of the Corporate General Partner, and from 1966 to
1981, served as its Executive Vice President . He has had extensive experience
in real estate financing and partnership management .
Mr. Adler is a former director of Fairmont Foods Company, and for many
years was Chairman of its Executive Committee. He also served on the Northern
California Advisory Board of Union Bank. As a Presidential appointee, he was a
member of the Postmaster Selection Committee under Postmaster General Winston
Blount. Mr. Adler continues to be active in various civic and philanthropic
enterprises.
David K. Machado, General Partner, age 53, is a licensed real estate broker
with extensive experience as a loan officer. He was a loan officer with
Mason-McDuffie Investment Company from 1970 to 1975 and with American Savings &
Loan Association from 1975 to 1980. Mr. Machado joined the Corporate General
Partner in 1980 and served as its Vice President and Manager in charge of
corporate loan production until May 1989. He has served as a commission real
estate broker with Owens Financial Group, Inc. since December 1, 1989.
Milton N. Owens, General Partner, age 84, is a licensed real estate broker
and has been Chairman of the Board of the Corporate General Partner since
October 1981. Mr. Owens is a member of the American Institute of Real Estate
Appraisers (MAI) and holds other professional designations. Mr. Owens has
conducted real estate appraisal courses at the University of California,
Berkeley. Prior to his formation of Owens Mortgage Company, Mr. Owens was
employed with the mortgage loan division of the Travelers Insurance Company from
1936 to 1951. Mr. Owens is the father of William C. Owens, also a General
Partner of the Partnership.
William C. Owens, General Partner, age 45, has been President of the
Corporate General Partner since April 1996. From 1989 until April 1996, he
served as a Senior Vice President of the Corporate General Partner. Mr. Owens
has been active in real estate construction, development, and mortgage financing
since 1973. Prior to joining Owens Mortgage Company in 1979, Mr. Owens was
involved in mortgage banking, property management and real estate development.
As President of the Corporate General Partner , Mr. Owens has
responsibility for the overall activities and operations of the company
including corporate investment, operating policy and planning. In addition, he
has had responsibility for loan production, including the underwriting and
review of potential loan investments. Mr. Owens is also the President of Owens
Securities Corp., an affiliate of the Corporate General Partner, of which he
owns a 21% interest. Mr. Owens is a licensed real estate broker, and is the son
of Milton Owens, also a General Partner of the Partnership.
Larry R. Schultz, General Partner, age 53, is a licensed real estate broker
and has been Executive Vice President of the Corporate General Partner since
October 1981. Mr. Schultz began working at the Corporate General Partner in
1964, and has experience in all aspects of its operations. Mr. Schultz is
responsible for loan committee review, loan underwriting, loan servicing, and
compliance matters of the Corporate General Partner.
In addition to his responsibilities with the Corporate General Partner, Mr.
Schultz has on numerous occasions acted as a court appointed receiver. He has
also acted as a general partner in various limited partnerships owning
California real estate.
Bryan H. Draper, age 38, has been Controller and Chief Financial Officer of
Owens Financial Group, Inc. since December 1987. Mr. Draper is a Certified
Public Accountant who previously worked as a public accountant for Deloitte,
Haskins & Sells from 1981 to 1982, Arthur Andersen & Co. from 1982 to 1986 and
finally with a closely held public accounting firm in Walnut Creek, California
from 1986 to 1987. Mr. Draper is responsible for all accounting, regulatory
agency filings, and tax matters for the Partnership, the Corporate General
Partner, and Owens Securities Corporation.
William E. Dutra, age 34, is a member of the Loan Committee of the
Corporate General Partner and has been an employee of the Corporate General
Partner since February 1986. As a Vice President in charge of loan production,
Mr. Dutra has responsibility for loan committee review, loan underwriting and
loan production.
Owens Financial Group, Inc., incorporated in 1981 is the Corporate General
Partner of the Partnership. Its predecessor, Owens Mortgage Company, was formed
in 1951 by Milton N. Owens for the purpose of arranging and servicing real
estate loans secured by deeds of trust on California real estate for private and
institutional lenders. Except for a brief period from 1961-1963 when the
servicing portfolio and six branch offices were sold to Palomar Mortgage
Company, Milton N. Owens controlled the operations of Owens Mortgage Company.
Presently, the Corporate General Partner is servicing approximately $198,000,000
of company-originated and purchased loans for the Partnership, private
individuals, corporate pension plans, IRA and individual pension accounts, and
institutional investors. Owens Financial Group, Inc. also serves as loan
originator for the Partnership.
Summary of Management Responsibilities
The duties, responsibilities and services of the General Partners, include
marketing the Units, mortgage investments, portfolio management, and the
management and disposition of Partnership properties. Offering and Organization
The General Partners were and are responsible for organizing the
Partnership as well as for registering and marketing the securities of the
Partnership. This includes formation of the Partnership; preparation and filing
of certain information, including the filing of the Registration Statement with
the Securities and Exchange Commission and certain state regulatory agencies;
and marketing Units for the Partnership.
Research and Acquisition
The Corporate General Partner, considers prospective investments for the
Partnership. As a part of its evaluation, the Corporate General Partner
evaluates the credit standing of prospective borrowers, analyzes the return to
the Partnership of potential mortgage loan transactions, reviews property
appraisals, and determines which types of transactions appear to be most
favorable to the Partnership. See "Business." For these services, the Corporate
General Partner generally receives mortgage placement fees (points) paid by
borrowers when it funds mortgage loans and on extension or refinancing thereof,
which fees may reduce the yield obtained from the Partnership's mortgage loans.
Partnership Management
The Corporate General Partner is responsible for the investment portfolio
of the Partnership. Such services include, but are not limited to: the creation
and implementation of Partnership investment policies; preparation and review of
budgets, economic surveys, cash flow and taxable income or loss projections and
working capital requirements; preparation and review of Partnership reports;
communications with Limited Partners; supervision and review of Partnership
bookkeeping, accounting and audits; supervision and review of Partnership state
and federal tax returns; and supervision of professionals employed by the
Partnership in connection with any of the foregoing, including attorneys,
accountants and appraisers. For these and certain other services the Corporate
General Partner is entitled to receive a management fee of up to 2-3/4% per
annum of the unpaid balance of the Partnership's mortgage loans. The management
fee is payable on all loans, including nonperforming or delinquent loans. The
General Partners believe that a fee payable on delinquent loans is justified
because of the expense involved in the administration of such loans. See
"Compensation of the General Partners and their Affiliates--Management Fees." If
the Corporate General Partner should choose not to make advances on delinquent
loans or purchase any defaulted loans from the Partnership during any calendar
year, the maximum management fee for such year will be reduced to 1-3/4% for
such year. However, so long as the Corporate General Partner makes any advance
on delinquent loans, the corporate General Partner shall be entitled to the
maximum management fee.
Mortgage Investments
The Corporate General Partner is responsible for supervising the making and
servicing of the Partnership's mortgage investments. The Corporate General
Partner may from time to time employ administrative persons to assist depending
upon certain factors such as the type of investment and the management ability
of such persons.
Mortgage investment services of the Corporate General Partner include but
are not limited to: review of the investments; recommendations with respect to
changes thereto; employment and supervision of employees together with the
establishment of procedures regarding investments; preparation and review of
projected performance; review of reserves and working capital; collection and
maintenance of all investments; and sales and servicing of investments.
The compensation to the Corporate General Partner for servicing is paid by
the borrower in the form of a higher interest rate on the loan invested in by
the Partnership. Although such servicing fees are paid by borrowers and not by
the Partnership, the amount of such fees will reduce the interest rates obtained
on Partnership loans by up to 1/4 of 1% and may thus be deemed to have been paid
by the Partnership.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No person or entity owns beneficially more than 5% of the ownership
interest in the Partnership. The following table sets forth the beneficial
ownership interests in the Partnership as of December 31, 1995 by (i) each
General Partner of the Partnership, and (ii) all General Partners as a group.
<TABLE>
<CAPTION>
Title of Amount of Beneficial Percent
Class Name and Address Ownership of Class
- ------- ---------------- --------- --------
<S> <C> <C> <C>
Units David Adler, P.O. Box 2308, Walnut Creek, CA 94595 $ 792,447 .48%
David K. Machado, P.O. Box 2308, Walnut Creek, CA 94595 155,160 .09%
Milton N. Owens, P.O. Box 2308, Walnut Creek, CA 94595 148,836 .09%
Larry R. Schultz, P.O. Box 2308, Walnut Creek, CA 94595 31,754 .02%
William C. Owens, P.O. Box 2308, Walnut Creek, CA 94595 3,244 .00%
Owens Financial Group, Inc., P.O. Box 2308, Walnut Creek,
CA 94595(2) 2,017,879 1.21%
--------- ----
All General Partners as a group (6 persons) $ 3,149,320 1.89%
========= ====
- -----------
<FN>
(1) All interests are subject to the named person's sole voting and investment
power.
(2) The ownership of the Corporate General Partner is held as follows: 26.85%
by Milton N. Owens, 16.78% each by David Adler, William C. Owens and Larry
R. Schultz, 6.71% each by David K. Machado and Bryan H. Draper, 3.36% each
by William E. Dutra and Andrew J. Navone, and an aggregate of 2.67% by two
unrelated individuals.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
As of and for the Year ended
December 31
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Loans secured by
<S> <C> <C> <C> <C> <C>
trust deeds $ 151,350,591 $ 145,050,213 $ 133,549,495 $ 119,224,512 $ 99,524,068
Less: Allowance
for loan losses (3,250,000) (2,750,000) (2,750,000) 0 0
Real estate held for Sale 9,012,359 4,628,325 2,608,000 0 0
Cash, cash equivalents
and other assets 8,288,818 5,697,459 5,202,246 5,540,580 6,334,896
--------- --------- --------- --------- ---------
Total assets $ 165,401,768 $ 152,625,997 $ 138,609,741 $ 124,765,092 $ 105,858,964
=========== =========== =========== =========== ===========
Liabilities $ 657,325 $ 779,269 $ 1,026,578 $ 460,625 $ 496,937
Partners' capital
General partners 1,623,526 1,488,360 1,342,578 1,228,400 1,032,547
Limited partners 163,120,917 150,358,368 136,240,585 123,076,067 104,329,480
----------- ----------- ----------- ----------- -----------
Total partners' capital $ 164,744,443 $ 151,846,728 $ 137,583,163 $ 124,304,467 $ 105,362,027
----------- ----------- ----------- ----------- -----------
Total liabilities/
partners' capital $ 165,401,768 $ 152,625,997 $ 138,609,741 $ 124,765,092 $ 105,858,964
=========== =========== =========== =========== ===========
Revenues $ 16,044,301 $ 15,165,534 $ 14,656,065 $ 12,581,067 $ 10,766,853
Operating expenses
Promotional interest 69,255 72,984 72,359 97,694 97,328
Management fee 1,431,616 1,475,155 2,234,968 535,540 0
Provision for losses on
loans 500,000 0 2,750,000 0 0
Provision for losses on
real estate held for
sale 200,000 400,000 0 0 0
Other 352,055 507,971 280,093 198,550 117,074
---------- ----------- ------------ ----------- -----------
Net income $ 13,491,375 $ 12,709,424 $ 9,318,645 $ 11,749,283 $ 10,552,451
========== ========== ========== ========== ===========
Net income allocated to
general partners $ 135,584 $ 127,726 $ 90,218 $ 113,750 $ 102,020
======== ======= ====== ======= =======
Net income allocated to
limited partners $ 13,355,791 $ 12,581,698 $ 9,228,427 $ 11,635,533 $ 10,450,431
========== ========== ========= ========== ==========
Net income per limited
partnership unit $ .08 $ .09 $ .07 $ .10 $ .11
=== === === === ===
</TABLE>
<PAGE>
The information in this table should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and
with the financial statements and notes thereto included in this Prospectus.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for the Years Ended December 31, 1995, 1994, and 1993
Change in Policy
The Corporate General Partner changed its policy on advancing interest on
delinquent loans and purchasing loans subject to foreclosure on those
Partnership loans originated on or after May 1, 1993, but continued to advance
interest on delinquent loans originated prior to May 1, 1993. However, effective
November 1, 1994, the Corporate General Partner modified this policy so as to
discontinue its practice of making such payments on certain loans which totaled
$5,052,000 which were originated prior to May 1, 1993, and were outstanding as
of December 31, 1995. Loan and real estate held for sale loss reserves were
recorded in the financial statements of the Partnership during the years ended
December 31, 1993 , 1994 and 1995. If all of these policies had been in effect
for the year ended December 31, 1993 , the net income and average net yield of
the Partnership could have been adversely affected for that year.
Results of Operations--For the Years Ended December 31, 1995, 1994 and 1993
The net income increase of $782,000 (6.2%) for 1995 as compared to 1994 was
primarily attributable to the increase in mortgage investments held by the
Partnership from $145,050,000 to $151,351,000 as of December 31, 1994 and 1995,
respectively. The net income increase was negatively affected by the addition to
reserves for loan losses of $500,000 and losses on real estate held for sale of
$200,000 in its financial statements for the year ended December 31, 1995. The
net income was further negatively affected by the increase in nonperforming
loans from $4,923,000 to $8,309,000 as of December 31, 1994 and 1995,
respectively. Nonperforming loans for this purpose are defined as those loans
which are 90 days or more delinquent in payment and on which the Corporate
General Partner has chosen not to advance delinquent interest payments to the
Partnership.
The Partnership experienced an increase in net income of $3,391,000 (36.4%)
for 1994 as compared to 1993 which was primarily attributable to the
establishment of a loan loss reserve in the amount of $2,750,000 in the
financial statements of the Partnership during the year ended December 31, 1993.
In addition, the Partnership increased its mortgage investments from
$133,549,000 to $145,050,000 as of December 31, 1993 and 1994, respectively. The
net income increase of the Partnership was reduced by the recording of a
provision for losses on real estate held for sale of $400,000 in its financial
statements for the year ended December 31, 1994. Prior to 1994, the Partnership
did not have a loss reserve for real estate in its financial statements. All net
income of the Partnership is distributed monthly either in the form of cash
distributions or the purchase of additional Units. All income was derived from
investments in mortgage loans and short-term interest-bearing accounts, notes
receivable from the Corporate General Partner and rental income from Real Estate
Held for Sale.
The Partnership has experienced a decrease in its average yield per Unit
from 9.15% in 1993 to 8.88% and 8.79% in 1994 and 1995, respectively. The net
yield represents the net income of the Partnership after all expenses, other
than the provision for losses on loans or real estate held for sale. If the
provisions for losses on loans or real estate held for sale are included, the
Partnership experienced an increase in its average yield per Unit from 6.98% to
8.60% in 1993 and 1994, respectively, and a decrease in average yield per Unit
from 8.60% to 8.31% in 1994 and 1995, respectively. The decreases have been the
result of the overall decrease in general market rates and changes in the
Corporate General Partner's policies regarding advancing delinquent interest and
purchasing at foreclosure sale properties which provided security for
Partnership loans. The amount of nonperforming loans held by the Partnership has
increased from $4,923,000 (3.39% of loan portfolio) to $8,309,000 (5.49% of loan
portfolio) as of December 31, 1994 and 1995, respectively due to the diminishing
amount of loans that the Corporate General Partner advances delinquent interest
on. However, the decreases have been partially offset due to a decrease in the
sum of the servicing and management fees paid to the Corporate General Partner
from $2,558,000 for 1993 to $1,813,000 and $1,803,000 for 1994 and 1995,
respectively. These represent decreases in the annualized rate of servicing and
management fees to total trust deed investments of the Partnership from 2.00% in
1993 to 1.32% and 1.19% for 1994 and 1995, respectively. Due to the increase in
nonperforming loans and the general decrease in market interest rates, the
Corporate General Partner has chosen to reduce the fees it collects in order to
maximize the yield to investors. These fees are well within the limitations on
such fees as imposed by the Partnership Agreement. Income is also affected by
the continuing competition for high quality mortgage investments.
Portfolio Review--For the Years Ended December 31, 1995, 1994 and 1993
Loan Portfolio
The number of Partnership mortgage investments decreased from 267 as of
December 31, 1993 to 254 as of December 31, 1994, and to 238 as of December 31,
1995. The average loan balance in this period increased from $500,185 in 1993 to
$571,064 in 1994 and to $635,927 in 1995. These average loan balance increases
reflect the Partnership's increased ability to invest in larger mortgage loans
meeting the Partnership's objectives.
The Partnership's loan portfolio consists primarily of short-term (1-7
years), fixed and variable rate loans secured by real estate. As of December 31,
1995, the Partnership's loans secured by deeds of trust on real property
collateral located in Northern California totaled approximately 79%
($120,744,000) of the loan portfolio.
As of December 31, 1995, approximately 94% of the loan portfolio was
invested in loans on income-producing property, 4% in land loans and 2% in
residential loans. Also, as of December 31, 1995, approximately 90% of the loan
portfolio was invested in first deeds of trust, 9% in second deeds of trust and
1% in third and all-inclusive deeds of trust.
The following table sets forth the principal amount of mortgage
investments, by classification of property securing each loan, held by the
Partnership as of December 31, 1995, 1994 and 1993 , respectively:
Principal Amount
1995 1994 1993
(000) (000) (000)
Single-Family Residences $ 2,250 $ 3,180 $ 3,004
Income-Producing Properties 142,598 135,128 122,592
Unimproved Land 6,503 6,742 7,953
------- ------- -------
Total $ 151,351 $ 145,050 $ 133,549
======= ======= =======
Prior to November 1, 1994, the Corporate General Partner had historically
made all periodic interest payments to the Partnership on all delinquent loans
made or invested in by the Partnership prior to May 1, 1993. Effective November
1, 1994, the Corporate General Partner has chosen to cease advancing interest or
principal payments on certain loans originated by the Corporate General Partner
prior to May 1, 1993, which totaled $5,052,000 as of December 31, 1995. As of
December 31, 1993 , there were no loans held by the Partnership for which
interest or principal payments had not been advanced by the Corporate General
Partner. As of December 31, 1995, there were delinquent loans aggregating
$8,309,000 for which the Corporate General Partner has elected not to advance
delinquent payments of interest or principal.
Additionally, an agreement had been entered into between the Corporate
General Partner and the Partnership wherein the Corporate General Partner had
agreed to indemnify the Partnership for principal losses up to a certain
limitation as provided for in the agreement. During 1993, the Corporate General
Partner met its full obligation under the agreement. The Corporate General
Partner and the Partnership do not intend to enter into subsequent
indemnification agreements with the Partnership.
Advances for delinquent interest payments on loans originated prior to May
1, 1993, and other payments, such as property taxes and mortgage interest
pursuant to senior indebtedness, made to or an behalf of the Partnership by the
Corporate General Partner during 1995 and 1994 , but not collected as of
December 31, 1995 and 1994 , totaled approximately $1,218,000 and $1,149,000 ,
respectively. The Partnership has no obligation to repay these advances to the
Corporate General Partner.
In connection with the periodic closing of the accounting records of the
Partnership and the preparation of the financial statements, an evaluation of
the loan loss requirement of the Partnership is performed by the Corporate
General Partner. Based upon this evaluation, a determination was made to
maintain a reserve for losses on loans in the Partnership's financial statements
in the amount of $3,250,000 and $2,750,000 as of December 31, 1995 and 1994,
respectively. As of December 31, 1995, the Corporate General Partner has
determined that the reserve for losses on loans is adequate. See
"Business--Delinquencies" for a discussion of the rate of delinquencies in 1994
and 1995.
Asset Quality
A consequence of lending activities is that losses will be experienced and
that the amount of such losses will vary from time to time depending upon the
risk characteristics of the loan portfolio as affected by economic conditions
and the financial experiences of borrowers. There is no precise method of
predicting specific losses or amounts that ultimately may be charged off on
particular segments of the loan portfolio, especially in light of the current
economic environment.
The conclusion that a Partnership loan may become uncollectible, in whole
or in part, is a matter of judgment. Although institutional lenders are subject
to requirements and regulations, that among other things, require a lender to
perform ongoing analyses of its portfolio, loan to value ratio, reserves, etc.,
and to obtain and maintain current information regarding its borrowers and the
securing properties, the Partnership is not subject to these regulations and has
not adopted these practices. Rather, the Corporate General Partner, in
connection with the periodic closing of the accounting records of the
Partnership and the preparation of the financial statements, causes an
evaluation of the mortgage loan portfolio of the Partnership to be performed by
management. Based upon this evaluation, a determination is made as to whether
the allowance for loan losses is adequate to cover potential loan losses of the
Partnership. As of December 31, 1995, management has determined that the
allowance for loan losses of $3,250,000 is adequate in amount. As of December
31, 1995, loans secured by trust deeds include $12,037,000 in loans delinquent
over 90 days of which $3,199,000 was invested in loans which were in the process
of foreclosure.
The adequacy of the allowance for loan losses to cover possible loan losses
is determined only on a judgmental basis, after full review, including
consideration of:
* Economic conditions;
* Borrower's financial condition;
* Evaluation of industry trends;
* Review and evaluation of potential problem loans identified as having loss
potential; and
* Quarterly review by Board of Directors.
Liquidity and Capital Resources
The Partnership relies upon purchases of Units and loan payoffs for the
source of capital for mortgage investments. Although general market interest
rates have most recently declined, a substantial increase in such rates could
have an adverse affect on the Partnership. If general market interest rates were
to increase substantially, the yield on the Partnership's mortgage investments
may provide lower yields than other comparable debt-related investments. As
such, additional Limited Partner investment into the Partnership could decline,
which, in turn, would reduce the liquidity of the Partnership. The Partnership
has not and does not intend to borrow money for investment purposes. See
"Business--Borrowing."
<PAGE>
Contingency Reserves
The Partnership maintains cash and certificates of deposit as contingency
reserves in an aggregate amount of at least 2% of the gross proceeds of the sale
of Units. To the extent that such funds are not sufficient to pay expenses in
excess of revenues, or to meet any obligation of the Partnership, it may be
necessary for the Partnership to sell or otherwise liquidate certain of its
investments on terms which may not be favorable to the Partnership.
Current Economic Conditions
The Partnership has been affected by the current regional real estate
downturn; however, the Partnership has not sustained any material losses to date
partially due to the prior practice of the Corporate General Partner to make all
periodic interest payments to the Partnership on delinquent loans funded prior
to May 1, 1993. This practice was modified November 1, 1994, so that delinquent
interest will be paid only with respect to certain loans funded prior to May 1,
1993. As of December 31, 1995, the Partnership held $8,309,000 in loans that
were greater than 90 days delinquent and on which the Corporate General Partner
was not advancing interest payments.
As of December 31, 1995, the Partnership held title to 11 separate
properties acquired through foreclosure of Partnership loans during 1993, 1994
and 1995. A $400,000 and $200,000 provision for losses on real estate held for
sale was recorded in the financial statements of the Partnership in 1994 and
1995, respectively. The Corporate General Partner considers this allowance to be
adequate as of December 31, 1995. See "Business--Real Estate Owned." Due to the
loan-to-value criteria established by the Corporate General Partner, the
mortgage loans held by the Partnership appear in general to be, in the opinion
of the General Partners, adequately secured.
The Partnership continues to receive substantial additional investments
from new and existing Limited Partners which provide capital for loans and
repurchases of existing Limited Partnership Units.
Changes in both short- and long-term interest rates have not had, to date,
a significant effect on the yields earned on mortgage investments of the
Partnership. The net yields earned by the Partnership's mortgage investments
have decreased only slightly over the past few years. However, many lenders have
excess capital to invest and have entered the commercial lending market,
providing additional lending competition to the Partnership and creating a
downward pressure on rates. In addition, when there is a reduction in the demand
for loans originated by the Corporate General Partner and, thus, fewer loans for
the Partnership to invest in, the Partnership will invest its excess cash in
shorter term investments yielding considerably less than the current investment
portfolio.
BUSINESS
All capitalized terms used herein and not otherwise defined have the
meaning given to such terms in the Partnership Agreement, a copy of which is
attached as Exhibit A to this Prospectus and incorporated herein by this
reference.
The Partnership is a California limited partnership organized on June 14,
1984, which invests in first, second, third, wraparound and construction
mortgage loans and loans on leasehold interest mortgages. In June 1985, the
Partnership became the successor-in-interest to, and acquired the assets and
limited partners of, Owens Mortgage Investment Fund I, a California limited
partnership formed in June 1983 with the same policies and objectives as the
Partnership. In October 1992, the Partnership changed its name from Owens
Mortgage Investment Fund II, to Owens Mortgage Investment Fund, a California
Limited Partnership. The address of the Partnership is P.O. Box 2308, 2221
Olympic Blvd., Walnut Creek, CA 94595. Its telephone number is (510) 935-3840.
All of the loans invested in by the Partnership are arranged by the
Corporate General Partner. In connection with the investment in such loans, the
Partnership may in some instances seek to acquire an equity interest in the
underlying real property in the form of a shared appreciation interest. To date,
no shared appreciation interests have been acquired by the Partnership. The
Partnership's mortgage loans are secured by mortgages on unimproved as well as
improved real property and nonincome producing as well as income-producing real
property such as apartments, shopping centers, office buildings, and other
commercial or industrial properties. No single Partnership loan may exceed 10%
of the total Partnership assets as of the date the loan is made.
The following table shows the growth in total Partnership capital, mortgage
investments and net income as of and for the years ended December 31, 1995,
1994, 1993, 1992 and 1991 .
Mortgage Net
Capital Investments Income
------- ----------- ------
1995 $ 164,744,443 $ 151,350,591 $ 13,491,375
1994 $ 151,846,728 $ 145,050,213 $ 12,709,424
199 $ 137,583,163 $ 133,549,495 $ 9,318,645
1992 $ 124,304,467 $ 119,224,512 $ 11,749,283
1991 $ 105,362,027 $ 99,524,068 $ 10,552,451
As of December 31, 1995, the Partnership held investments in 238 mortgage
loans, secured by ownership and leasehold interests in real property, 79% of
which are situated in Northern California. The following table sets forth the
types and maturities of mortgage investments held by the Partnership as of
December 31, 1995:
TYPES AND MATURITIES OF MORTGAGE INVESTMENTS
(As of December 31, 1995)
Number
of Loan Amount Percent
------- ------ -------
1st Mortgages 186 $136,110,802 89.93%
2nd Mortgages 50 14,660,759 9.69%
3rd Mortgages or wraparound deeds of
trust 2 579,030 .38%
--- ----------- ------
238 $151,350,591 100.00%
=== =========== ======
Maturing on or between January 1, 1996
and December 31, 1997 132 $ 71,236,724 47.07%
Maturing on or between January 1, 1998
and December 31, 2000 71 55,608,921 36.74%
Maturing on or between January 1, 2001
and December 31, 2010 35 24,504,946 16.19%
--- ----------- ------
238 $151,350,591 100.00%
=== =========== ======
Income-Producing Properties 210 $142,597,751 94.22%
Single-Family Residences 14 2,249,616 1.49%
Unimproved land 14 6,503,224 4.29%
--- ----------- ------
238 $151,350,591 100.00%
=== =========== ======
- --------
(1) $14,700,000 was past maturity as of December 31, 1995.
The average loan balance of the mortgage loan portfolio of $635,927 as of
December 31, 1995, is considered by the General Partners to be a reasonable
diversification of investments concentrated in mortgages secured by commercial
properties. A majority of such investments earn a variable rate of interest with
the remainder earning a fixed rate of interest. All were negotiated according to
the Partnership's investment standards.
Due to general economic conditions, the commercial real estate market has
recently experienced decreases in both values and rental rates and an increase
in vacancy rates. These conditions have helped to create stricter underwriting
standards of the Corporate General Partner in relation to the financial strength
of tenants, vacancy rates in comparable properties, existence and amounts of
senior mortgages, general area economic development and growth, and other
factors. The Corporate General Partner has continued to use relatively low
loan-to-value ratios as a major criteria in making mortgage loans. See "Risk
Factors--Risks of Real Estate Financing--Risks of Being Undersecured."
As of December 31, 1995, the Partnership had invested in construction loans
the aggregate amount of $1,655,000 and in loans partially secured by a leasehold
interest of $11,981,000.
The Partnership has other assets in addition to its mortgage investments,
comprised principally of funds held in conjunction with contingency reserve
requirements, cash held for investment, real estate owned, mortgage interest
receivable and unsecured notes from the Corporate General Partner. As of
December 31, 1995, $5,056,358 ($3,324,000 representing contingency reserve
funds) was primarily invested in certificates of deposit (with staggered
maturity dates to a maximum of one year), money market accounts, and general
banking accounts as required to transact the business of the Partnership. In
addition, as of December 31, 1995, the Partnership held $9,012,359 in real
estate owned, $1,359,228 in mortgage interest receivable from the borrowers and
$1,023,232 in unsecured notes due from the Corporate General Partner.
Delinquencies
The Corporate General Partner does not regularly examine the maintenance of
acceptable loan-to-value ratios for the existing portfolio because the majority
of loans in the Partnership's portfolio mature in a period of 1-7 years. In the
event that payments on a loan securing a property become delinquent, the loan is
past maturity, the General Partners learn of physical changes to the property
securing the loan or to the area in which the property is located or the General
Partners learn of changes to the economic condition of the borrower or of
tenant's leasing space in the property securing the loan, the General Partners
will perform an internal review on the property including, but not limited to, a
physical evaluation of the property as well as for the area in which the
property is located, the financial stability of the borrower and the property's
tenant mix.
Although the Corporate General Partner is not obligated to do so, it has
chosen to make interest payments to the Partnership with respect to certain
Partnership loans originated prior to May 1, 1993, and which are delinquent more
than 90 days. For making such payments or purchasing delinquent loans, the
Corporate General Partner is entitled to a higher maximum management fee. See
"Compensation of the General Partners and Their Affiliates--Management Fees."
Such payments have been recorded by the Partnership as interest payments as if
made by the borrower, and have not been classified as contributions by the
Corporate General Partner or as loans made by the Corporate General Partner. The
Partnership has no obligation to repay such amounts to the Corporate General
Partner.
As of December 31, 1995, the Partnership's portfolio included $12,037,000
(compared with $12,849,000 as of December 31, 1994) of loans delinquent more
than 90 days, representing 8% of the Partnership's investment in mortgage loans.
The balance of delinquent loans at December 31, 1995, includes $3,199,000
(compared with $7,963,000 as of December 31, 1994) in the process of
foreclosure, of which $854,000 (compared with $1,387,000 as of December 31,
1994) involves loans to borrowers who are in bankruptcy. The General Partners
believe that these loans may result in a loss of principal and/or interest.
However, the General Partners believe that the $3,250,000 allowance for losses
on loans which is maintained in the financial statements of the Partnership as
of December 31, 1995 is sufficient to cover any potential losses of principal.
Of the $12,849,000 that was delinquent as of December 31, 1994, $4,127,000
remained delinquent as of December 31, 1995, and $7,910,000 was added subsequent
to December 31, 1994. Of the $8,722,000 that was removed from delinquency during
1995, $1,850,000 became Real Estate Owned of the Partnership (see "Properties")
and the Partnership was foreclosed out of an additional mortgage loan of
$377,272 by a senior lienholder that was included in the delinquent balance at
December 31, 1994. In addition, the Corporate General Partner assumed the
obligation to the Partnership for a shortfall of $525,085 on the payoff of a
Partnership loan that was included in the delinquent balance at December 31,
1994. The General Partners believe that there could be partial losses of
principal on these loans; therefore, an additional allowance for loan losses of
$500,000 was provided for in the financial statements of the Partnership in
1995. An allowance for loan losses of $3,250,000 and $2,750,000 is maintained in
the financial statements of the Partnership as of December 31, 1995 and 1994,
respectively.
Where payments on delinquent loans are not made currently by the borrowers,
the Corporate General Partner has chosen to continue to advance to the
Partnership such payments on a monthly basis on certain loans originated prior
to May 1, 1993. Such loans totaled $3,728,000 as of December 31, 1995. The
amount of delinquent interest and other amounts, such as property taxes and
interest pursuant to senior indebtedness advanced by the Corporate General
Partner on loans secured by trust deeds held by the Partnership at December 31,
1995, which has not been collected as of December 31, 1995, totals approximately
$1,218,000. The Partnership is not obligated to reimburse the Corporate General
Partner for such advances.
Finally, although not required to do so, prior to May 1, 1993, the
Corporate General Partner would purchase certain loans from the Partnership at
the time of foreclosure of such loans, for the unpaid principal amount and
accrued interest, in order to prevent the Partnership from suffering a loss upon
such foreclosure. However, commencing with loans originated on or after May 1,
1993, the Corporate General Partner has determined that , it no longer will
purchase such loans except where the Corporate General Partner determines, in
its sole discretion, that it will do so, as was the case twice in 1995. The
Partnership was foreclosed out of a $377,272 loan by a senior lienholder and was
paid off on a mortgage loan with a $525,085 shortfall during 1995. The Corporate
General Partner increased the unsecured note payable to the Partnership by such
amounts ($902,357). See "Unsecured Loan to Corporate General Partner ."
To date the Partnership has suffered no material losses on delinquencies,
defaults or foreclosures, partially due to the prior practice of the Corporate
General Partner to advance payments on loans originated prior to May 1, 1993,
that were not timely made by the borrowers , the prior practice of the Corporate
General Partner to purchase loans from the Partnership which were at risk of
causing a loss to the Partnership and its practice to date to voluntarily absorb
such losses in very limited circumstances. Delinquent loans (defined as those
loans for which the borrower is 90 days late in payment of installments due)
have historically represented approximately 5-10% of the total loans that the
Partnership has outstanding at any given time. There is no assurance that the
Corporate General Partner will continue to make payments to the Partnership on
any delinquent loan originated prior to May 1, 1993. If the Corporate General
Partner should discontinue making payments on additional delinquent loans
originated prior to May 1, 1993, or discontinue entirely its practice of
purchasing loans prior to foreclosure or otherwise assuming the loss, there
could be a material decrease in distributions.
Following is a table representing the Partnership's delinquency experience
(over 90 days) as of December 31, 1993, 1994 and 1995:
1995 1994 1993
---- ---- ----
Delinquent Loans $ 12,037,000 $ 12,849,000 $ 10,621,000
=========== =========== ===========
Total Mortgage Investment $151,351,000 $145,050,000 $133,549,000
=========== =========== ===========
Percent of Delinquent Loans
to Total Loans 7.95% 8.86% 7.95%
===== ===== =====
The following delinquent loans held by the Partnership have been acquired
and foreclosed upon by the Corporate General Partner from January 1, 1993
through December 31, 1995 by year:
Principal Delinquent
Balance Interest Year Foreclosed
------- -------- ---------------
$1,025,581 $ 150,295 1993
$ 58,000 $ 4,417 1994
$2,501,308 $ 252,810 1995
Of the $1,025,581 of the above Partnership loans foreclosed on by the
Corporate General Partner in 1993, $492,549 continued to be Real Estate Owned of
the Corporate General Partner as of December 31, 1995. A property which provided
security for one Partnership loan of $511,500 foreclosed on by the Corporate
General Partner in 1993 was disposed of in 1993 with no loss of principal to the
Partnership, but the Corporate General Partner sustained a loss of $112,795 of
delinquent interest. The property which provided security for a $58,000
Partnership loan was foreclosed on in 1994 and was disposed of by the Corporate
General Partner in 1994 at no loss of principal or delinquent interest. In
addition, the Corporate General Partner foreclosed on a mortgage loan which was
junior to a mortgage loan of $415,000 held by the Partnership during 1995. As a
result thereof, the Corporate General Partner owns two properties on which the
Partnership currently has mortgage loans, which loans total $492,000.
Should the Corporate General Partner realize any gain or loss on the
disposition or operation of a property acquired by the Corporate General Partner
through foreclosure of a property that had secured a Partnership loan , the
Corporate General Partner will retain such gain or absorb such loss. The
Partnership will not have any claim to any gain nor will it be liable for any
loss on such activities.
Senior lienholders also foreclosed the Partnership out of mortgages in the
amounts of $591,000 and $377,000 during 1994 and 1995, respectively. The
Corporate General Partner determined that there was not substantial equity to
justify the Partnership's foreclosing on the junior loans and taking title to
the underlying properties. In addition, the Partnership was paid off on a loan
at a discount of $525,085 during 1995. Although not obligated to do so, the
Corporate General Partner assumed the entire principal losses of $591,000 and
$902,000 in 1994 and 1995, respectively, and increased its unsecured loan
payable to the Partnership by the same amount.
In connection with the loan foreclosed out in 1994 and $64,975 on the loans
foreclosed out and sold at a discount in 1995, the Corporate General Partner has
also advanced $119,350 to the Partnership in the form of interest advances which
the Corporate General Partner lost at the time of foreclosure or payoff. The
Partnership is not obligated to reimburse the Corporate General Partner for such
advances.
If the Corporate General Partner were unable or unwilling to advance
interest on additional delinquent loans originated prior to May 1, 1993, or if
the delinquency rate increases on loans held by the Partnership which were
originated on or subsequent to May 1, 1993, the interest income of the
Partnership will be reduced by a proportionate amount. For example, if 10% of
the Partnership loans are nonperforming and the Corporate General Partner does
not advance such delinquent interest, the income of the Partnership will be
reduced by approximately 10%. If a mortgage loan held by the Partnership is
foreclosed on, the Partnership would acquire ownership of real property and the
inherent benefits and detriments of such ownership.
The Corporate General Partner may decide to further suspend or reduce
advances to the Partnership on delinquent interest payments with materially
adverse consequences to the Partnership and a material decrease in distributions
to Limited Partners. The amount of nonperforming loans increased from $4,923,000
(3.4% of the mortgage loan portfolio) as of December 31, 1994 to $8,309,000
(5.5% of the mortgage loan portfolio as of December 31, 1995. This increase is
primarily due to the increase in nonperforming loans originated on or after May
1, 1993 from $0 as of December 31, 1994, to $3,257,000 as of December 31, 1995.
In addition, the amount of loans that were originated on or after May 1, 1993,
and subject to the Corporate General Partners revised policy regarding advancing
delinquent interest totaled approximately $106,865,000 or 71% of the total trust
deed portfolio as of December 31, 1995. As such, an ever increasing percentage
of the Partnership's trust deed investments are in loans in which the Corporate
General Partner has a policy to not advance delinquent interest. Should the
delinquency rate on these loans increase, the interest income received by the
Partnership would be reduced.
Real Estate Owned
As of May 1, 1993, the Corporate General Partner changed its policy
regarding the purchase of mortgage loans from the Partnership prior to
foreclosure so as to generally not purchase mortgage loans from the Partnership
prior to foreclosures. Subsequent to this change in policy, the Partnership
acquired title to four properties through foreclosure during 1993 in which it
had loans totaling $2,612,122. Of these four properties, one was disposed of
during 1993 and one was disposed of during 1995 in transactions in which the
Partnership sustained no loss of principal. During 1994, the Partnership
acquired title to four properties through foreclosure on which it had loans
totaling $2,005,000. In addition, the Partnership acquired title to six
properties during 1995 through foreclosure in which it had loans totaling
$2,823,246. Of these six properties, one was disposed of during 1995 in a
transaction in which the Partnership sustained no loss of principal. The
Partnership continues to hold title to the following 11 properties as of
December 31, 1995:
<TABLE>
<CAPTION>
REAL ESTATE OWNED
(As of December 31, 1995)
Additional Delinquent
Partnership Capitalized Senior Interest at
Description Loan Amount Costs Loans Foreclosure
Light Industrial Warehouse
<S> <C> <C> <C> <C>
Merced, CA $ 1,000,000 $ 0 $ 0 $ 175,333
Residential Lots
Carmel Valley, CA $ 600,000 $ 1,173,916 $ 500,000(1) $ 141,750
Office Building
Monterey, CA $ 550,000 $ 151,426 $1,425,000(2) $ 30,077
Commercial Lot
Sacramento, CA $ 500,000 $ 49,828 $ 0 $ 39,042
Commercial Building
Sacramento, CA $ 850,000 $ 0 $ 0 $ 30,817
Developed Land
Los Gatos, CA $ 571,853 $ 0 $ 0 $ 140,282
Light Industrial Warehouse
Emeryville, CA $ 925,000 $ 0 $ 0 $ 235,721
Commercial Lot/Residential Development
Vallejo, CA $ 525,000 $ 43,569 $ 0 $ 89,949(3)
Residential Lot
Grass Valley, CA $ 55,000 $ 380 $ 0 $ 6,302
Retail Lot/Residence
Milpitas, CA/Campbell, CA $ 661,531 $ 17,500 $ 0 $ 159,971
Commercial Building
Oakland, CA $ 29,856 $ 0 $ 0 $ 34,134
- --------
<FN>
(1) This senior loan was paid off by the Partnership during 1994 due to its
relatively high interest rate.
(2) This senior loan was originally $2,102,646 including late charges and fees.
The Corporate General Partner arranged for this loan to be discounted to
$1,425,000 if the Partnership were to pay it off in full. The Partnership
paid this loan off prior to March 31, 1995.
(3) The delinquent interest was advanced by the Corporate General Partner on
behalf of the Partnership, which holds a 70% interest in the property and
on behalf of the co-owner of the property, an independent, third-party.
Under applicable law, the Corporate General Partner could only be
reimbursed for such advances if all lenders/owners of the property were
treated the same. Consequently, the Partnership reimbursed the Corporate
General Partner the $83,949 advanced by the Corporate General Partner ,
although it was not obligated to do so. The remaining $38,550 advanced by
the Corporate General Partner was reimbursed by the other owner of the
property.
</FN>
</TABLE>
Substantially all delinquent interest with respect to the Partnership loans
securing these properties was advanced to the Partnership and to the senior
lienholder, if applicable, by the Corporate General Partner. The Partnership has
no obligation to reimburse the Corporate General Partner for such advances, and
except as indicated above, has not reimbursed the Corporate General Partner for
any amounts.
The light industrial warehouse located in Merced, California continues to
be vacant. The property is currently listed with a real estate broker for lease
or sale. The Partnership may sustain a loss on this property and has recorded a
$350,000 allowance for loss on this property in its financial statements as of
December 31, 1995.
The Partnership has entered into a joint venture agreement with an
unrelated developer/builder for the development and buildout of 30 residential
lots located in Carmel Valley, California which lots are to be contributed by
the Partnership to the joint venture at a future time. The joint venture
agreement provides for the Partnership to receive a priority return of principal
and interest on any development capital contributed to the venture in addition
to a priority return of $70,000 per lot. The Partnership is entitled to an
allocation of 70% of any profits from the venture. Most all of the
infrastructure work including roads, drainage and utility tie-ins have been
completed in the development for which the Partnership has advanced
approximately $900,000. Construction of residential units began in February
1996.
The Partnership leased out the majority of the office building located in
Monterey, California to a publicly traded company at the end of 1995, and lease
payments began in January, 1996. The Corporate General Partner expects to be
able to operate this property profitability, lease up the remaining space and
place the property on the market for sale.
The commercial lot located in Sacramento, California is currently listed
with a real estate broker for sale. The Partnership may sustain a loss on this
property and has recorded a $250,000 allowance for loss on this property in its
financial statements as of December 31, 1995.
The commercial building in Sacramento will be put on the market for sale in
the near future. In addition, the Corporate General Partner is proceeding with
judicial foreclosure proceedings to obtain a personal judgment against the
former borrower on this property. The Corporate General Partner does not expect
any loss on this property.
The Corporate General Partner is attempting to rezone the developed land in
Los Gatos, California from light industrial to high-density residential. If
successful with this rezoning, the Partnership may enter into a joint venture to
develop the property or sell the property to a developer.
The light industrial warehouse located in Emeryville, California currently
generates revenue from tenants and a commercial sign which is located on the
property. The property currently is listed for sale. The Corporate General
Partner is in the process of obtaining development rights on the parcels in
Vallejo, California. The Corporate General Partner has brought suit against
Solano County and three local cities in association with this process. The
residential lot located in Grass Valley, California is currently listed for
sale. The retail lot located in Milpitas, California and the single family
residence located in Campbell, California are currently under contract for sale
at no loss to the Partnership. The commercial building located in Oakland,
California is currently under contract for sale at no loss to the Partnership.
These properties, other than the light industrial warehouse located in
Emeryville, California, did not generate revenue in 1995 and, as such, resulted
in operating losses. With the possible exceptions of the industrial warehouse
located in Merced, California and the commercial lot located in Sacramento,
California, the General Partners believe that due to the values of these
properties, the Partnership should not sustain any material losses of principal
on their ultimate disposition. However, the Partnership has maintained a reserve
for losses on real estate in its financial statements of $600,000 as of December
31, 1995.
An additional allowance of $500,000 was added to the loan loss reserve
during 1995 bringing the amount maintained in the financial statements of the
Partnership to $3,250,000 as of December 31, 1995. The General Partners believe
that, based on historical experience, the recorded loan loss reserve as of
December 31, 1995, is adequate in amount.
An additional $200,000 allowance for losses on real estate held for sale
was added in the financial statements of the Partnership during the year ended
December 31, 1995, bringing the total amount maintained as a reserve for losses
on real estate in the financial statements of the Partnership as of December 31,
1995, to $600,000. The General Partners believe that this allowance is adequate
in amount.
Prior to January 1, 1993, the Corporate General Partner , in accordance
with the terms of a Limited Indemnification Agreement that has since been
terminated, purchased from the Partnership four nonperforming loans for their
face amount of $3,990,500 . The Partnership received as consideration for such
sales an unsecured loan from the Corporate General Partner for the same amount.
The Corporate General Partner subsequently foreclosed on the loans , and from
the disposition of these properties ($1,904,407) were applied against the
Corporate General Partner's unsecured loan. In 1994, in order to enable the
Partnership to avoid loss recognition, the Corporate General Partner voluntarily
increased the amount of this unsecured loan by $591,000, the amount of a loan
the Partnership was foreclosed out of by a senior lienholder. During 1995, again
in order to enable the Partnership to avoid the recognition of loss, in
connection with a $377,272 mortgage loan which the Partnership was foreclosed
out of and a $525,085 discounted payoff the Partnership received with respect to
a mortgage loan, the Corporate General Partner voluntarily increased its
obligations under the unsecured loan by $902,357, the amount of these principal
losses. Since disposing of the four properties described above, the Corporate
General Partner has made additional principal payments against its unsecured
loan aggregating $2,250,718.
At December 31, 1995, the outstanding principal balance of the Corporate
Genera' Partner's unsecured loan is $1,023,232. The loan is due upon demand,
bears interest at the rate of 8% per annum, and is expected to be repaid by
December 31, 1997. The Corporate General Partner continues to make monthly
payments of principal and interest on this loan, and it is current.
Although the terms of the loan between the Partnership and the Corporate
General Partner may or may not be at market, they are considered fair and
reasonable.
Principal Investment Objectives
The Partnership invests primarily in mortgage loans on commercial,
industrial and residential income producing real property, single-family
residences and land. The terms of each loan are negotiated on a loan-by-loan
basis by the Corporate General Partner.
The Partnership's two principal investment objectives in making investments
of the type described above are to: (i) preserve the capital of the Partnership;
and (ii) provide monthly cash distributions to the Limited Partners. It is not
an objective of the Partnership to provide tax-sheltered income. The General
Partners have the power, subject to provisions of the Partnership Agreement such
as Article VI, to change the Partnership's investment objectives.
The Corporate General Partner locates and identifies virtually all
mortgages in which the Partnership invests and makes all investment decisions on
behalf of the Partnership in its sole discretion. The Limited Partners are not
entitled to act on any proposed investment. In evaluating prospective
investments, the Corporate General Partner considers such factors as the ratio
of the amount of the investment to the value of the property by which it is
secured, the property's potential for capital appreciation, expected levels of
rental and occupancy rates, current and projected cash flow of the property,
potential for rental increases, the degree of liquidity of the investment,
geographic location of the property, the condition and use of the property, its
income-producing capacity, the quality, experience and creditworthiness of the
borrower, general economic conditions in the area where the property is located,
and any other factors which the Corporate General Partner believes are relevant.
Almost all loans made or invested in by the Partnership are originated by
the Corporate General Partner. During the course of its business, the Corporate
General Partner is continuously evaluating prospective investments. The
Corporate General Partner will originate loans from referrals from brokerage
organizations, referrals from previous borrowers, additional lending to previous
borrowers and personal solicitations of new borrowers. All potential mortgage
loans to be made or invested in are evaluated to determine if the mortgage loan
is the type made by the Partnership, if the security for the loan and the
loan-to-value ratio meets the standards established by the Partnership, and if
the loan may be structured in a manner to meet the Partnership's investment
criteria and objectives. If the Corporate General Partner approves the loan as
presented, an appraisal will be ordered on the property securing the loan, and
the property will be inspected by an officer, director, agent or employee of the
Corporate General Partner.
The Partnership does not typically purchase mortgages at less than
principal value. Such a loan might be obtained if the Corporate General Partner
were to purchase an existing mortgage loan from a third party and sell the
mortgage loan to the Partnership at an amount less than its face value. This
difference is compensation for the services of the Corporate General Partner in
locating, negotiating and evaluating such loan purchase. Such loans are not
important to the Partnership's operations, cash flow or profitability.
The Partnership requires that the borrower obtain a title insurance policy
as to the priority of the mortgage and the condition of title. The Partnership
receives independent, on-site appraisals for each property in which it invests.
All independent appraisers used by the Partnership are licensed or qualified as
independent fee appraisers and are certified by the state in which the property
being appraised is located and may hold a designation from. Such appraisals will
ordinarily take into account the following factors, among others: the property;
estimated building cost; community and site data; valuation of land; valuation
by cost; economic market analysis and income; and correlation of the foregoing
valuation methods. However, the General Partners generally rely on their own
independent analysis and not exclusively on such appraisals in determining
whether or not to arrange a particular mortgage loan.
Types of Mortgage Loans
As more fully described below, the Partnership invests in first, second,
and third mortgage loans, wraparound mortgage loans, construction mortgage loans
on real property, and loans on leasehold interest mortgages. The Partnership
does not ordinarily make or invest in mortgage loans with a maturity of more
than 15 years, and most loans have terms of 1-7 years. All loans provide for
monthly payments of interest and some also provide for principal amortization,
although many Partnership loans provide for payments of interest only and a
payment of principal in full at the end of the loan term. The General Partners
or their Affiliates do not originate loans with negative amortization
provisions.
First Mortgage Loans
First mortgage loans are secured by first deeds of trust on real property.
Such loans are generally for terms of from one year to seven years. In addition,
such loans do not usually exceed 80% of the appraised value of improved
residential real property, 50% of the appraised value of unimproved real
property, and 70% of the appraised value of commercial property.
Second and Wraparound Mortgage Loans
Second and wraparound mortgage loans are secured by second or wraparound
deeds of trust on real property which is already subject to prior mortgage
indebtedness, in an amount which, when added to the existing indebtedness, does
not generally exceed 70% of the appraised value of the mortgaged property. A
wraparound loan is one or more junior mortgage loans having a principal amount
equal to the outstanding balance under the existing mortgage loans plus the
amount actually to be advanced under the wraparound mortgage loan. Under a
wraparound loan, the Partnership generally makes principal and interest payments
on behalf of the borrower to the holders of the prior mortgage loans.
Third Mortgage Loans
Third mortgage loans are secured by third deeds of trust on real property
which is already subject to prior first and second mortgage indebtedness, in an
amount which, when added to the existing indebtedness, does not generally exceed
70% of the appraised value of the mortgaged property unless it is commercial
property, in which case said amount does not generally exceed 65% of the
appraised value of the mortgaged property.
Construction Loans
Construction loans are loans made for the renovation of developed property,
and for the development of undeveloped property. Construction loans invested in
by the Partnership are generally secured by first deeds of trust on real
property. Such loans are generally for terms of from six months to 2 years. In
addition, if the mortgaged property is being developed, the amount of such loans
generally will not exceed 70% of the appraised value of the mortgaged property,
as developed.
Generally the Partnership will not disburse funds with respect to a
particular construction loan until work in the previous phase of the project on
which the loan is being made has been completed, and until an independent
inspector has verified the quality of construction and adherence to the
construction plans and has reviewed the estimated cost of completing the
project. In addition, the Partnership requires the submission of signed labor
and material lien releases by the borrower in connection with each completed
phase of the project prior to making any periodic disbursements of proceeds of
the loan to the borrower.
Leasehold Interest Loans
Loans on leasehold interests are secured by the borrower's leasehold
interest in the particular real property. Such loans are generally for terms of
from six months to 15 years. Leasehold interest loans generally do not exceed
70% of the value of the leasehold interest and are accompanied by personal
guarantees of the borrowers. The Partnership has made very few loans on
leasehold interests.
Variable Rate Loans
Approximately $82,691,000 (54.64%) of the Partnership's loan portfolio as
of December 31, 1995, contain a variable interest rate feature. The variable
rate loans originated by the General Partners 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).
Premiums over the above described indices have varied from 250-550 basis
points depending upon market conditions at the time the loan is made. Generally,
an index based upon the prime rate or Treasury Bill rate is the most volatile,
while an index based upon the cost of funds is the most stable.
From January 1, 1995, through December 31, 1995, the one year Treasury
Constant Maturity Index has decreased from 7.21% to 5.21%, the five-year
Treasury Constant maturity Index has decreased from 7.81% to 5.44%, the Prime
Rate Index remained at 8.50% and the Monthly Weighted Average Cost of Funds
Index for the Eleventh District Savings Institutions has increased from 4.747%
to 5.12%.
It is possible that the interest rate index used in a variable rate loan
will rise (or fall) more slowly than the rate of competing investments available
to the Partnership. The General Partners attempt to minimize such differential
by tying variable rate loans to indices that are more sensitive to fluctuations
in market rates.
Interest Rate Caps
Interest rate caps are found in all variable rate loans originated by the
Corporate General Partner. The interest rate cap most frequently used is a 4 %
ceiling and a floor equal to the starting rate. The inherent risk in interest
rate caps occurs when general market interest rates exceed the cap rate.
Assumability
Variable rate loans of 5 to 10 year maturities, are generally not assumable
without the prior consent of the General Partners. The Partnership does not
typically make or invest in other assumable loans. To minimize risk to the
investors, any borrower assuming a loan is subject to the same stringent
underwriting criteria as the original borrower.
Prepayment Penalties
The Partnership's loans typically do not contain a prepayment penalty . If
the Partnership's loans are at a high rate of interest in a market of falling
interest rates, the failure to have a prepayment penalty provision in the loan
allows the borrower to refinance the loan at a lower rate of interest, thus
providing a lower yield to the Partnership on the reinvestment of the prepayment
proceeds. However, as of December 31, 1995, $82,691,000 (approximately 54.6%) of
the mortgage loans held in the Partnership's portfolio were variable rate loans
which by their terms generally will have lower interest rates in a market of
falling interest rates, thereby providing lower yields to the Partnership.
However, these loans are written with relatively high minimum interest rates,
which generally operates to reduce this risk of lower yields.
Balloon Payment
A majority of the loans made or invested in by the Partnership 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 a mortgage loan
in a large lump sum payment, its ability to satisfy this obligation may be
dependent upon its ability to obtain suitable refinancing or otherwise raise a
substantial cash amount. As a result, such loans involve a higher risk of
default than fully amortizing loans.
Equity Interests and Participation In Real Property
As part of investing in or making a mortgage loan the Partnership may
acquire an equity interest in the real property securing the loan in the form of
a shared appreciation interest or other equity participation.
The Partnership also may invest its funds directly in real property, if in
the opinion of the General Partners, it is in the Partnership's best interest.
See "Business-Real Estate Owned." No other properties (other than those that may
be subject to foreclosure by the Partnership or a senior lender) are currently
under review for acquisition by the Partnership.
Standards for Mortgage Loans
In arranging mortgage loans, the Corporate General Partner considers
relevant real property and financial factors, including the condition and use of
the property, its income-producing capacity and the quality, experience, and
creditworthiness of the borrower.
The Partnership does not normally invest in mortgage loans secured by
multifamily residential property or commercial property unless the net annual
estimated cash flow after vacancy, operating expense, and mortgage debt service
deductions equals or exceeds the annual payments required on the mortgage loan.
In addition, the Partnership limits the amount of its investment in any single
mortgage loan, and the amount of its investment in mortgage loans to any one
borrower, to 10% of the total Partnership assets as of the date the loan is
made.
Mortgage Loans to Affiliates
The Partnership will not invest in mortgage loans to any of the General
Partners, Affiliates of the General Partners, or any limited partnership or
entity affiliated with or organized by the General Partners. However, the
Partnership may have an investment in a mortgage loan to the General Partners
when the Corporate General Partner assumes by foreclosure the obligations of the
borrower under a mortgage loan. As of December 31, 1995, the Partnership had
secured loans outstanding to the Corporate General Partner of $492,332.
Purchase of Loans from Affiliates
Although the Partnership has never done so, the Partnership may purchase
loans from the General Partners or their Affiliates that were originated by the
General Partners or their Affiliates and held for such party's own portfolio, as
long as any such loan is not in default and as long as such loan otherwise
satisfies all of the requirements set forth above. In addition, if such loan was
not made by the maker of the loan within the 90 days prior to its purchase by
the Partnership from the General Partners or their Affiliates, the General
Partners or their Affiliates, respectively, shall retain a minimum of a 10%
interest in such loan.
Borrowing
The Partnership has not incurred indebtedness for the purpose of investing
in mortgage loans. However, the Partnership may incur indebtedness in order to
prevent default under mortgage loans which are senior to the Partnership's
mortgage loans or to discharge such senior mortgage loans if this becomes
necessary to protect the Partnership's investment in mortgage loans. Such
short-term indebtedness may be with recourse to the Partnership's assets. In
addition, although the Partnership has not historically had to do so, the
Partnership may incur indebtedness in order to assist in the operation of a
property securing a mortgage loan that the Partnership takes over as a result of
default on the loan or foreclosure.
Sale and Repayment of Mortgages
The Partnership invests in mortgage loans and does not engage in real
estate operations or real estate developments (other than when such operations
are required when the Partnership forecloses on a loan in which it has made an
investment or takes over management of such foreclosed property), and does not
invest in mortgage loans primarily for sale or other disposition in the ordinary
course of business. The Partnership may require a borrower to repay the mortgage
loan upon sale of the mortgaged property if the General Partners determine that
such repayment appears to be advantageous to the Partnership based upon
then-current interest rates, the length of time that the loan has been held by
the Partnership, and the objectives of the Partnership. The net proceeds to the
Partnership from any such sale or repayment are invested in new mortgage loans
or distributed to the Partners at such times and in such intervals as the
General Partners in their sole discretion determine.
No Trust or Investment Company Activities
The Partnership has not qualified as a real estate investment trust under
the Internal Revenue Code of 1986, as amended, and, therefore, is not subject to
the restrictions on its activities imposed on real estate investment trusts. The
Partnership is not subject to registration as an investment company under the
Investment Company Act of 1940. It is the intention of the Partnership to
conduct its business in such manner as not to be deemed a "dealer" in mortgage
loans for federal income tax purposes.
Miscellaneous Policies and Procedures
The Partnership will not: (i) issue securities senior to the Units or issue
any Units or other securities for other than cash; (ii) invest in the securities
of other issuers for the purpose of exercising control; (iii) underwrite
securities of other issuers; or (iv) offer securities in exchange for property.
No single Partnership loan will exceed 10% of the total Partnership assets as of
the date that a loan is made.
Competition and General Economic Conditions
The Partnership's major competitors in providing mortgage loans secured by
deeds of trust on income producing and residential property are banks, savings
and loan associations, thrifts, and other entities both larger and smaller than
the Partnership. The Partnership is competitive in large part because the
Corporate General Partner generates all of its loans. The Corporate General
Partner has been in the business of making or investing in mortgage loans in
Northern California for more than 40 years and has developed a quality
reputation and recognition within the field.
Due to general economic conditions, the commercial real estate market in
California has experienced decreases in both values and rental rates and an
increase in vacancy rates. These conditions prompted the Corporate General
Partner to apply stricter underwriting standards . The Corporate General Partner
continues to apply relatively low loan-to-value ratios as a practice in making
mortgage loans.
In the past few years, the major institutional lenders had not been as
active in the commercial mortgage market as in past years. In fact, some
institutional lenders discontinued their commercial lending practice completely.
Recently, however, some major institutional lenders have reentered the
commercial mortgage market due to a stronger economy, stabilized property values
and leasing rates and the decrease in demand for residential loans. This has
created increased competition to the Partnership for investments in mortgages
secured by commercial properties, creating downward pressure on interest rates.
As such, interest rates of mortgage investments held by the Partnership could
drop in the near future, reducing the net yield earned by the Limited Partners.
CERTAIN LEGAL ASPECTS OF THE PARTNERSHIP'S MORTGAGE INVESTMENTS
Introduction
The following discussion is limited to the laws of California, the state in
which the properties securing the Partnership's mortgage investments will
generally be located. The laws of other states where the Partnership has or may
have mortgage investments may be significantly different, but the amount of such
investments is currently deemed to be immaterial by the General Partners.
General
The type of security device that will in almost all instances be used by
the Partnership in making mortgage loans will be the deed of trust, the most
commonly used real property security device in California and many other states.
Although a deed of trust is similar to a mortgage with power of sale, the deed
of trust has three parties: the borrower-trustor (similar to a mortgagor), the
trustee, and the lender-creditor (similar to a mortgagee) called the
beneficiary. The trustor grants the property, irrevocably until the debt is
paid, "in trust, with power of sale" to the trustee to secure payment of the
trustor's obligations. The trustee's authority is governed by law, the express
provisions of the deed of trust and the directions of the beneficiary. Each deed
of trust will provide that the beneficiary may replace the trustee by executing
a written instrument appointing a successor and recording it in the county in
which the property is located. The trustee under the deeds of trust securing
mortgage loans made by the Partnership will be a qualified corporation or title
insurance company selected by the General Partners. The General Partners usually
select Investors Yield, Inc., a majority-owned subsidiary of the Corporate
General Partner, as trustee. Generally, mortgage loans made by the Partnership
will not be insured by the Federal Housing Administration or otherwise
guaranteed or insured. Furthermore, the Partnership does not originate, service,
or warehouse mortgage loans. Such functions are performed on behalf of the
Partnership by the Corporate General Partner.
Foreclosure
Foreclosure of a deed of trust is accomplished in most cases by a
nonjudicial trustee's sale under the power-of-sale provision contained in the
deed of trust. Prior to such sale, the trustee must record a notice of default
and send a copy to the trustor, to any person who has recorded a request for a
copy of a notice of default, and to certain other persons. Where a beneficiary
under a junior deed of trust has recorded a request for a notice of default, a
copy of the notice must be sent to the beneficiary under such junior deed of
trust within 10 days after recordation of the notice of default. If no such
request has been recorded, the notice must nevertheless be sent to the
beneficiary under such junior deed of trust within one month. The trustor or any
beneficiary under a junior deed of trust or any person having a subordinate lien
or encumbrance of record may, at any time within the period commencing with the
date of recordation of the notice of default until five business days prior to
the date set for the foreclosure sale, cure the default and thereby reinstate
the loan by paying the entire amount of the debt then due, exclusive of
principal due only because of acceleration upon default, plus costs and expenses
actually incurred in enforcing the obligation and statutorily limited attorney's
and trustee's fees.
When the beneficiary under a junior deed of trust cures the default and
reinstates the loan secured by a senior deed of trust, the amount paid by the
beneficiary so to cure becomes a part of the indebtedness secured by the junior
deed of trust. After expiration of the reinstatement period (three months from
the date of recordation on the Notice of Default), and at least 20 days before
the trustee's sale, notice of sale must be posted in a public place and
published once a week over such 20-day period. The notice of sale must also be
recorded at least 14 days prior to the sale date. A copy of the notice of the
sale must, at least 20 days before the sale date, be posted on the property and
sent to the trustor, to each person who has requested a copy, to any successor
in interest to the trustor, and to the beneficiary under any junior deed of
trust.
The trustee's sale must be conducted by public auction and must be held in
the county where all or some part of the property subject to the deed of trust
is located. At the sale, the trustee may require a bidder to show evidence of
ability to deposit with the trustee the full amount of the bidder's final bid,
in cash (or equivalent thereto satisfactory to the trustee), prior to and as a
condition to recognizing such bid, and may conditionally accept and hold these
amounts for the duration of the sale. The beneficiary under the deed of trust
being foreclosed need not bid cash at the sale, but may instead make a "credit
bid" to the extent of the total amount secured by its deed of trust, including
trustee's fees and expenses. A beneficiary under a deed of trust junior to the
deed of trust has no right to credit bid any part of the indebtedness secured by
its junior deed of trust.
After the sale, the trustee will execute and deliver a trustee's deed to
the purchaser of the property.
A recital in the deed executed pursuant to the power of sale of compliance
with all requirements of law regarding the mailing of copies of notices or the
publication of a copy of the notice of default or the personal delivery of the
notice of default constitutes prima facie evidence of compliance with such
requirements and conclusive evidence thereof in favor of bona fide purchasers
and encumbrancers for value and without notice. The purchaser's title is,
however, subject to all prior liens and claims. Thus, if the deed of trust being
foreclosed is a junior deed of trust, such as the wraparound mortgage loans
which may be made by the Partnership, the trustee conveys title to the purchaser
subject to all senior deeds of trust and other prior liens and claims. A
foreclosure of a junior deed of trust has no effect on a senior deed of trust,
with the possible exception of the right of a senior beneficiary to accelerate
the balance of its loan pursuant to a "due-on-sale" clause contained in the
senior deed of trust. See "Due-on-Sale Clauses" below.
The proceeds received by the trustee from the trustee sale are applied
first to the costs, fees, and expenses of sale, and then in satisfaction of the
indebtedness secured by the deed of trust under which the sale was conducted.
Any additional proceeds are to be paid in accordance with California Law which
generally states that it be dispersed to the holders of junior deeds of trust
and other liens and claims in order of their priority, whether or not due and
payable. Any remaining proceeds are payable to the trustor or his successor in
interest. Following the trustee sale, neither the trustor nor a junior lienor
has any right of redemption, and the beneficiary may not obtain a deficiency
judgment against the trustor. In some instances, the loan may be secured by both
a deed of trust, as well as personal property. If the proceeds from the
foreclosure sale are insufficient to satisfy the obligations; then the
beneficiary may pursue his right by going after the additional security (the
personal property).
Another way to foreclose under a deed of trust is by a court proceeding. A
judicial foreclosure (in which the beneficiary's purpose is usually to obtain a
deficiency judgment where otherwise unavailable) is subject to most of the
delays and expenses of other lawsuits, sometimes requiring up to several years
to complete. Following a judicial foreclosure sale, the trustor or his
successors in interest may redeem for a period of one year (or a period of only
three months if the entire amount of the debt with interest and costs of the
action and sale is bid at the foreclosure sale).
Antideficiency Legislation and Other Limitations on Lenders
California has four principal statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust. Two of the California statutes
limit the beneficiary's right to obtain a deficiency judgment against the
trustor following foreclosure of a deed of trust, one based on the method of
foreclosure and the other on the type of debt secured. Under one statute, a
deficiency judgment is barred where the foreclosure was accomplished by means of
a nonjudicial trustee's sale. Under the other statute, a deficiency judgment is
barred where the foreclosed deed of trust secured a "purchase money" obligation
of either of two types: (i) a promissory note in favor of the seller of the
property evidencing the balance of the purchase price or (ii) a promissory note
in favor of a third-party lender to secure repayment of a loan used to pay all
or part of the purchase price of a one-to-four unit residential dwelling
occupied, at least in part, by the purchaser. Another statute, commonly known as
the "one form-of-action" rule, requires, among other things, the beneficiary to
exhaust the security under the deed of trust by foreclosure before bringing a
personal action against the trustor on the promissory note. The fourth statutory
provision limits any deficiency judgment obtained by the beneficiary following a
judicial sale to the excess of the outstanding debt over the fair value of the
property at the time of sale, thereby preventing a beneficiary from obtaining a
large deficiency judgment against the debtor as a result of low bids at the
judicial sale.
Effective January 1, 1992, the California legislature enacted a new law
which created an exception to the one form-of-action rule. If the beneficiary
believes that the security (real property) is contaminated by toxic waste, the
beneficiary can file a lawsuit to declare the security to be environmentally
impaired, and proceed against the borrower on the note. In order to do so,
strict statutory requirements must be followed.
The California Supreme Court has held that a beneficiary under a junior
deed of trust, whose lien has been extinguished as a result of foreclosure by
trustee's sale of a senior deed of trust, may bring a personal action directly
against the trustor on the promissory note. The beneficiary under the junior
deed of trust is not bound by the statute prohibiting a deficiency judgment
where the foreclosure was by means of a nonjudicial trustee's sale or by the
statute requiring the beneficiary to exhaust the security under the deed of
trust by foreclosure before bringing a personal action against the trustor on
the promissory note. The statutory provisions limiting any deficiency judgment
to the excess of the outstanding debt over the fair market value of the property
at the time of sale also have been held to have no application to a beneficiary
under a junior deed of trust extinguished by a nonjudicial foreclosure of a
senior deed of trust. The only antideficiency statute by which a beneficiary
under such a "sold out" junior deed of trust is bound is that barring a
deficiency judgment on a "purchase money" obligation. A junior beneficiary whose
deed of trust secures a "purchase money" obligation is prohibited from suing on
the promissory note following a trustee's sale under a senior deed of trust.
To the extent that the mortgage loans invested in or made by the
Partnership are "purchase money," the Partnership will be prevented from suing
on each such mortgage loan for a deficiency judgment if it should decide to
judicially foreclose the deed of trust securing such loan, and the Partnership
will be precluded from bringing a personal action on such mortgage loan even if
the Partnership becomes "sold out" because of the foreclosure of a senior deed
of trust. However, it is anticipated that in most instances the General Partners
will decide (because of the delay inherent in and redemption rights following
judicial foreclosures) to utilize the nonjudicial foreclosure remedy and not
seek deficiency judgments against defaulting trustors.
Other statutory provisions, such as the federal bankruptcy laws and laws
giving certain priorities to federal tax liens, may have the effect of delaying
foreclosure of the deed of trust securing a defaulted mortgage loan and may in
certain circumstances reduce the amount realizable from the foreclosure sale of
the mortgaged property.
Junior Mortgage Loans; Rights of Senior Mortgagees
All second and third mortgage loans and wraparound mortgage loans invested
in or made by the Partnership will be secured by second or third deeds of trust
which are junior to first or second deeds of trust held, in most cases, by
institutional lenders. The rights of the Partnership, as beneficiary under a
junior deed of trust, are subordinate to the rights of the beneficiaries under
all senior deeds of trust.
The form of deed of trust used by most institutional lenders, like the one
that will be used by the Partnership, confers on the beneficiary the right both
to receive all proceeds collected under any hazard insurance policy and all
awards made in connection with any condemnation proceedings, and to apply such
proceeds and awards to any indebtedness secured by the deed of trust in such
order as the beneficiary may determine. 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 beneficiaries under the senior deeds of
trust will have the prior right to collect any insurance proceeds payable under
a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by their deeds of
trust. If the Partnership holds a third deed of trust, the second deed of trust
would be paid all remaining funds, until paid in full, after the senior deed of
trust is paid, and before the Partnership is paid.
The form of deed of trust used by most institutional lenders typically
contains a "future advances" clause, similar to the one that will be used by the
Partnership. Such a clause provides, in essence, that additional amounts
advanced to or on behalf of the trustor by the beneficiary are to be secured by
the deed of trust. While such a clause is valid under California law, the
priority of any advance made under the clause depends primarily upon whether the
advance was an "obligatory" or "optional" advance. If the beneficiary is
obligated to advance the additional amounts, the advance is entitled to receive
the same priority as amounts initially made under the deed of trust,
notwithstanding that there may be intervening junior deeds of trust and other
liens between the date of recording of the deed of trust and the date of the
advance, and notwithstanding that the beneficiary had actual knowledge of such
intervening junior deed of trust and other liens at the time of the advance.
Where the beneficiary is not obligated to advance the additional amounts and has
actual knowledge of the intervening junior deeds of trust and other liens, the
advance will be subordinate to such intervening junior deeds of trust and other
liens.
Another provision typically found in the form of deed of trust used by most
institutional lenders obligates the trustor to 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 deed of trust, to provide and
maintain fire insurance on the property, to maintain and repair the property and
not to commit or permit any waste thereof, and to appear in and defend any
action or proceeding purporting to affect the property or the rights of the
beneficiary under the deed of trust. Upon a failure of the trustor to perform
any of these obligations, the beneficiary is given the right under the deed of
trust to perform the obligation itself, at its election, with the trustor
agreeing to reimburse the beneficiary for any sums expended by the beneficiary
on behalf of the trustor. All sums so expended by the beneficiary become part of
the indebtedness secured by the deed of trust. In addition, where a beneficiary
under a junior deed of trust is compelled to satisfy a senior lien for the
beneficiary's own protection, the beneficiary may enforce the lien as part of
the indebtedness secured by the junior deed of trust.
Upon default by the trustor under a deed of trust, the beneficiary may
foreclose the deed of trust by trustee's sale and extinguish any junior deed of
trust and other subordinate liens and claims. The beneficiary under a junior
deed of trust may bid at the foreclosure sale, but the bid must be all cash.
Unlike the beneficiary under the senior deed of trust being foreclosed, the
junior beneficiary is not entitled to credit bid any part of the indebtedness
secured by the junior deed of trust. Beneficiaries under junior deeds of trust
often attempt to avoid this problem by paying, before the trustee's sale and
during the reinstatement period, the amount in default under the senior deed of
trust (plus costs and statutorily limited trustee's and attorney's fees), adding
the amounts so paid to the indebtedness secured by the junior deed of trust, and
then foreclosing by trustee's sale under the junior deed of trust on the grounds
that a default under the senior deed of trust constituted an event of default
under the terms of the junior deed of trust. The junior beneficiary, as
beneficiary under its deed of trust then being foreclosed, is entitled to credit
bid up to the total indebtedness secured by the junior deed of trust. The
property would be sold at the trustee's sale subject to the senior deed of
trust, and the proceeds of sale would be applied first to the costs, fees, and
expenses of sale and then to the indebtedness secured by the junior deed of
trust, with any additional proceeds being payable to the holders of other junior
liens and claims in order of their priority. Any remaining proceeds would be
payable to the trustor, or his successor in interest.
In the event the junior beneficiary does not reinstate the senior deed of
trust and a trustee's sale is held thereunder, then the junior beneficiary is
entitled to share in any proceeds of the foreclosure sale remaining after
payment in full of the costs, fees, and expenses of sale, and the indebtedness
secured by the senior deed of trust as well as amounts secured by any prior
liens or claims. If the proceeds distributed to the junior beneficiary are not
sufficient to satisfy the outstanding indebtedness secured by the junior deed of
trust, the junior beneficiary may sue the trustor directly on the promissory
note as a "sold out" junior beneficiary. However, if the deed of trust held by
the junior beneficiary secures a "purchase money" obligation, the junior
beneficiary is prohibited from suing on the promissory note following the
trustee's sale and would, therefore be unable to recover from the trustor any
amounts remaining due.
"Due-on-Sale" Clauses
The Partnership's standard forms of promissory note and deed of trust, like
those of most institutional lenders, may contain a "due-on-sale" clause
permitting the Partnership to accelerate the maturity of a loan if the borrower
conveys the property.
In recent years a series of California Supreme Court decisions and
legislative actions have placed substantial restrictions on the right of lenders
to enforce such clauses. A 1975 statute applicable to deeds of trust executed on
or after January 1, 1976 encumbering residential real property prohibited
acceleration in the event of certain enumerated types of transfers of property,
such as upon death or divorce. This limitation would be preempted by the Garn
Act described below, if inconsistent with such legislation. However, it does not
appear to be inconsistent and probably is not preempted. In August 1978, the
California Supreme Court held that a due-on-sale clause in a deed of trust on
residential property could not be enforced by an institutional lender upon the
occurrence of an outright sale unless the lender could demonstrate that
enforcement was reasonably necessary to protect against impairment of its
security or the risk of default. In 1982, the California Supreme Court extended
this holding to cover private lenders and loans secured by nonresidential
properties. The Garn-St. Germain Depository Institutions Act of 1982 (the "Garn
Act") provides that, with certain exceptions and restrictions, any lender may
enforce a due-on-sale clause with respect to a mortgage on real property.
Prepayment Charges
The mortgage loans invested in or made by the Partnership may provide
for prepayment charges to be imposed on the borrowers in the event of certain
early payments on the loans. Other mortgage loans may also include "lock-in"
provisions forbidding prepayment for a specific period of time, usually several
years. Although prepayment charge provisions are enforceable as an alternate
performance or option on the part of the borrower, the amount of the prepayment
charge must be reasonable. Additionally, prepayment charges and lock-in
provisions are limited by statute where the mortgaged real property is
residential property of four units or less.
The General Partners have the absolute discretion to waive prepayment
charges with respect to mortgage loans made by the Partnership, either at the
time of origination of the loan or thereafter.
Late Charges and Additional Interest on Delinquent Payments
The mortgage loans invested in or made by the Partnership generally include
a provision which may require the borrower to pay a late payment charge, if
payment is not received within a certain number of days of its due date, and/or
additional interest on delinquent payments which are due under the loan
documents. Whenever it has paid interest to the Partnership not paid by a
borrower, the Corporate General Partner, as the servicing agent for loans made
by the Partnership, and as additional consideration for its services, retains
all late payment charges, together with all additional interest on delinquent
payments due under the loan documents. The Partnership assigns to the Corporate
General Partner all such late charges and additional interest on delinquent
payments due pursuant to the terms of the loan documents. Further, the Corporate
General Partner is granted the absolute discretion to waive any late charges
and/or additional interest and delinquent payments on behalf of the Partnership
as it deems necessary.
Applicability of California Usury Law
Prior to 1979, the California usury law prohibited a nonexempt lender, such
as the Partnership, from receiving interest of more than 10% on any loan. Since
1979, the maximum rate of interest for loans made by a nonexempt lender (other
than loans primarily for personal, family, or household purposes) became the
higher of (a) 10% per annum or (b) 5% per annum plus the rate prevailing on
advances by the Federal Reserve Bank of San Francisco to member banks on the
25th day of the month preceding the earlier of (i) the date of execution of the
contract to make a loan or (ii) the date of the making of a loan. Loans, the
proceeds of which are used primarily for the purchase, construction, or
improvement of real property, are not deemed to be made primarily for personal,
family, or household purposes. In addition, the California usury law was
expressly made inapplicable to interest received by a successor in interest to a
loan made by an exempt lender. The Partnership will seek to structure its loan
transactions so as to avoid application of the usury laws of California and the
other states in which the properties securing its investments are located.
However, there can be no assurance that some of the interest charges and fees
which the Partnership receives on its investments may not be held to be
usurious. See "Risk Factors--Usury Laws." However, the Partnership will not
knowingly make a usurious loan.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the anticipated federal income tax
aspects of an investment in the Partnership. However, it is impractical to set
forth in this Prospectus all aspects of federal, state, and local law which may
have tax consequences with respect to an investor's investment in the
Partnership. Furthermore, the discussion of the various aspects of federal
taxation contained herein is based on the Internal Revenue Code of 1986, as
amended ("Code"), existing laws, judicial decisions and administrative
regulations, rulings and practice, all of which are subject to change. Any such
change could be retroactive. In addition, the Partnership and the Limited
Partners may be subject to state and local taxes in states and localities in
which the Partnership may be deemed to be doing business, and this discussion
does not cover state or local tax consequences to a Limited Partner. There is
uncertainty concerning certain of the tax aspects discussed herein and there can
be no assurance that some of the deductions claimed or positions taken by the
Partnership will not be challenged by the IRS. The IRS has increased its audit
efforts with respect to limited partnerships, and an audit of the Partnership's
information return may result in, among other things, an increase in the
Partnership's gross income, in the disallowance of certain deductions or credits
claimed by the Partnership or in an audit of the income tax returns of a Limited
Partner. Any audit adjustments made by the IRS could adversely affect the
Limited Partner, and even if no such adjustments are ultimately sustained, the
Limited Partner will, directly or indirectly, bear the expense of contesting
such adjustments with the IRS. This analysis is not intended as a substitute for
careful tax planning. LIMITED PARTNERS ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISORS, WITH SPECIFIC REFERENCE TO THEIR OWN TAX SITUATION AND POTENTIAL
CHANGES IN APPLICABLE LAWS AND REGULATIONS. SEE "RISK FACTORS."
Neither the Partnership's independent accountant nor tax counsel to the
Partnership, Wendel, Rosen, Black & Dean ("Tax Counsel"), will prepare or review
the Partnership's income tax information returns, which will be prepared by the
General Partners. Tax matters involving the Partnership will be handled by the
General Partners, often with the advice of independent accountants, and may be
reviewed with Tax Counsel in certain circumstances.
Tax Counsel has rendered an opinion to the Partnership concerning the
status of the Partnership as a partnership rather than an association taxable as
a corporation for tax purposes. THIS OPINION IS SPECIFICALLY LIMITED TO THAT
SUBJECT AND DOES NOT DISCUSS THE OTHER TOPICS DISCUSSED HEREIN; NO OPINION AS TO
ANY OTHER MATTERS SHOULD BE INFERRED. However, the following discussion does
address what the General Partners consider to be the material tax issues
associated with an investment in the Partnership.
The discussion of federal tax consequences herein is based upon the facts
described in this Prospectus and upon the facts as they have been represented by
the General Partners. Furthermore, this discussion is based upon existing laws,
applicable current and proposed Treasury Regulations ("Regulations"), current
published administrative positions of the IRS contained in Revenue Rulings,
Revenue Procedures and other IRS pronouncements, and published judicial
decisions. There can be no assurance that any position of the Partnership
summarized below would be sustained by a court, if contested, or that
legislative or administrative changes or court decisions will not be forthcoming
which would significantly modify the statements expressed herein. Any such
changes may or may not be retroactive with respect to transactions prior to the
date of such changes.
Moreover, it is possible that such changes, even if not applied
retroactively, could reduce the tax benefits anticipated to be associated with
an investment in the Partnership.
FOR ALL THE FOREGOING REASONS, EACH LIMITED PARTNER IS URGED TO CONSULT AND
RELY UPON HIS OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL AND STATE CONSEQUENCES
ARISING FROM AN INVESTMENT IN THE PARTNERSHIP. THE COST OF SUCH CONSULTATION
COULD, DEPENDING ON THE AMOUNT THEREOF, 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 TAX LAWS. INVESTORS SHOULD BE AWARE THAT THE IRS MAY NOT AGREE
WITH ALL TAX POSITIONS TAKEN BY THE PARTNERSHIP AND THAT LEGISLATIVE,
ADMINISTRATIVE OR COURT DECISIONS MAY REDUCE OR ELIMINATE THE ANTICIPATED TAX
BENEFITS TO AN INVESTOR.
Taxation as a Partnership. A partnership generally will not itself be
subject to federal income tax if it is classified as a partnership for federal
income tax purposes, and each Partner will be required to report on his federal
income tax return his distributive share of the taxable income or loss of the
Partnership for each year. See "Taxation of Nonexempt Limited Partners" below.
However, as discussed below, for federal income tax purposes a "publicly traded
partnership" may be taxed as a corporation even though it is classified as a
partnership for other than federal income tax purposes. The Partnership will not
apply for a ruling from the IRS that the Partnership will be taxed as a
partnership rather than as an association taxable as a corporation. The
Partnership will rely on the opinion of Tax Counsel that the Partnership will be
classified as a partnership rather than as an association taxable as a
corporation for federal income tax purposes. Tax Counsel's opinion is based upon
certain representations of the General Partners, including the representations
that (i) the Partnership is organized and will be operated in compliance with
the Partnership Agreement and applicable state statutes governing limited
partnerships; (ii) the aggregate deductions to be claimed by the Partners as
their distributive shares of Partnership losses, if any, for the first two years
of Partnership operations did not exceed the amount of equity capital invested
in the Partnership; (iii) a creditor who made or makes a nonrecourse loan to the
Partnership did not have and will not have or acquire at any time, as a result
of making such loan, any direct or indirect interest in the profits, capital or
property of the Partnership other than as a secured creditor; and (iv) the
General Partners have, as of the date of the opinion letter, and will maintain
during the life of the Partnership a net worth of at least $20 million.
An organization, such as the Partnership, that is a limited partnership
under state law will be characterized as a partnership for federal income tax
purposes if it has less than three of the following major corporate
characteristics set forth in the Regulations: continuity of life, free
transferability of interests, limited liability, and centralization of
management. Based upon the representations of the General Partners, it is the
opinion of Tax Counsel that since the Partnership lacks at least two of these
four corporate characteristics, it is more likely than not that the Partnership
will be characterized as a partnership rather than as an association taxable as
a corporation for federal income tax purposes. Such opinion is based upon Tax
Counsel's interpretation of the Code, Regulations and published rulings and
court decisions. This opinion represents only Tax Counsel's best judgment and
has no binding effect or official status of any kind, so there is no assurance
that the opinion sets forth the position which would be sustained by a court, if
contested, or that legislative or administrative changes or court decisions may
not issue in the future which would significantly modify the opinion.
The Revenue Act of 1987 enacted Code provisions governing "publicly traded
partnerships." A partnership is publicly traded if its interests are traded on
an established securities market or are readily tradable on a secondary market
(or the substantial equivalent thereof). A publicly traded partnership will not
be treated as a corporation for tax purposes if 90% or more of its gross income
is "qualifying income." Qualifying income includes, among other 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 are to be applied separately to the
partnership, and a tax-exempt partner's share of Partnership gross income will
be treated as income from an unrelated trade or business. If the Partnership is
classified as a publicly traded partnership, it is possible that the Partnership
will be considered engaged in a financial business, so that the income of the
Partnership will not meet this qualifying income test and the Partnership will
be treated as a corporation for federal income tax purposes.
In June 1988, the IRS issued Notice 88-75 stating that Regulations, when
issued, will provide that interests in a partnership will not be treated as
readily tradable on a secondary market or the substantial equivalent thereof
under the circumstances, or by reasons of certain transactions, described in the
notice. The notice states, among other things, that interests in a partnership
will not be considered readily tradable on a secondary market or the substantial
equivalent thereof within the meaning of the publicly traded partnership rules
if the sum of the percentage interests in capital or profits represented by
partnership interests that are sold or otherwise disposed of during the taxable
year does not exceed 5% of the total interests in partnership capital or
profits. Certain transfers, including, but not limited to, transfers between
family members, transfers at death, transfers in which the basis of the
transferred interest carries over (in whole or in part) to the transferee,
transfers in which the basis is determined under Code Section 732, issuances of
interests by the Partnership for cash, property or services and certain
specified redemptions are disregarded in determining whether the 5% "safe
harbor" is met. Such specified redemptions are not considered transfers for
these purposes if (i) the redemption agreement requires receipt of written
notification of the limited partner's intention to exercise its redemption right
by the partnership or the general partner (or an agent thereof) at least 60
calendar days before the redemption date; (ii) the redemption agreement requires
that the redemption price not be established until at least 60 days after
receipt of such notification (or the price is established not more than four
times during the partnership's taxable year); and (iii) 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, does not exceed 10% of the total interest in
partnership capital or profits.
The General Partners have represented that (i) the Partnership will not
register Units or permit any other person to register Units for trading on an
established securities market within the meaning of Code Section 7704(b); (ii)
pursuant to Section X.2.(c) of the Partnership Agreement, the General Partners
will prohibit any transfer of Units which would cause the sum of percentage
interests in Partnership capital or profits represented by partnership interests
that are transferred during any taxable year of the Partnership to exceed 5% of
the total interest in partnership capital or profits (excluding for this purpose
transfers in which the basis of a Unit in the hands of the transferee is
determined, in whole or in part, by reference to its basis in the hands of the
transferor or is determined under Code Section 732; transfers at death;
transfers between members of a family as defined in Code Section 267(c)(4);
distributions from a retirement plan qualified under Code Section 401(a); and
transfers pursuant to Section XI.3 of the Partnership Agreement); (iii) no
distribution will be made to a Limited Partner within 60 calendar days of
receipt of the Limited Partner's written notice of withdrawal; and (iv) the
General Partners will not permit during any fiscal year of the Partnership the
withdrawal of Units representing in excess of 10% of the total interest in
Partnership capital or profits. Based upon the representations of the General
Partners, the Partnership should not be considered a publicly traded
partnership. However, because the law has only relatively recently been enacted
and regulations have not yet been issued, no opinion of Tax Counsel is available
on this issue.
No assurance can be given that partnership status could not be lost because
of future changes in the Code or the Regulations or other applicable authority,
or due to changes in the manner in which the Partnership is operated. If the
Partnership were taxable as a corporation, either at the outset or due to a
change in the manner in which the Partnership was operated or a change in
relevant law (including legislation, regulations, rulings or case law), the
Partnership would be subject to federal income tax on any taxable income at
regular corporate tax rates. The Limited Partners would not be entitled to take
into account their distributive share of the Partnership's deductions or
credits, if any, and would not be subject to tax on their share of the
Partnership's income except to the extent distributed to them either as
dividends out of current or accumulated earnings and profits or as a gain in
excess of the tax basis of their Units. Classification of the Partnership as an
entity taxable as a corporation would result in a substantial reduction in yield
and cash flow to a Limited Partner on his investment. In addition, if the
Partnership were deemed to be a publicly traded partnership but not taxable as a
corporation because it met the qualifying income test, the income of the
Partnership would be considered unrelated business taxable income.
General Principles of Partnership Taxation. A partnership generally is not
subject to any federal income taxes. The Partnership will file, for federal
income tax purposes, partnership information returns reporting its operations on
the accrual basis for each taxable year. The taxable year of the Partnership
will be the calendar year. The Partnership will provide Limited Partners with
income tax information relevant to the Partnership and their own income tax
returns, including each Limited Partner's share of the Partnership's taxable
income or loss, if any, capital gain or loss (net short-term and net long-term)
and other tax items for the Partnership's taxable year.
Taxation of Nonexempt Limited Partners. Each Limited Partner that is not
exempt from federal income tax will be required to report on his own income tax
return the Limited Partner's share of Partnership items of income, gain, loss,
deduction and credit. Accordingly, a Limited Partner will be subject to tax on
the Limited Partner's distributive share of Partnership taxable income whether
or not any cash distribution is made to the Limited Partner. Because the
Partnership will originate mortgage investments that may be subject to the
"original issue discount" rules (see "Original Issue Discount Rules" below), it
is possible that a Limited Partner's taxable income from the Partnership will
exceed any cash distributed to the Limited Partner by the Partnership with
respect to a particular year. It is anticipated that substantially all of the
income generated by the Partnership will be taxed as ordinary income for federal
income tax purposes.
In general, a Limited Partner is not taxed on Partnership distributions
unless such distributions exceed the Limited Partner's adjusted basis in its
Units. A Limited Partner's adjusted basis in his Units is the amount originally
paid for such interest increased by (i) his proportionate share of Partnership
indebtedness with respect to which no partner is personally liable, (ii) his
proportionate share of the Partnership's taxable income, and (iii) any
additional contributions to Partnership capital by such Limited Partner, and
decreased by (x) his proportionate share of Partnership losses, (y) the amount
of cash, and fair value of noncash, distributions to such Limited Partner, and
(z) any decreases in his share of any nonrecourse liabilities of the
Partnership. Any increase in nonrecourse liabilities of the Partnership is
treated as a cash contribution and a decrease in nonrecourse liabilities is
treated as a cash distribution, even though the Limited Partner contributes or
receives no cash, respectively. Distributions in excess of such basis generally
will be treated as gain from the sale or exchange of a Limited Partner's
interest in the Partnership.
A Limited Partner may deduct his share of Partnership losses, if any, to
the extent of his adjusted basis for his Units and subject to the "at risk" and
"passive loss" limitations. If a Limited Partner's share of Partnership losses
exceeds his basis in his Units at the end of the year in which the losses occur,
the excess losses cannot be deducted that year, but are allowed as a deduction
at the end of the first succeeding Partnership year, and any subsequent years,
to the extent that the Limited Partner's adjusted basis for his Units at the end
of any such year exceeds zero.
In general, a Limited Partner that is not a widely-held corporation may not
deduct losses incurred in certain business activities, including the types of
lending activity contemplated by the Partnership, in an amount exceeding the
aggregate amount the taxpayer is "at risk" in that activity at the close of his
taxable year. The effect of these rules generally is to limit the availability
of Partnership tax losses as offsets against other taxable income of a Limited
Partner to an amount equal to his adjusted basis in his Units excluding any
portion of adjusted basis attributable to Partnership nonrecourse indebtedness.
In addition, the at risk amount does not include contributions by a Limited
Partner to the extent the Limited Partner used the proceeds of a nonrecourse
borrowing to make such contributions.
The Tax Reform Act of 1986 (the "Reform Act") limited 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. Generally, 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
such as 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 (but not credits) from a
passive activity are allowed in full when the taxpayer disposes of his entire
interest in the passive activity in a taxable transaction.
If the Partnership is deemed to be engaged in the trade or business of
lending money, Partnership income which arises from that trade or business and
would otherwise be considered income from a passive activity will generally be
recharacterized as nonpassive income (except that under certain circumstances
where the Limited Partner has incurred debt to acquire his Unit, a portion of
Partnership income may be considered passive income), even though the net losses
of the Partnership or loss on the sale of a Unit will be treated as passive
activity losses. If the Partnership is not considered engaged in a trade or
business, then income and loss will be considered portfolio income and loss. The
determination of whether the Partnership is engaged in a trade or business
depends on the circumstances of the Partnership's operations, including the
number of loans made during any particular year, so no opinion of Tax Counsel is
available on this issue. In addition, if the Partnership acquires property
through foreclosure or a mortgage loan is recharacterized as an equity interest,
the allocated share of income, gains, deductions, losses, credits and tax
preferences from such a property or equity interest would be treated as arising
from a passive activity.
Under the Reform Act and the Revenue Reconciliation Act of 1990, most
miscellaneous itemized deductions are deductible by an individual taxpayer only
to the extent that, in the aggregate, 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. A Limited Partner's allocable share of the expenses of the
Partnership will be considered miscellaneous itemized deductions for this
purpose only if the Partnership is not considered to be in the trade or business
of lending money.
Gain or loss on the sale by a Limited Partner of his Units will equal the
difference between the amount realized (i.e., the amount of cash and the fair
market value of property received), including his share of Partnership
nonrecourse liabilities and his adjusted basis in such Units. Generally, gain
recognized by a Limited Partner on the sale of Units which have been held over
one year will 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 Code,
which would be treated as ordinary income. The definition of these terms will
not be considered here beyond noting that the Partnership may have "unrealized
receivables" arising from the ordinary income component of "market discount
bonds." In addition, if the Partnership holds property as a result of
foreclosure which is unsold at the time a Limited Partner sells his Units, or
holds an investment in a mortgage loan that is classified as an equity interest,
the amount of ordinary income that would result if the Partnership were to sell
such property is generally an "unrealized receivable."
Under current tax law, for noncorporate taxpayers long-term capital gain is
subject to the taxpayer's regular tax rate or 28%, whichever is less. The amount
of ordinary income against which a noncorporate taxpayer may deduct a capital
loss is the lower of $3,000 (or in the case of a married taxpayer filing a
separate return $1,500) or the excess of such losses of the taxpayer over the
taxpayer's capital gain.
A taxpayer's tax liability with respect to an investment in the Partnership
will, of course, depend upon his individual tax bracket. Currently, there are
five tax brackets for individuals. For calendar year 1996, the first bracket is
at 15% (on taxable income not over $40,100 in the case of married taxpayers
filing joint returns), the second at 28% (on taxable income from
$40,100-96,900), the third at 31% (on taxable income from $96,900-$147,700), the
fourth at 36% (on taxable income from $147,700-$263,750), and the fifth at 39.6%
(on taxable income over $263,700). Long-term capital gain is subject to the
taxpayer's regular tax rate or 28%, whichever is less.
The Reform Act and the Revenue Reconciliation Act of 1993 ("93
RRA")generally lengthened the period over which the cost of real property may be
recovered through depreciation deductions and limited the depreciation methods
which may be used. The changes apply to real property placed in service on or
after May 13, 1993. For example, as to any nonresidential property acquired by
the Partnership after that date (including the light industrial warehouse in
Merced, California which was acquired on June 15, 1993) (see "Real Estate
Owned"), cost recovery generally would be limited to the straight line method
over a period of 39 years.
The Reform Act added new, or revised existing, tax preference items to be
included and adjustments to be made in the determination of alternative minimum
taxable income ("AMTI"). For example, losses from passive activities allowable
in determining taxable income, with certain adjustments, would be disallowed and
tax-exempt interest on newly-issued private activity bonds and untaxed
appreciation on charitable contributions of appreciated property would
constitute tax preference items. The 93 RRA modified the rate schedule for
alternative minimum tax applicable to noncorporate taxpayers effective for tax
years beginning after December 31, 1992. For married taxpayers filing jointly,
the lower tier consists of a 26% rate, applicable to the first $175,000 of a
taxpayer's AMTI in excess of the exemption amount. The upper tier (for married
taxpayers filing jointly) consists of a 28% rate, applicable to AMTI that is
greater than $175,000 above the exemption amount. The 93 RRA also increased the
exemption amounts to $45,000 for married individuals filing joint returns,
$33,750 for unmarried individuals, and $22,500 for married individuals filing
separately, estates and trusts, but phases out these exemption amounts based on
certain income levels.
Section 163(d) of the Code, applicable to noncorporate taxpayers and S
corporation shareholders, places a limitation upon the deductibility of interest
incurred on loans made 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 such property. In general, 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 and any passive activity losses allowed under the phase-in
rules for interests in passive activities acquired prior to the effective date
of the Reform Act (as discussed above). Interest expense of the Partnership and
interest expense incurred by Limited Partners to acquire Units will not be
treated as investment interest to the extent attributable to a passive activity
of the Partnership. However, that portion of interest expense allocable to
portfolio investments is subject to the investment interest limitations.
Interest attributable to debt incurred by a Limited Partner in order to
purchase or carry Units may constitute "investment interest" subject to the
deductibility limitations of Code Section 163(d). Therefore, Limited Partners
should consider the effect of investment interest limitations on using debt
financing for their purchase of Units.
Tax Treatment of Tax-Exempt Entities. Sections 511 through 514 of the Code
impose a tax on the "unrelated business taxable income" of organizations
otherwise exempt from tax under Section 501(a) of the Code. Entities subject to
the unrelated business income tax include qualified employee benefit plans, such
as pension and profit-sharing plans, Keogh or HR-10 plans, and individual
retirement accounts. Other charitable and tax-exempt organizations are also
generally subject to the unrelated business income tax. Such organization, plan
or account is referred to as a "Tax-Exempt Entity". Interest income is not
subject to this tax unless it constitutes "debt-financed income."
Unrelated business taxable income includes gross income, reduced by certain
deductions and modifications, derived from any trade or business regularly
carried on by a partnership of which the Tax-Exempt Entity is a member where the
Partnership is a publicly traded partnership (see "Taxation as a Partnership"
above) or which is unrelated trade or business with respect to the Tax-Exempt
Entity. Among the items generally excluded from unrelated business taxable
income are (i) interest and dividend income; (ii) rents from real property
(other than debt-financed property or property from which participating rentals
are derived); and (iii) gains on the sale, exchange or other disposition of
assets held for investment.
In general, the receipt of unrelated business taxable income by a
Tax-Exempt Entity has no effect on such entity's tax-exempt status or on the
exemption from tax of its other income. However, in certain circumstances, the
continual receipt of unrelated business taxable income may cause certain
Tax-Exempt Entities to lose their exemption. Moreover, for certain types of
Tax-Exempt Entities, the receipt of any unrelated business income taxable may
cause all income of the 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 such year. EACH TAX-EXEMPT ENTITY IS URGED TO
CONSULT ITS OWN TAX ADVISORS CONCERNING THE POSSIBLE ADVERSE TAX CONSEQUENCES
RESULTING FROM AN INVESTMENT IN THE PARTNERSHIP.
The General Partners intend to invest Partnership assets in such a manner
that tax-exempt Limited Partners will not derive unrelated business taxable
income or unrelated debt-financed income with respect to their interests in the
Partnership. However, unrelated debt-financed income might be derived in the
event that the General Partners deem it advisable to incur indebtedness in
connection with foreclosures on property where mortgagees have defaulted on
their loans. This is the case, for example, with respect to the residential lots
in Carmel Valley, California which are subject to senior loans in the amount of
$500,000. If the Partnership ultimately recognized gain on the sale or other
disposition of those lots, a portion of such gain may be treated as
debt-financed income. See "Real Estate Owned." Subject to certain exceptions, if
a Tax-Exempt Entity, or a partnership of which it is a partner, acquires
property subject to acquisition indebtedness, the income attributable to the
portion of the property which is debt financed (based on the ratio of the
average acquisition indebtedness to the average amount of the adjusted basis of
such property) may be treated as unrelated business taxable income. Sales of
foreclosure property might also produce unrelated business taxable income if the
Partnership is characterized as a "dealer" with respect to such property.
Moreover, mortgage loans made by the Partnership which permit the Partnership to
participate in the appreciation value of the properties may be recharacterized
by the IRS as an equity interest and such recharacterization could result in
unrelated debt-financed income. However, there can be no assurance that the IRS
will agree that the Partnership's other income is not subject to tax under the
unrelated business income and unrelated debt-financed income tax provisions.
If a Qualified Plan's (defined below) Partnership income constitutes
unrelated business taxable income, such 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 the Partnership of a portion of the assets
of a qualified employee benefit plan and an individual retirement account
("Qualified Plan"), a fiduciary should consider (i) whether the investment is in
accordance with the documents and instruments governing the plan; (ii) whether
the investment satisfies the diversification requirements of Section
404(a)(1)(C) of the Employee Retirement Income Security Act of 1974 ("ERISA");
(iii) 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 (iv) whether the investment would cause the IRS to
impose an excise tax under Section 4975 of the Code. An investment in the
Partnership of the assets of an individual retirement account generally will not
be subject to the aforementioned diversification and prudence requirements of
ERISA unless the individual retirement account 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 and Audits. The Partnership's income tax returns
will be prepared by the General Partners. Generally, all partners are required
to report partnership items on their individual returns consistent with the
treatment of such items on the partnership's information return. However, a
partner may report an item inconsistently if he files a statement with the IRS
identifying the inconsistency. Otherwise, additional tax necessary to make the
partner's treatment of the item consistent with the partnership's treatment of
the item may be summarily assessed without a notice of deficiency or an
opportunity to protest the additional tax in the Tax Court being afforded to the
partner. Penalties for intentional disregard of the consistency requirements may
also be assessed.
The Partnership's returns may be audited by the IRS. Tax audits and
adjustments are made at the partnership level in one unified proceeding, the
results of which are binding on all partners. A partner may, however, protest
the additional tax by paying the full amount thereof and suing for a refund in
either the U.S. Claims Court or a U.S. District Court.
A partnership must designate a "tax matters partner" to represent the
partnership in dealing with the IRS. One of the General Partners will serve as
the "tax matters partner" to act on behalf of the Partnership and the Limited
Partners 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. Limited Partners with less than a
1% interest in the Partnership will not receive notice from the IRS of these
Partnership administrative proceedings unless they form a group with other
Partners which group has an aggregate interest of 5% or more in the Partnership
and request such notice. However, all Limited Partners have the right to
participate in the administrative proceedings at the Partnership level. Limited
Partners will be notified of adjustments to their distributive shares agreed to
at the Partnership level by the "tax matters partner."
If the Partnership's return is audited and adjustments are proposed
by the IRS, the "tax matters partner" may cause the Partnership to contest any
adverse determination as to partnership status or other matters, and the result
of any such contest cannot be predicted. Moreover, Limited Partners should be
aware that any such contest would result in additional expenses to the
Partnership, and that the costs incurred in connection with such an audit and
any ensuing administrative proceedings will be the responsibility of the
Partnership and may adversely affect the profitability, if any, of Partnership
operations. To the extent that Partnership funds are insufficient to meet such
expenses, funds may have to be furnished by Limited Partners, although they will
be under no obligation to do so. Adjustments, if any, resulting from any audit
may require each Limited Partner to file an amended tax return, and possibly may
result in an audit of the Limited Partner's own return. Any audit of a Limited
Partner's return could result in adjustments of non-Partnership items as well as
Partnership income and losses.
The Partnership will endeavor to provide all required tax information to
the Limited Partners within 60 days after the close of each calendar year.
Original Issue Discount Rules. The original issue discount rules will cover
obligations to the Partnership by third parties, i.e., mortgage loans and
obligations issued by the Partnership, if any. The original issue discount rules
will result in the Partnership realizing as interest income from a mortgage loan
the amount that economically accrues under the loan during the course of the
year (using compound interest concepts) even where a lesser amount is actually
paid or accrued under the terms of the mortgage loan. Identical concepts will be
used for determining the Partnership's interest deduction on its obligations, if
any.
Market Discount. The Partnership may purchase mortgage investments for an
amount substantially less than the remaining principal balance of such mortgage
investments. In such circumstances, each monthly payment which the Partnership
receives from a mortgagor will consist of interest at the stated rate for the
investment in a mortgage loan and a principal payment. If the Partnership
purchases an investment in a mortgage loan at a discount, for federal income tax
purposes the principal portion of each monthly payment will constitute (1) the
return of a portion of the Partnership's investment in the investment in a
mortgage loan and (2) the payment of a portion of the market discount for the
investment in a mortgage loan. The amount of each monthly payment attributable
to market discount will be recognized by the Partnership as ordinary income and
the amount of each monthly payment representing the return of the Partnership's
investment will not constitute taxable income to the Partnership. Accrued market
discount will also be treated as ordinary income on the sale of an investment in
a mortgage loan.
Subsequent Purchasers. Because of the accounting difficulties which would
be involved, the Partnership does not plan to make an election to adjust the
bases of Partnership assets pursuant to Section 754 of the Code, although it is
empowered to do so by the Partnership Agreement. Accordingly, the share of
depreciation deductions, if any, and gain or loss upon the sale of any
Partnership assets allocable to a subsequent purchaser of a Partnership Unit
will be determined by the Partnership's tax basis in such assets which will not
have been adjusted to reflect such purchaser's purchase price for his Unit (as
would have been possible had the Partnership made an election pursuant to
Section 754 of the Code). This treatment might not be attractive to prospective
purchasers, so that a Limited Partner might have difficulty in selling these
Units or might be forced to sell at a price lower than the price that might have
been obtained had such an election been made.
Taxation of Mortgage Loan Interest. Mortgage loans made by the Partnership
may, in certain situations, be structured to permit the Partnership to
participate in the appreciation in the value of the properties to which such
mortgage loans relate or in the cash flow generated by the operation of such
properties by the borrowers. The General Partners anticipate that the
Partnership will report for tax purposes all earnings attributable to mortgage
loans as interest income. In each case the determination of whether the
Partnership will be treated for tax purposes as a creditor or as a partner or
other equity participant will depend on an analysis of the facts and
circumstances of the specific mortgage loan and therefore no opinion of Tax
Counsel is available with respect to this issue. Therefore, there is no
assurance that the IRS would not successfully recharacterize a mortgage loan as
an equity interest. If a mortgage loan is recharacterized as an equity interest,
the Partnership would be required to recognize an allocable share of the income,
gain, loss, deductions, credits and tax preference items attributable to the
property to which the mortgage loan relates. Recharacterization of a loan as an
equity interest also could result in the receipt of unrelated business taxable
income for certain tax-exempt Limited Partners.
Treatment of Compensation of General Partners. Fees paid for the
organization, promotion, and syndication of a partnership are required to be
capitalized and may not be deducted currently. Fees paid for the organization
(but not promotion or syndication) of a partnership may be amortized and
deducted ratably over a period of 60 months. The Partnership will reimburse the
General Partners or their affiliate company for advances of all organization and
offering expenses out of "Cash available for distribution" during the first five
years following the expenditure or earlier should the Partnership be dissolved
sooner. Such reimbursements will be treated in the manner specified above.
The investment evaluation fee and servicing fee will be payable from
payments by borrowers and should not have any effect on Partnership income and
expense. However, the IRS could take the position that these fees are paid by
the Partnership, in which case interest income of the Partnership would be
increased by the amount of the fees, and the fees would be deductible by the
Partnership only to the extent the fees are reasonable compensation for the
services rendered and otherwise considered deductible expenditures. No opinion
of Tax Counsel is available with respect to this issue. The reimbursable
expenses payable by the Partnership to the General Partners and their affiliates
for goods and materials used for or by the Partnership and actual cost of
services of nonmanagement and nonsupervisory personnel related to the
administration of the Partnership will generally be treated in the same manner
as if the Partnership incurred such costs directly.
Allocations. The Limited Partners will receive allocations of the
Partnership's net income or net loss in the manner described in Article VIII of
the Partnership Agreement. These allocations are generally intended to match,
insofar as practicable, the allocation of net income with distributions of cash
to the Partners and the allocation of net loss with the related economic burden
borne by the respective Partners. Allocations of profits and losses will be
recognized for federal income tax purposes under Section 704(b) of the Code only
to the extent they have substantial economic effect or are in accordance with
the Partners' respective interests in the Partnership. The allocations under the
Partnership Agreement do not comply with Treasury Regulations governing
substantial economic effect, but are intended to be proportionate to the capital
contributions of the Partners and in accordance with the respective interests of
the Partners in the Partnership. If the IRS were to succeed in reallocating a
portion of the income or loss of the Partnership to the General Partners, the
Limited Partners would recognize a lesser share of income or a greater share of
loss, as the case may be. Such recognition would also affect the Limited
Partners' respective tax bases in their Units.
If a partner performs services for a partnership or transfers property to a
partnership and there is a related distribution to such partner, then the
distribution will be treated as a payment for such services or property to a
person who is not a partner. The IRS could argue that part of the distribution
of Partnership profits to the General Partners should be treated as payments for
syndication and organization costs or fees for making and acquiring mortgage
loans. Such treatment could have the result that taxable income allocated to
Limited Partners would increase without a corresponding increase in their share
of cash distributions.
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 such proposal, the likely effect of any such proposals upon
the income tax treatment presently associated with investment in mortgage loans
or the Partnership, or the effective date, which could be retroactive, of any
legislation which may derive from any such past or future proposal. POTENTIAL
INVESTORS ARE STRONGLY URGED TO CONSIDER ONGOING DEVELOPMENTS IN THIS UNCERTAIN
AREA AND TO CONSULT THEIR OWN TAX ADVISORS IN ASSESSING THE RISKS OF INVESTMENT
IN THE PARTNERSHIP.
State and Local Taxes. The Partnership may make or acquire loans in states
and localities which impose a tax on the Partnership's assets or income, or on
each Limited Partner based on his share of any income (generally in excess of
specified amounts) derived from the Partnership's activities in such
jurisdiction. Limited Partners who are exempt from federal income taxation will
generally also be exempt from state and local taxation. ALL LIMITED PARTNERS
SHOULD CONSULT WITH THEIR OWN TAX ADVISORS CONCERNING THE APPLICABILITY AND
IMPACT OF STATE AND LOCAL TAX LAWS.
ERISA Considerations. ERISA generally requires that the assets of employee
benefit plans be held in trust and that the trustee, or a duly authorized
investment manager (within the meaning of Section 3(38) of ERISA), 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 ERISA and prohibits certain transactions
between an employee benefit plan and the parties in interest with respect to
such plan (including fiduciaries). Under the Code, similar prohibitions apply to
all Qualified Plans, including IRA's and Keogh Plans covering only self-employed
individuals which are not subject to ERISA. Under ERISA and the Code, any person
who exercises any authority or control respecting the management or disposition
of the assets of a Qualified Plan is considered to be a fiduciary of such
Qualified Plan (subject to certain exceptions not here relevant).
Furthermore, ERISA and the Code prohibit parties in interest (including
fiduciaries) of a Qualified Plan from engaging in various acts of self-dealing.
To prevent a possible violation of these self-dealing rules, the General
Partners and their Affiliates may not permit the purchase of Units with assets
of any Qualified Plan (including a Keogh Plan or IRA) if they (i) have
investment discretion with respect to the assets of the Qualified Plan invested
in the Partnership or (ii) regularly give individualized investment advice which
serves as the primary basis for the investment decisions made with respect to
such assets.
Annual Valuation. Fiduciaries of Qualified Plans subject to ERISA are
required to determine annually the fair market value of the assets of such
Qualified Plans as of the close of any such plan's fiscal year. Although the
General Partners will provide annually upon the written request of a Limited
Partner an estimate of the value of the Units based upon, among other things,
outstanding mortgage investments, it may not be possible to value the Units
adequately from year to year, because there may be no market for them.
Plan Assets Generally. If the assets of the Partnership are deemed to be
"plan assets" under ERISA, (i) the prudence standards and other provisions of
Part 4 of Title 1 of ERISA applicable to investments by Qualified Plans and
their fiduciaries would extend (as to all plan fiduciaries) to investments made
by the Partnership, (ii) certain transactions that the Partnership might seek to
enter into might constitute "prohibited transactions" under ERISA and the Code
because the General Partners would be deemed to be fiduciaries of the Qualified
Plan Limited Partners and (iii) audited financial information concerning the
Partnership would have to be reported annually to the Department of Labor.
In 1986, the Department of Labor promulgated a final regulation defining
the term "plan assets" (the "Final Regulation"). Under the Final Regulation,
generally, when a plan makes an equity investment in another entity, the
underlying assets of that entity will be considered plan assets unless (1)
equity participation by benefit plan investors is not significant, (2) the
entity is a real estate operating company or (3) the equity interest is a
"publicly-offered security."
(i) Exemption for Insignificant Participation by Qualified Plans. The
Final Regulation provides that the assets of a corporation or partnership in
which an employee benefit plan invests would not be deemed to be assets of such
plan if less than 25% of each class of equity interests in the corporation or
partnership is held in the aggregate by "benefit plan investors" (including, for
this purpose, benefit plans such as Keogh Plans for owner-employees and IRA's).
For purposes of this "25%" rule, the interests of any person (other than an
employee benefit plan investor) who has discretionary authority or control with
respect to the assets of the entity, or who provides investment advice for a fee
(direct or indirect) with respect to such assets, or any affiliate of such a
person, shall be disregarded. Thus, while the General Partners and their
Affiliates are not prohibited from purchasing Units, any such purchases will be
disregarded in determining whether this exemption is satisfied. The Partnership
cannot assure "benefit plan investors" that it will always qualify for this
exemption. But see "Exemption for Publicly Offered Securities" below.
(ii) Exemption For a Real Estate Operating Company. The Final
Regulation also provides an exemption for securities issued by a "real estate
operating company." 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 the
Final Regulation 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 the Partnership would
qualify for an exemption from "plan assets" treatment as a real estate operating
company.
(iii) Exemption for Publicly Offered Securities. Under the Final
Regulation, a "publicly offered security" is a security that is (i) freely
transferable, (ii) part of a class of securities that is owned by 100 or
more investors independent of the issuer and of one another, and (iii) either is
(a) part of a class of securities registered under Section 12(b) or 12(g) of the
Securities Exchange Act of 1934, or (b) sold to the plan as part of an offering
of securities to the public pursuant to an effective registration statement
under the Securities Act of 1933 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. For purposes of this
definition, whether a security is "freely transferable" a factual question to be
determined on the basis of all relevant facts and If a security is part of an
offering in which the minimum is $10,000 or less, however, certain customary
restrictions on the 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 administrative needs
(which are enumerated in the Final Regulation) not, alone or in combination,
affect a finding that such securities are transferable. Because the Units will
not be subject to any transfer other than those enumerated in the Final
Regulations, the Units are by more than 100 independent investors and the Units
are registered under an applicable section of the Securities Exchange Act of
1934, the Units should be "Publicly-Offered Securities" within the meaning of
the Final Regulations. As a result, the underlying assets of the Partnership
should not be considered to be plan assets under the Final Regulations.
SUMMARY OF PARTNERSHIP AGREEMENT AND DESCRIPTION OF UNITS
The Units represent limited partnership interests in the Partnership. The
rights and obligations of the Partners in the Partnership are governed by the
Amended and Restated Limited Partnership Agreement ("Partnership Agreement"), as
amended as of September 1, 1992. The following is a summary of the Partnership
Agreement and does not purport to be complete, is qualified in its entirety by
reference to the Partnership Agreement, and in no way modifies or amends the
Partnership Agreement. See Exhibit A. As of December 31, 1995, there were 2,517
Limited Partners of the Partnership.
Nature of the Partnership
The Partnership is a California limited partnership formed June 14, 1984,
under the Uniform Limited Partnership Act. The Partnership Agreement authorizes
the issuance and sale of Units for cash up to a maximum outstanding of
$250,000,000.
The Responsibilities of the General Partners
The General Partners have the exclusive management and control of all
aspects of the business of the Partnership. In the course of their management,
the General Partners may, in their sole discretion, arrange mortgage loans when
and upon such terms as they determine to be in the best interests of the
Partnership, and employ such persons, including, under certain circumstances,
affiliates of the General Partners, as they deem necessary for the efficient
operation of the Partnership. However, Limited Partners (excluding General
Partners who own limited partnership interests) holding more than a majority of
the then outstanding Units may vote or consent to amend the Partnership
Agreement, dissolve the Partnership, remove any General Partner and elect one or
more new General Partners, or approve or disapprove the sale, pledge,
refinancing or exchange of all or substantially all of the assets of the
Partnership.
Liabilities of Limited Partners--Nonassessability
A Limited Partner may not be assessed for additional capital contributions,
and will not be liable for the liabilities of the Partnership in excess of such
Limited Partner's capital contribution and share of undistributed profits, if
any.
After a Limited Partner transfers his Unit or withdraws from the
Partnership, the Limited Partner may be liable under California law to the
Partnership for an amount not in excess of its capital contribution with
interest if necessary to discharge liabilities to creditors whose claims arose
before the return of capital.
Under California law, neither the existence nor the exercise of certain
voting rights that are contained in the Partnership Agreement should cause the
Limited Partners to be deemed to be taking part in the management of Partnership
business with a resulting loss of limited liability. Such rights consist of the
right, by a vote of a majority in interest of the Limited Partners, to remove
and then replace the General Partners, to elect a successor General Partner, to
admit a new General Partner, to dissolve the Partnership, to amend, under
certain circumstances, the Partnership Agreement and to approve or disapprove
the sale, pledge, refinancing, or exchange of all or substantially all of the
assets of the Partnership.
Term and Dissolution
The Partnership will continue until December 31, 2034, but may, in certain
circumstances, be dissolved at an earlier date. The Partnership may be dissolved
upon:
a. The dissolution, death, retirement, removal, or adjudication of
bankruptcy of a General Partner, unless (i) a remaining General Partner
continues the business of the Partnership or (ii) if there is no remaining
General Partner, the Limited Partners (excluding General Partners who own
limited partnership interests), by a vote of a majority in interest, elect to
continue the business of the Partnership and a successor General Partner is
elected by the Limited Partners.
b. A vote of a majority in interest by the Limited Partners (excluding
General Partners who own limited partnership interests) in favor of dissolution
and winding up of the Partnership.
Meetings
Meetings of the Limited Partners for any purpose may be called by the
General Partners at any time and upon written request to the General Partners
signed by the Limited Partners holding at least 10% of the Units. The General
Partners have never called a meeting of the Limited Partners and have no present
intention of doing so.
Voting Rights
The Limited Partners have the right to vote or consent by majority action
(disregarding any Units owned by General Partners), and such action is required,
to:
a. amend the Partnership Agreement, except to cure any ambiguity or
formal defect or omission, to conform the Partnership Agreement to applicable
laws and regulations and any change which, in the General Partners' judgment, is
not to the prejudice of the Limited Partners;
b. dissolve the Partnership;
c. remove any General Partner and elect one or more new General
Partners; or
d. approve or disapprove the sale, pledge, refinancing or exchange of
all or substantially all of the assets of the Partnership.
If a General Partner is removed, is terminated as a General Partner of the
Partnership, or withdraws from his position as a General Partner, the
Partnership shall pay to the General Partner all amounts then accrued and owing
to the General Partner. Additionally, the Partnership shall terminate a General
Partner's interest in Partnership income, losses, distributions, and capital by
payment of an amount equal to the then present fair market value of such
Partner's interest. The then present fair market value of such Partner's
interest purchased by the Partnership shall be determined by agreement between
such General Partner and the Partnership or, if they cannot agree, by
arbitration in accordance with the then current rules of the American
Arbitration Association. The expense of arbitration shall be borne equally by
such General Partner and the Partnership. The method of payment to such General
Partner should not threaten the solvency or liquidity of the Partnership.
The Partnership's books and records are maintained at the principal office
of the Partnership and are open to inspection and examination by Limited
Partners or their duly authorized representatives during normal office hours. A
copy of each appraisal for the underlying property upon which a mortgage loan is
made is maintained at the principal office of the Partnership, until at least
five years after the last date the Partnership holds the related mortgage, and
is open to inspection, examination and copying by Limited Partners or their duly
authorized representatives during normal office hours. A fee for copying may be
charged by the Partnership.
Status of Units
Each Unit when issued will be fully paid and nonassessable and all Units
have equal rights. Investments in the Partnership, whether initial investments
or subsequent additional investments, may be made at any time during any
calendar month. An investor is deemed to be a Limited Partner, with all of the
associated rights, immediately upon acceptance by the General Partners.
Distributions
Capital contributions made by Limited Partners are invested in the Limited
Partnership's pooled mortgage fund as of the date that the Limited Partner is
deemed to be a Limited Partner. Interest, if any, payable to Limited Partners
accrues to the benefit of such Limited Partner as of such date. Interest from
the Partnership's mortgage loans is paid in arrears, and, therefore, is paid to
the Partners on the thirtieth day of the month following the month in which such
interest is earned.
All cash available for distribution (as defined in the Partnership
Agreement), if any, is paid monthly in cash or additional Units (.99% to the
Corporate General Partner, and 99.01% to the Limited Partners) in the ratio that
their respective capital contributions bear to the aggregate capital
contributions of the Partners as of the last day of the calendar month preceding
the month in which such distribution is made. Net proceeds (as defined in the
Partnership Agreement), if any, received by the Partnership may be reinvested in
new loans of the General Partners or may be distributed at such times and in
such intervals as the General Partners may determine, in their sole discretion.
In the event of any distribution of net proceeds, such distributions shall be
made to the Partners, .99% to the General Partners, and 99.01% to the Limited
Partners or the ratio that their respective capital contributions bear to the
aggregate capital contributions of the Partners as of the last day of the
calendar month preceding the month in which such distribution of net proceeds is
made, provided that no such distribution will be made to the General Partners
with respect to that portion or their adjusted capital contribution represented
by their promotional interests until the Limited Partners have received 100% of
their capital contributions. Any proceeds from the sale of Units that have not
been invested by the Partnership within two years of the date of the Prospectus,
or any amendment or supplement thereto except for reserves and necessary
operating capital, shall be distributed pro rata to the Partners as a return of
their capital contribution.
All distributions may be suspended at any time by the General Partners, in
their sole discretion. All distributions are subject to the payment of expenses
and the establishment and maintenance of reserves which are adequate in the
judgment of the General Partners. See Financial Statements of the Partnership
herein for historical record of net income allocated to Limited Partners. All of
such amounts were cash available for distribution to the Limited Partners.
Reinvestments
Each Limited Partner has the option of reinvesting distributions
("Reinvested Distribution") instead of receiving cash payments. Reinvested
Distributions are used to purchase additional Units from the Partnership at a
rate of one Unit for every $1.00 of Reinvested Distributions. Subject to the
right of the General Partners to terminate or reinstate the Reinvestment Plan,
such Plan will continue to be available whenever permitted by federal and state
law, and as long as such Limited Partner meets all applicable suitability
standards. Reinvested Distributions are invested in additional mortgage loans
and other investments.
A Limited Partner may elect to participate in the Reinvestment Plan at the
time it invests and will be deemed a reinvestment participant as of that day.
Such Limited Partner may also make such election or revoke a previous election
at any time by sending written notice to the Partnership. Such notice shall be
effective for the month in which the notice is received if received at least 10
days prior to the end of the calendar month, otherwise it is effective the first
of the following month. Units so purchased under the Plan are credited to the
Limited Partner's capital account as of the first day of the month following the
month in which the reinvested distribution is made. If a Limited Partner revokes
a previous election, subsequent distributions made by the Partnership are
distributed to the Limited Partner instead of being reinvested in Units.
The General Partners will mail to each reinvestment participant a statement
of account describing the Reinvested Distributions received, the number of Units
purchased, the purchase price per Unit, and the total Units accumulated, within
30 days after the Reinvested Distributions have been credited. Tax information
for income earned on Units under the Reinvestment Plan for the calendar year
will be sent to each reinvestment participant by the General Partners at the
same time annual tax information is sent to the Limited Partners. Reinvestment
of distributions does not relieve a reinvestment participant of any income tax
which may be payable on such distributions.
No reinvestment participant shall have the right to draw checks or drafts
against his account or to give instructions to the General Partners except as
expressly provided in the Partnership Agreement.
Units acquired through the Reinvestment Plan carry the same rights,
including voting rights, as Units acquired through original investment.
The terms and conditions of the Reinvestment Plan may be amended,
supplemented, or terminated for any reason by the Partnership at any time by
mailing notice thereof at least 30 days prior to the effective date of such
action to each reinvestment participant at his last address of record.
The General Partners reserve the right to suspend or terminate the
Reinvestment Plan if: (a) they determine, in their sole discretion, that the
Plan impairs the capital or the operations of the Partnership; (b) they
determine, in their sole discretion, that an emergency makes such continuance of
the plan not reasonably practicable; (c) any governmental or regulatory agency
with jurisdiction over the Partnership so demands for the protection of the
Limited Partners; (d) in the opinion of counsel for the Partnership, such Plan
is not permitted by federal or state law or, when repurchases, sales,
assignments, transfers and exchanges of Units in the Partnership within the
previous twelve (12) months would result in the Partnership being considered
terminated within the meaning of Section 708 of the Internal Revenue Code; or
(e) the General Partners determine in good faith that allowing any further
reinvestments would give rise to a material risk that the Partnership would be
treated as a "publicly traded partnership" within the meaning of Internal
Revenue Code Section 7704 for any taxable year.
Assignment and Transfer of Units
There is no public market for the Units and none is expected in the future.
Limited Partners have only a restricted and limited right to assign their
partnership interests and rights. A Limited Partner's interest in the
Partnership may only be transferred by written instrument satisfactory in form
to the General Partners. No transfer may be made of a fractional Unit, and no
transfer may be made if, as a result of such transfer, a Limited Partner (other
than a Limited Partner transferring all of his or her Units or in the event of a
transfer by operation of law) would own less than 2,000 Units. No transfer may
be made except in compliance with then-current laws, rules and regulations of
any applicable governmental authority, and all proposed transferees must meet
the registration and suitability provisions of applicable state laws.
Transferees who wish to become substituted Limited Partners may do so only upon
the written consent of the General Partners, and after compliance with Article X
of the provisions of the Partnership Agreement.
Repurchase of Units, Withdrawal from Partnership
A Limited Partner may withdraw, or partially withdraw, from the Partnership
and obtain the return of all or part of its outstanding capital account by
sending written notice of withdrawal to the General Partners, subject to the
following limitations:
1. Any such payment will be made by the Partnership from cash
available for distribution, Net Proceeds and capital contributions; such
distributions will be made within 61 to 91 days after the date the written
notice is provided to the General Partners; provided, however, the Limited
Partners shall have the right to receive such distributions of cash only to the
extent such funds are available; the General Partners shall not be required to
use any other sources of Partnership funds other than cash available for
distribution, net proceeds and capital contributions to fund a withdrawal; nor
shall the General Partners be required to sell or otherwise liquidate any
portion of the Limited Partnership's assets in order to fund a withdrawal.
2. All payments in satisfaction of requests for withdrawal shall be on
a "first-come, first-served" basis. In the event that the sums required to fund
withdrawals in any particular month exceed the amount of cash available for
distribution, funds shall be distributed first to the Limited Partner whose
request was first received by the General Partners, until such Limited Partner's
request is paid in full. If such Limited Partner's withdrawal request cannot be
paid in full at the time made, because of insufficient cash available for
distribution or otherwise, the General Partners shall continue to distribute
eligible funds to such Limited Partner until such withdrawal request is paid in
full. Once the General Partners have satisfied the request of the Limited
Partner whose request was received first, the next Limited Partner to submit a
withdrawal request may begin to receive distributions on account of such
withdrawal.
3. Distributions to withdrawing Limited Partners are limited to a
maximum of $75,000 per calendar quarter for any Limited Partner (or $100,000 in
the case of a deceased Limited Partner).
4. During up to 91 days, as applicable, following receipt of written
notice of withdrawal from a Limited Partner, the General Partners shall not
refinance any loans of the Partnership or reinvest any cash available for
distribution or net proceeds until the Partnership has sufficient funds
available to distribute to the withdrawing Limited Partner all of his capital
account in cash.
5. No more than 10% of the outstanding Units may be withdrawn during
any calendar year except upon dissolution of the Partnership.
6. In the event that any Limited Partner takes withdrawals from the
Partnership and such withdrawal reduces the capital account of such Limited
Partner below $2,000, the Corporate General Partner may distribute all remaining
amounts in such account to such Limited Partner.
The interest of a General Partner is not assignable, in whole or in part,
except when a substitution is made by the Limited Partners and except for the
right of Limited Partners to elect to continue the Partnership and elect a new
General Partner upon the occurrence of the dissolution, death, retirement,
removal or adjudication of bankruptcy of the last remaining General Partner of
the Partnership. The Partnership Agreement contains no provisions limiting the
right of General Partners to withdraw from the Partnership.
Special Power of Attorney
Under the terms of the Partnership Agreement, each Limited Partner appoints
the General Partners to serve as their attorneys-in-fact with respect to the
execution, acknowledgment and filing of certain documents related to the
Partnership or the Partnership Agreement. The special power of attorney given by
each Limited Partner to the General Partners cannot be revoked and will survive
the death of a Limited Partner or the assignment of Units.
REPORTS TO LIMITED PARTNERS
Within 60 days after the end of each fiscal year of the Partnership, the
General Partners will deliver to each Limited Partner such information as is
necessary for the preparation by each Limited Partner of his federal income tax
return. Within 120 days after the end of the Partnership's calendar year, the
General Partners will transmit to each Limited Partner an annual report which
will include financial statements of the Partnership audited by the
Partnership's independent public accountants and prepared on an accrual basis in
accordance with generally accepted accounting principles. Such financial
statements will include a profit and loss statement, a balance sheet of the
Partnership, a cash flow statement and a statement of changes in Partners'
capital with a reconciliation with respect to information furnished to Limited
Partners for income tax purposes. The annual report for each year will report on
the Partnership's activities for that year, identify the source of Partnership
distributions, set forth the compensation paid to the General Partners and their
affiliates, and a statement of the services performed in consideration therefor
and contain such other information as is deemed reasonably necessary by the
General Partners to advise the Limited Partners of the affairs of the
Partnership.
The Partnership will have available upon written request for review by
Limited Partners a copy of the information filed with the Securities and
Exchange Commission on Form 10-K within 90 days of the closing of the fiscal
year end, and on Form 10-Q within 45 days of the closing of each other quarterly
fiscal period, by dissemination of such Form 10-K and Form 10-Q or any other
report containing substantially the same information as required by Form 10-K
and Form 10-Q.
PLAN OF DISTRIBUTION
The Units being offered hereunder will be offered to the general public
through Owens Securities Corp. ("Selling Agent"), who is a member of the
National Association of Securities Dealers, Inc. ("NASD") and who is affiliated
with the Corporate General Partner. In addition, at the option of the Corporate
General Partner, Units may be offered for sale by certain officers or directors
of the Corporate General Partner, or other licensed securities dealers. Owens
Securities Corporation will use its best efforts to find eligible investors who
desire to subscribe for the purchase of Units from the Partnership. The proceeds
from the offering will be available to the Partnership only with respect to
Units actually sold by Owens Securities Corp. or other broker dealers, or
certain officers or directors of the Corporate General Partner. Because the
Units are offered on a "best-efforts" basis, there can be no assurance that all
or any part of the Units will be sold.
The amount of the offering is 67,327,788 Units (including reofferings of
Units purchased or to be purchased by the Partnership on withdrawals by Limited
Partners). The Units will be offered to the public at $1.00 per Unit. The
minimum investment is 2,000 Units ($2,000). The General Partner has the right to
reject any offer to purchase Units, but shall generally accept or reject
applications upon their receipt. The offering period will continue until
terminated by the General Partners. In addition, at times when the General
Partners determine that there are not enough suitable loans for investment with
the Partnership's funds, the General Partners may, as was done in 1991, 1992,
1994, and 1995 declare a moratorium on the sale of Units. The offering may not
extend beyond one year in certain jurisdictions without the prior consent of the
appropriate regulatory agencies. 163,316,937 Units were outstanding as of
December 31, 1995, held by 2,496 Limited Partners.
Owens Securities Corp. is registered as a broker-dealer qualified to sell
Units in the Partnership under federal law and the laws of certain states.
The Corporate General Partner intends to pay commissions to Owens
Securities Corp. and other licensed security dealers (not exceeding 4%) and will
reimburse Owens Securities Corp. for certain expenses incurred in selling the
Units. Such reimbursed expenses for this offering are estimated to be no more
than $40,000, and may include reimbursement of salaries and general office and
administrative expenses. Commissions to be paid to certain licensed securities
dealers or registered representatives, including Owens Securities Corp., are
anticipated to be no more than $250,000 for this offering. Such reimbursement
and commissions will be paid by the Corporate General Partner, and will not
reduce the amount of investment funds received by the Partnership from the sale
of Units. See "Compensation of the General Partners and Their Affiliates." The
General Partners and participating broker/dealers shall be prohibited from
directly or indirectly paying or awarding any finders fees, commissions or other
compensation to any person engaged by a potential investor for investment advice
as an inducement to such advisor to advise the purchase of Units; provided,
however, that the payment of the normal sales commissions payable to a
registered broker/dealer or other properly licensed person for selling Units
shall not be prohibited. The Partnership will reimburse the Corporate General
Partner for all expenses of this offering (including legal and accounting
expenses, printing costs and filing fees, but not sales expense reimbursement
and commissions) out of cash available for distribution. Investors who desire to
purchase Units should complete the Subscription Agreement and Power of Attorney
(attached as Exhibit B) and return it to Owens Mortgage Investment Fund, P.O.
Box 2308, Walnut Creek, CA 94595. Full payment must accompany all subscriptions.
Checks should be made payable to "Owens Mortgage Investment Fund." By submitting
the Subscription Agreement and Power of Attorney with payment for the purchase
of Units, the investor (i) accepts and agrees to be bound by the provisions of
the Partnership Agreement, (ii) grants a special and limited power of attorney
to the General Partners; and (iii) represents and warrants that the investor
meets relevant suitability standards and is eligible to purchase Units. See
"Investor Suitability Standards".
LEGAL MATTERS
Certain legal matters in connection with the issuance of Units offered
hereby will be passed upon for the Partnership by A. Nick Shamiyeh, Walnut
Creek, California, legal counsel for the Partnership and the General Partners.
The sole principal of the firm, as well as his individual retirement account,
own or control an aggregate of 127,730 Units, none of which were received in
connection with the preparation of any offering of Units.
Tax Counsel for the Partnership is Wendel, Rosen, Black & Dean, Oakland,
California. Certain members of the firm own or control an aggregate of 926,387
Units, none of which were received in connection with the preparation of any
offering of Units. Certain members of the firm and certain trusts for which
members of the firm are trustees, own interests in notes secured by deeds of
trust originated and placed directly with such members, plans or trustees by the
Corporate General Partner as a result of transactions separate and distinct from
any transaction involving the Partnership. The principal amount of all such
notes as of December 31, 1995, is $1,165,523.
EXPERTS
The financial statements and financial statement schedule of Owens Mortgage
Investment Fund as of December 31, 1995 and 1994 , and for each of the years in
the three-year period ended December 31, 1995, and the balance sheet of Owens
Financial Group, Inc. as of December 31, 1995, have been included herein and in
the registration statement in reliance upon the reports of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
INDEMNIFICATION
For information regarding indemnification of the General Partners by the
Partnership, see "Fiduciary Responsibility."
<PAGE>
INDEX TO FINANCIAL STATEMENTS
OWENS MORTGAGE INVESTMENT FUND
Page
Report of KPMG Peat Marwick LLP, Independent Auditors F-2
Balance Sheets-- December 31, 1995 and 1994 F-3
Statements of Income for the three-years ended
December 31, 1995, 1994 and 1993 F-4
Statements of Partner's Capital the three-years ended
December 31, 1995, 1994 and 1993 F-5
Statements of Cash Flows for the three-years ended
December 31, 1995, 1994 and 1993 F-6
Notes to Financial Statements F-7
OWENS FINANCIAL GROUP, INC.
Report of KPMG Peat Marwick LLP, Independent Auditors F-16
Consolidated Balance Sheet-- December 31, 1995 F-17
Notes to Consolidated Balance Sheet F-18
<PAGE>
Independent Auditors' Report
The Partners
Owens Mortgage Investment Fund:
We have audited the accompanying balance sheets of Owens Mortgage
Investment Fund, a California limited partnership, as of December 31, 1995 and
1994 and the related statements of income, partners' capital and cash flows for
each of the years in the three-year period ended December 31, 1995. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide 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 Owens Mortgage Investment
Fund as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1995 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
February 16, 1996
Oakland, California
<PAGE>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
Balance Sheets
December 31, 1995 and 1994
Assets 1995 1994
------ ---- ----
Cash and cash equivalents $ 5,056,358 2,153,706
Certificates of deposit 850,000 1,100,000
Loans secured by trust deeds 151,350,591 145,050,213
Less allowance for loan losses (3,250,000) (2,750,000)
----------- -----------
148,100,591 142,300,213
Unsecured loans due from general partner 1,023,232 1,249,989
Interest receivable 1,359,228 1,193,764
Real estate held for sale, net 9,012,359 4,628,325
----------- -----------
$ 165,401,768 152,625,997
=========== ===========
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued liabilities 16,168 ---
Accrued distributions payable 489,157 446,625
Due to general partner 152,000 332,644
------------ ------------
Total liabilities 657,325 779,269
------------ ------------
Partners' Capital:
General partners: Authorized 2,475,248 units in
1995 and 1994; 1,628,897 and 1,490,390 units
issued and 1,625,507 and 1,490,341 units
outstanding in 1995 and 1994, respectively 1,623,526 1,488,360
Limited partners: Authorized 247,524,752 units in
1995 and 1994; 224,117,641 and 208,998,326
units issued and 163,316,937 and 150,554,388
units outstanding in 1995 and 1994, respectively 163,120,917 150,358,368
----------- -----------
Total partners' capital 164,744,443 151,846,728
----------- -----------
$ 165,401,768 152,625,997
=========== ===========
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
Statements of Income
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
Revenues:
Interest income on loans secured by
<S> <C> <C> <C>
trust deeds $ 15,761,544 14,859,276 14,512,044
Other interest income 282,757 306,258 144,021
---------- ---------- ----------
Total revenues 16,044,301 15,165,534 14,656,065
---------- ---------- ----------
Operating expenses:
Management fees 1,431,616 1,475,155 2,234,968
Promotional interest 69,255 72,984 72,359
Administrative 56,516 56,516 56,516
Legal and accounting 60,254 137,118 102,267
Net real estate operations 224,108 270,038 75,844
Other 11,177 44,299 45,466
Provision for loan losses 500,000 -- 2,750,000
Provision for losses on real
estate held for sale 200,000 400,000 --
---------- --------- ----------
Total operating expenses 2,552,926 2,456,110 5,337,420
---------- ---------- ----------
Net income $ 13,491,375 12,709,424 9,318,645
========== ========== ==========
Net income allocated to
general partners $ 135,584 127,726 90,218
========== ========== ==========
Net income allocated to
limited partners $ 13,355,791 12,581,698 9,228,427
========== ========== ==========
Net income per weighted average
limited partner unit $ .08 .09 .07
===== ==== ====
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
Statements of Partners' Capital
Years ended December 31, 1995, 1994 and 1993
Total
General Partners Limited Partners Partners'
Units Amount Units Amount Capital
Balances,
<S> <C> <C> <C> <C> <C>
December 31, 1992 1,230,381 $ 1,228,400 123,272,087 $ 123,076,067 124,304,467
Net income 90,218 90,218 9,228,427 9,228,427 9,318,645
Sale of partnership
units 142,297 142,297 19,221,666 19,221,666 19,363,963
Partners' withdrawals -- -- (10,444,380) (10,444,380) (10,444,380)
Partners' distributions (118,337) (118,337) (4,841,195) (4,841,195) (4,959,532)
---------- ---------- ----------- ----------- -----------
Balances,
December 31, 1993 1,344,559 1,342,578 136,436,605 136,240,585 137,583,163
Net income 127,726 127,726 12,581,698 12,581,698 12,709,424
Sale of partnership
units 145,970 145,970 17,580,479 17,580,479 17,726,449
Partners' withdrawals -- -- (10,925,360) (10,925,360) (10,925,360)
Partners' distributions (127,914) (127,914) (5,119,034) (5,119,034) (5,246,948)
----------- ---------- ----------- ----------- -----------
Balances,
December 31, 1994 1,490,341 1,488,360 150,554,388 150,358,368 151,846,728
Net income 135,584 135,584 13,355,791 13,355,791 13,491,375
Sale of partnership
units 138,507 138,507 15,119,315 15,119,315 15,257,822
Partners' withdrawals -- -- (10,090,062) (10,090,062) (10,090,062)
Partners' distribution (138,925) (138,925) (5,622,495) (5,622,495) (5,761,420)
------------ ----------- ----------- ----------- -----------
Balances,
December 31, 1995 1,625,507 $ 1,623,526 163,316,937 $ 163,120,917 164,744,443
=========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 13,491,375 12,709,424 9,318,645
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for losses on real estate held for
sale 200,000 400,000 --
Provision for loan losses 500,000 -- 2,750,000
Changes in operating assets and liabilities:
Due from general partner -- -- 1,971,444
Interest receivable (165,464) (146,964) (60,828)
Deferred interest -- (39,845) 39,845
Accrued distributions payable 42,532 18,801 13,131
Accounts payable 16,168 -- --
Due to general partner (180,644) 273,735 12,977
---------- ---------- ----------
Net cash provided by operating
activities 13,903,967 13,215,151 14,045,214
---------- ---------- ----------
Cash flows from investing activities:
Purchases of loans secured by trust deeds (63,029,067) (66,337,750) (51,074,287)
Principal collected 2,513,912 2,193,668 1,572,187
Loan payoffs 51,918,735 50,403,003 32,054,489
Additions to real estate held for saLE (2,638,630) (415,325) --
Disposition of real estate held for sale 577,395 -- --
Investment in certificates of deposit, net 250,000 400,000 (1,000,000)
----------- ----------- -----------
Net cash used in investing
activities (10,407,655) (13,756,404) (18,447,611)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of mortgage payable -- (500,000) --
Proceeds from sale of partnership units 15,257,822 17,726,449 19,363,963
Cash distributions (5,761,420) (5,246,948) (4,959,532)
Capital withdrawals (10,090,062) (10,925,360) (10,444,380)
----------- ----------- -----------
Net cash (used in) provided by
financing activities 593,660) 1,054,141 3,960,051
------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents 2,902,652 512,888 (442,346)
Cash and cash equivalents at beginning of year 2,153,706 1,640,818 2,083,164
------------ ------------ ------------
Cash and cash equivalents at end of year $ 5,056,358 2,153,706 1,640,818
============ ============ ============
</TABLE>
See notes 4 and 5 for supplemental disclosure of non-cash investing activities.
See accompanying notes to financial statements.
<PAGE>
(1) Organization
Owens Mortgage Investment Fund (the Partnership), a California limited
partnership, was formed on June 14, 1984 to invest in loans secured by
first, second and third trust deeds, wraparound and construction mortgage
loans and leasehold interest mortgages. The Partnership commenced
operations on the date of formation and will continue until December 31,
2034 unless dissolved prior thereto under the provisions of the partnership
agreement.
The general partners include Owens Financial Group, Inc. (OFG) and certain
individuals who are OFG's shareholders and officers. The individual
partners have assigned to OFG their interest in any present or future
promotional allowance from the Partnership. OFG is a California corporation
engaged in the origination of real estate mortgage loans for eventual sale
and the subsequent servicing of those mortgages for the Partnership and
other third-party investors.
The general partners are authorized to offer and sell units in the
Partnership up to an aggregate of 250,000,000 units outstanding at $1.00
per unit, representing $250,000,000 of limited partnership interests in the
Partnership. Limited partnership units outstanding were 163,316,937,
150,554,388 and 136,436,605 at December 31, 1995, 1994 and 1993,
respectively.
(2) Summary of Significant Accounting Policies
(a) 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.
(b) Loans Secured by Trust Deeds
Loans secured by trust deeds are acquired from OFG and are recorded at
cost. Interest income on loans is accrued by the simple interest method.
Effective January 1, 1995, the Partnership adopted the Financial Accounting
Standards Board's Statement No. 114, Accounting by Creditors for Impairment
of a Loan, and No. 118, Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures. Under Statement No. 114, a loan is
impaired when, based on current information and events, it is probable that
a creditor will be unable to collect the contractual interest and principal
payments of a loan according to the contractual terms of the loan
agreement. Statement No. 114 requires that impaired loans be measured on
the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Statement No. 118 clarifies interest income
recognition and disclosure provisions of Statement No. 114. The adoption of
these statements did not have a material effect on the financial statements
of the Partnership.
The Partnership recognizes interest income on impaired loans using the
cash-basis method of accounting. Cash receipts are allocated to interest
income, except when such payments are specifically designated as principal
reduction or when management does not believe the Partnership's investment
in the loan is fully recoverable.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
(c) Allowance for Loan Losses
The Partnership maintains an allowance for loan losses equal to $3,250,000
and $2,750,000 as of December 31, 1995 and 1994, respectively. Management
of the Partnership believes that based on historical experience and a
review of the loans and their respective collateral, the allowance for loan
losses is adequate in amount.
Through October 31, 1994, OFG made all delinquent interest payments on
loans originated prior to May 1, 1993 on a non-recourse basis. However,
effective November 1, 1994, OFG discontinued its practice of making such
payments for certain loans which it periodically identifies. The
outstanding balance of all loans delinquent greater than ninety days is
$8,309,000 and $4,923,000 as of December 31, 1995 and 1994, respectively.
The Partnership discontinues the accrual of interest on loans when, in the
opinion of management, there is significant doubt as to the collectibility
of interest or principal from either the borrower or OFG or when the
payment of principal or interest is ninety days past due, unless OFG
continues to advance interest payments to the Partnership. As of December
31, 1995 and 1994, the aforementioned loans totaling $8,309,000 and
$4,923,000, respectively, are classified as non-accrual loans.
The Partnership's investment in loans for which OFG has provided advances
for delinquent interest payments is $3,921,739 and $6,566,000 at December
31, 1995 and 1994, respectively. The outstanding balance of loans
originated prior to May 1, 1993 which is eligible to receive advances
totals approximately $39,100,000 as of December 31, 1995.
Advances for delinquent interest payments and other payments, such as
property taxes, mortgage interest pursuant to senior indebtedness, and
development costs made to or on behalf of the Partnership by OFG during
1995 and 1994, but not collected as of December 31, 1995 and 1994, totaled
approximately $1,218,000 and $1,149,000, respectively. The Partnership has
no obligation to repay these advances to OFG. In addition, during 1995, OFG
assumed the obligation to the Partnership for a shortfall of $525,000 on
the pay-off of a Partnership loan. In 1995 and 1994, OFG assumed the
Partnership's interest in loans in the amount of $377,000 and $591,000,
respectively, and was foreclosed out of the loans by the holders of the
first deeds of trust (see note 4). During 1994, OFG assumed through
foreclosure a Partnership loan of $58,000.
(d) Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents
include interest-bearing and noninterest-bearing bank deposits and
short-term certificates of deposit with original maturities of three months
or less.
(e) Certificates of Deposit
Certificates of deposit are held with various financial institutions with
original maturities of up to one year.
(f) Real Estate Held for Sale
Real estate held for sale includes real estate acquired through foreclosure
and is carried at the lower of the recorded investment in the loan,
inclusive of any senior indebtedness, or the property's estimated fair
value, less estimated costs to sell.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
(g) Income Taxes
No provision is made for income taxes since the Partnership is not a
taxable entity. Accordingly, any income or loss is included in the tax
returns of the partners.
(3) Loans Secured by Trust Deeds
Loans secured by trust deeds as of December 31, 1995 and 1994 are as
follows:
1995 1994
---- ----
Income-producing properties $ 142,597,751 135,128,661
Single-family residences 2,249,616 3,179,945
Unimproved land 6,503,224 6,741,607
------------ ------------
$ 151,350,591 145,050,213
============ ============
First mortgages 136,110,802 131,139,007
Second mortgages 14,660,759 13,228,818
Third mortgages or all-inclusive
deeds of trust 579,030 682,388
------------ ------------
$ 151,350,591 145,050,213
============ ============
Scheduled maturities of loans secured by trust deeds as of December 31,
1995 and the interest rate sensitivity of such loans is as follows:
Fixed Variable
Year ending interest interest
December 31, rate rate Total
1996 $ 34,488,381 7,010,470 41,498,851
1997 21,959,710 7,778,163 29,737,873
1998 3,889,083 14,759,620 18,648,703
1999 1,250,000 19,009,068 20,259,068
2000 1,494,863 15,206,287 16,701,150
Thereafter (through 2010) 5,577,589 18,927,357 24,504,946
----------- ----------- -----------
$ 68,659,626 82,690,965 151,350,591
=========== =========== ===========
Variable rate loans use as indices the one and five year Treasury Constant
Maturity Index (5.21% and 5.44%, respectively, as of December 31, 1995),
the prime rate (8.5% as of December 31, 1995) and the weighted average cost
of funds index for Eleventh District savings institutions (5.12% as of
December 31, 1995). Premiums over these indices have varied from 250-550
basis points depending upon market conditions at the time the loan is made.
The scheduled maturities for 1996 include approximately $14,700,000 in
loans which are past maturity as of December 31, 1995, of which $6,553,476
represents loans for which interest payments are delinquent over 90 days.
During the years ended December 31, 1995 and 1994, the Partnership
refinanced loans totaling $19,466,491 and $11,266,000, respectively,
thereby extending the maturity dates of such loans.
<PAGE>
(3) Loans Secured by Trust Deeds, Continued
The Partnership's total investment in loans delinquent over 90 days is
$12,037,000 and $12,849,000 as of December 31, 1995 and 1994, respectively.
As of December 31, 1995 and 1994, OFG is providing non-recourse advances
for the delinquent interest payments on $3,553,000 and $7,926,000 of such
loans, respectively.
The Partnership's investment in impaired loans as of December 31, 1995
totals approximately $12,037,000, of which $7,290,000 has a specific
related allowance for credit losses totaling approximately $2,250,000,
while there is no specific allowance for credit losses for the remaining
balance of $4,747,000. The only activity in the allowance for credit losses
during the year ended December 31, 1995 was an addition to the allowance of
$500,000.
Interest income recognized on impaired loans during the year ended December
31, 1995 totaled approximately $896,000, $440,000 of which was paid by
borrowers and $456,000 of which was advanced on a non-recourse basis to the
Partnership by OFG.
As of December 31, 1995 and 1994, the Partnership's loans secured by deeds
of trust on real property collateral located in Northern California totaled
approximately 79% ($120,744,304) and 82% ($118,462,000), respectively, of
the loan portfolio. The Northern California region is a large geographic
area which has a diversified economic base. The ability of borrowers to
repay loans is influenced by the strength of the region and the impact of
prevailing market conditions on the value of real estate. Such loans are
secured by deeds of trust in real estate properties and are expected to be
repaid from the cash flow of the properties or proceeds from the sale or
refinancing of the properties. The policy of the Partnership is to require
real property collateral with a value, net of senior indebtedness, that
exceeds the carrying amount of the loan balance and to record a deed of
trust on the underlying property.
(4) Unsecured Loan Due from General Partner
During 1993, OFG sold three properties acquired from the Partnership
through foreclosure proceedings on Partnership loans assumed in 1991 and
1992. The sales proceeds were insufficient to repay the Partnership's
investment in the related mortgage notes; accordingly, OFG executed an
unsecured note payable to the Partnership in the aggregate amount of
$1,411,112 to satisfy OFG's obligation pursuant to the Limited
Indemnification Agreement.
During 1994, OFG sold one property acquired through foreclosure proceedings
on a Partnership loan assumed in 1993 and was foreclosed out of the second
position by the holder of the first deed of trust on a Partnership loan
assumed in 1994. The proceeds from these transactions were insufficient to
repay the Partnership's investment in the related mortgage notes. Though
under no obligation to do so, OFG assumed the loss of $960,512 and added
this amount to the outstanding balance of the unsecured note payable.
During 1995, OFG assumed the obligation to the Partnership for a shortfall
on the discounted pay-off of a mortgage and was foreclosed out of the
second position by the holder of the first deed of trust on a Partnership
loan assumed in 1995. Though under no obligation to do so, OFG assumed the
loss on these transactions of $902,000 and added this amount to the
outstanding balance of the unsecured note payable.
The balance of the unsecured loan due from the general partner has been
reduced by payments and totals $1,023,232 and $1,249,989 as of December 31,
1995 and 1994, respectively. The note bears interest at 8% and is due on
demand.
(5) Real Estate Held for Sale
Real estate held for sale at December 31, 1995 and 1994 consists of the
following properties acquired through foreclosure in 1993 through 1995:
1995 1994
---- ----
Warehouse, Merced, California, net of valuation
allowance of $350,000 and $200,000 as of
December 31, 1995 and 1994, respectively $ 650,000 800,185
Light industrial, Emeryville, California 925,000 925,000
70% interest in undeveloped land, Vallejo,
California 568,569 538,705
Commercial lot, Sacramento, California, net of
valuation allowance of $250,000 and
$200,000 as of December 31, 1995 and
1994, respectively 299,828 358,407
Undeveloped land, Grass Valley, California 55,380 55,000
Retail lot, Milpitas, California, and residence,
Campbell, California 661,531 --
Commercial property, Sacramento, California 850,000 --
Developed land, Los Gatos, California 571,853 --
Office building and undeveloped land,
Monterey, California 2,126,426 --
Commercial building, Oakland, California 29,856 --
Residential lots, Carmel, California 2,273,916 1,373,633
38.5% interest in residential lots, Belmont,
California -- 577,395
------------ ----------
$ 9,012,359 4,628,325
========== =========
The acquisition of these properties resulted in non-cash increases in real
estate held for sale and non-cash decreases in loans secured by trust deeds
of $2,501,308 and $2,005,000 for the years ended December 31, 1995 and
1994, respectively.
The Partnership has entered into a joint venture agreement with an
unrelated developer/builder for the development and buildout of thirty
residential lots located in Carmel Valley, California which are to be
contributed to the joint venture at a future time. The joint venture
agreement provides for the Partnership to receive a priority return of
principal and interest on any development capital contributed to the
venture in addition to a priority return of $70,000 per lot. Seventy
percent of any profits from the joint venture will inure to the
Partnership. Most all infrastructure work including roads, drainage and
utility tie-ins have been completed in the development for which the
Partnership has advanced approximately $900,000. Construction and sale of
residential units is anticipated to begin in 1996.
(6) Partners' Capital
(a) Contributions
Limited partners of the Partnership contributed $1.00 for each unit
subscribed. Registration costs incurred by the Partnership have been offset
against contributed capital. Such costs, which were incurred in 1989,
amounted to approximately $198,000.
(6) Partners' Capital, Continued
(b) Allocations, Distributions and Withdrawals
In accordance with the partnership agreement, the Partnership's profits,
gains and losses are allocated to each limited partner and the general
partners in proportion to their respective capital contributions.
Distributions are made monthly to the limited partners in proportion to
their respective units as of the last day of the preceding calendar month.
Accrued distributions payable represent amounts to be paid to the partners
in January of the subsequent year based on their capital balances at
December 31.
The Partnership makes cash distributions to those limited partners who
elect to receive such distributions. Those limited partners who elect not
to receive cash distributions have their distributions reinvested in
additional limited partnership units. Such reinvested distributions totaled
$8,395,180, $7,863,379 and $7,074,392 for the years ended December 31,
1995, 1994 and 1993, respectively.
The limited partners may withdraw, or partially withdraw, from the
Partnership and obtain the return of their outstanding capital accounts
within 91 days after written notices are delivered to the general partners,
subject to the following limitations:
Any such payments are required to be made only from cash available for
distribution, net proceeds and capital contributions (as defined) during
said 91-day period.
A maximum of $75,000 per partner may be withdrawn during any calendar
quarter (or $100,000 in the case of a deceased limited partner).
The general partners are not required to establish a reserve fund for the
purpose of funding such payments.
No more than 10% of the outstanding limited partnership interest may be
withdrawn during any calendar year except upon dissolution of the
Partnership.
(c) Promotional Interest of General Partners
The general partners contributed capital to the Partnership in the amount
of 0.5% of the limited partners' aggregate capital contributions and,
together with their promotional interest, the general partners have an
interest equal to 1% of the limited partners' contributions. This
promotional interest of the general partners of up to 1/2 of 1% is recorded
as an expense of the Partnership and credited as a contribution to the
general partners' capital account as additional compensation. As of
December 31, 1995, the general partners had made cash capital contributions
of $829,028 to the Partnership. The general partners are required to
continue cash capital contributions to the Partnership in order to maintain
their required capital balance.
The promotional interest expense charged to the Partnership was $69,255,
$72,984 and $72,359 for the years ended December 31, 1995, 1994 and 1993,
respectively.
(7) Contingency Reserves
In accordance with the partnership agreement and to satisfy the
Partnership's liquidity requirements, the Partnership is required to
maintain cash as contingency reserves (as defined) in an aggregate amount
of at least 1-1/2% of the gross proceeds of the sale of limited partnership
units. The cash capital contribution of the general partners (amounting to
$829,028 at December 31, 1995), up to a maximum of 1/2 of 1% of the limited
partners' capital contributions, will be available as an additional
contingency reserve, if necessary.
The contingency reserves required at December 31, 1995 and 1994 were
approximately $3,324,000 and $3,056,000, respectively. Certificates of
deposit and certain cash equivalents as of the same dates were accordingly
maintained as reserves.
(8) Income Taxes
The net difference between partners' capital per the Partnership's federal
income tax return and these financial statements is comprised of the
following components:
1995 1994
---- ----
Partners' capital per financial statements $ 164,744,443 151,846,728
Accrued interest income (1,359,228) (1,193,764)
Allowance for loan losses 3,250,000 2,750,000
Valuation allowance - real estate held for sale 600,000 400,000
Accumulated depreciation 4,830 --
Accrued expenses due to general partner 152,000 59,011
Accrued distributions 489,157 446,625
----------- -----------
Partners' capital per federal income tax return $ 167,881,202 154,308,600
=========== ===========
(9) Transactions with Affiliates
OFG is entitled to receive from the Partnership a management fee of up to
2.75% per annum of the average unpaid balance of the Partnership's mortgage
loans at the end of each of the preceding twelve months for services
rendered as manager of the Partnership. The maximum management fee is
reduced to 1.75% per annum if OFG has not provided during the preceding
calendar year any of the certain services defined in the limited
partnership agreement.
All of the Partnership's loans are serviced by OFG, in consideration for
which OFG receives up to .25% per annum of the unpaid principal balance of
the loans. Servicing fees are paid from the interest income of the loans
collected from the borrowers.
Interest income on loans secured by trust deeds is collected by OFG and,
along with advances on delinquent loans, is remitted monthly to the
Partnership, net of servicing fees received by OFG. Interest receivable
from OFG amounted to $1,359,228 and $1,193,764 at December 31, 1995 and
1994, respectively.
<PAGE>
(9) Transactions with Affiliates, Continued
OFG, at its sole discretion may, on a monthly basis, adjust the management
and servicing fees as long as they do not exceed the allowable limits of
2.75% and .25%, respectively. In determining the management and servicing
fees and hence the yield to the Partnership, OFG may consider a number of
factors, including the then-current market yields. Management fees amounted
to approximately $1,432,000, $1,475,000 and $2,235,000 for the years ended
December 31, 1995, 1994 and 1993, respectively, and are included in the
accompanying statements of income. Service fee payments to OFG approximated
$371,000, $338,000 and $323,000 for the years ended December 31, 1995, 1994
and 1993, respectively, and is recognized as a reduction in interest income
on loans secured by trust deeds in the accompanying statements of income.
OFG receives late payment charges from borrowers who make delinquent
payments. Such charges are in addition to the normal monthly loan payments
and totaled approximately $152,000, $447,000 and $247,000 for the years
ended December 31, 1995, 1994 and 1993, respectively.
OFG originates all loans the Partnership invests in and receives an
investment evaluation fee payable from payments made by borrowers. Such
fees earned by OFG amounted to approximately $1,865,000, $2,261,000 and
$2,235,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
Included in loans secured by trust deeds at December 31, 1995 and 1994 are
notes totaling $494,549 and $492,549, respectively, which are secured by
properties acquired by OFG through foreclosure proceedings subject to these
notes. The Partnership received interest income of $131,482, $300,245 and
$385,060 during the years ended December 31, 1995, 1994 and 1993,
respectively, from OFG under loans secured by trust deeds and the unsecured
loan due from OFG.
Due to general partner at December 31, 1995 and 1994 consists of
unreimbursed costs and expenses payable to OFG.
(10) Net Income Per Limited Partner Unit
Net income per limited partnership unit is computed using the weighted
average of limited partnership units outstanding during the year, which was
160,636,164, 146,237,145 and 132,117,787 for the years ended December 31,
1995, 1994 and 1993, respectively.
(11) Fair Value of Financial Instruments
Effective December 31, 1995, the Partnership adopted the Financial
Accounting Standards Board's Statement No. 107, Disclosures about Fair
Value of Financial Instruments. This statement requires the determination
of fair value for certain of the Partnership's assets. The following
methods and assumptions were used to estimate the value of the financial
instruments included in the following categories:
(a) Cash and Cash Equivalents and Certificates of Deposit
The carrying amount approximates fair value because of the relatively short
maturity of these instruments.
<PAGE>
(11) Fair Value of Financial Instruments, Continued
(b) Loans Secured by Trust Deeds
The fair value of these instruments of approximately $151,759,000 as of
December 31, 1995 is estimated based upon projected cash flows discounted
at the estimated current interest rates at which similar loans would be
made. The allowance for loan losses of $3,250,000 at December 31, 1995
should also be considered in evaluating the fair value of loans secured by
trust deeds.
<PAGE>
Independent Auditors' Report
The Shareholders
Owens Financial Group, Inc.:
We have audited the accompanying consolidated balance sheet of Owens Financial
Group, Inc. and Subsidiaries as of December 31, 1995. This consolidated
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this consolidated financial statement
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit of a balance sheet includes examining, on a test basis, evidence
supporting the amounts and disclosures in that balance sheet. An audit of a
balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the consolidated
balance sheet provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of Owens Financial
Group, Inc. and Subsidiaries as of December 31, 1995 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick
February 16, 1996
Oakland, California
<PAGE>
OWENS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1995
Assets
Cash and cash equivalents $ 2,155,792
Advances, less allowance for losses of $1,598,000 629,551
Trust deeds receivable, less allowance for losses of $325,000 1,137,835
Trust deeds held for sale 1,045,324
Receivables from affiliates 180,742
Investment in limited partnership 2,017,878
Real estate held for sale, net 1,270,002
Real estate held for investment, net 385,634
Property and equipment, net of accumulated
depreciation of $479,765 26,773
Other assets 229,942
----------
$ 9,079,473
==========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and other accrued expenses 167,335
Accrued bonus, pension and profit sharing expense 256,752
Payable to trust deed investors 150,956
Mortgages payable 1,192,895
Note payable to bank 1,045,324
Note payable to affiliate 1,023,232
Deferred income 172,602
----------
Total liabilities 4,009,096
Shareholders' equity:
Common stock, $1 par value, authorized 100,000 shares;
issued and outstanding 74,500 shares 74,500
Additional paid-in capital 1,780,726
Retained earnings 3,437,452
Notes receivable from shareholders (222,301)
----------
Total shareholders' equity 5,070,377
----------
$ 9,079,473
==========
<PAGE>
OWENS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1995
(1) Organization
Owens Financial Group, Inc. (the Company) was incorporated in 1981 in the
state of California. The Company is engaged in originating and servicing
real estate loans secured by deeds of trust for private and institutional
investors.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated balance sheet includes the accounts of the
Company and its majority-owned subsidiaries, Investors' Yield, Inc. and
Owens Securities Corporation (OSC) in which the Company has ownership
interests of 75% and 79%, respectively. The primary business of Investors'
Yield, Inc. is to act as trustee under deeds of trust securing promissory
notes. The primary business of OSC is to market the limited partnership
units of Owens Mortgage Investment Fund (OMIF), a California limited
partnership for which the Company serves as the operating general partner.
OSC is registered with the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc. All significant
intercompany transactions have been eliminated in consolidation.
The preparation of the consolidated balance sheet 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.
(b) Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents
includes interest-bearing bank deposits and short-term investments with
original maturities of three months or less. Cash and cash equivalents
includes approximately $1,374,000 invested in money market funds at
December 31, 1995.
(c) Revenue Recognition
Loans originated by the Company are sold to OMIF and other investors. Loan
origination fees and direct loan origination costs are recognized as
revenue and expense, respectively, at the time the related loans are funded
in escrow as such loans are generally sold immediately to investors. Such
fees earned on loans originated for OMIF totaled approximately $1,865,000
for the year ended December 31, 1995.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
Loan administration fees are earned for servicing real estate mortgage
loans owned by private and institutional investors, including OMIF. The
fees are generally calculated as a percentage of the outstanding principal
balances of the loans serviced and are recorded as income when earned. The
maximum servicing fee payable by OMIF is .25% per annum of the average
unpaid principal balance of the loans. Such fees earned on loans serviced
for OMIF totaled approximately $371,000 for the year ended December 31,
1995.
The Company is entitled to receive from OMIF a management fee for services
rendered as manager of OMIF. The maximum management fee payable by OMIF is
2.75% per annum of the average unpaid principal balance of OMIF's mortgage
loans and are recorded as income monthly as earned. OFG charged OMIF less
than the maximum allowable management fee which totaled approximately
$1,432,000 for the year ended December 31, 1995.
(d) Advances
Prior to May 1, 1993, the Company made, on a non-recourse basis, all
interest payments and certain other payments, such as property taxes and
mortgage interest pursuant to senior indebtedness, on delinquent loans
invested in by OMIF or other trust deed investors. However, in 1993 the
Company discontinued its practice of advancing delinquent interest payments
for loans originated on or after May 1, 1993 and, effective November 1,
1994, discontinued such practice on certain other trust deed investments
held by OMIF.
The allowance for losses on advances is maintained at a level considered by
management to provide adequately for potential losses related to advances
of interest and other payments.
(e) Investment in Limited Partnership
Investment in limited partnership reflects the Company's equity basis in
OMIF. Under the equity method of accounting, the original investment is
recorded at cost and is adjusted periodically to recognize additional
investments made by the Company and the Company's share of profits, losses
and distributions after the date of acquisition.
(f) Real Estate Held for Sale
Real estate held for sale is carried at the lower of cost or estimated net
realizable value. Cost includes the outstanding principal balance of the
former mortgage loan plus advances made to OMIF or other investors for
delinquent interest and other payments in the period prior to acquisition
and the costs of obtaining title and possession. Net realizable value
represents the estimated sales value less costs of disposition. When the
estimated net realizable value declines below cost subsequent to the
acquisition of the property, the difference is charged to current
operations.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
(g) Real Estate Held for Investment and Property and Equipment
Real estate held for investment and property and equipment include
property, furniture, equipment and leasehold improvements stated at cost
less accumulated depreciation and amortization. Buildings are depreciated
using the straight-line method over an estimated life of approximately 30
years. Furniture and equipment is depreciated using an accelerated method
over the estimated useful lives of the respective assets (generally five to
seven years). Leasehold improvements are amortized using the straight-line
method over the term of the lease or the estimated useful life of the
assets, whichever is shorter.
(h) Payable to Trust Deed Investors
Payable to trust deed investors represents cash balances received from
investors which are pending investment in new loans secured by trust deeds.
(i) Income Taxes
The Company is a qualified Subchapter S corporation for federal income tax
and state franchise tax reporting and therefore the income of the Company
is includable in the income tax returns of the shareholders. Accordingly,
no provision has been made in the financial statements for the effect of
federal income taxes. A provision has been made for minimum state franchise
tax at 1.5% of income before income taxes.
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases.
(3) Advances and Allowance for Losses Related to Loans
Though under no obligation to do so, the Company periodically assumes
OMIF's and other investors' positions in certain loans, incurring losses in
some such instances. Losses of principal realized in 1995 pertained only to
OMIF investments and totaled $902,000, of which $848,000 was recognized in
1994 and included in the allowance for losses related to loans as of
December 31, 1994.
Advances include approximately $1,915,000 advanced to OMIF as of December
31, 1995. Such amounts are due from borrowers and are non-recourse to OMIF.
Advances made during 1995 to OMIF which are still outstanding as of
December 31, 1995 approximate $1,218,000.
To the extent advances for delinquent interest and other payments on loans
originated prior to May 1, 1993 are made at the discretion of the Company
subsequent to December 31, 1995, such advances will be accounted for in the
period in which they are made.
(3) Advances and Allowance for Losses Related to Loans, Continued
At December 31, 1995, OMIF's investment in loans for which the Company
provides advances for payments delinquent over thirty days totals
$6,065,000. The outstanding balance of loans originated for OMIF which is
eligible to receive advances totals approximately $39,100,000 as of
December 31, 1995.
(4) Trust Deeds
Trust deeds receivable represent portions of real estate mortgages
purchased by the Company and held for investment purposes and outstanding
advances which are converted by the Company to secured notes receivable.
Such trust deeds have varying maturities through 2008 and have interest
rates ranging from 6.6% to 14.0%.
Trust deeds held for sale consist of loans that have been funded and are
awaiting sale to investors. Such deeds are valued at the lower of
historical cost or current market value as determined by outstanding
commitments from investors and generally relate to properties located in
California.
(5) Receivables from Affiliates
Included in receivables from affiliates is a note receivable from a
shareholder of $28,742 at December 31, 1995. This receivable bears interest
at 9.5% and is due in December 2001.
Receivables of $152,000 at December 31, 1995 represent OMIF expenses paid
by the Company in December of each year and reimbursed by OMIF in January.
(6) Investment in Limited Partnership
OMIF is engaged in the business of investing in real estate loans secured
by trust deeds. The Company is a general partner of OMIF. Investment in
limited partnership represents the Company's 1% general partner interest,
along with an investment in limited partnership units of OMIF totaling
$359,571 as of December 31, 1995.
<PAGE>
(7) Real Estate Held for Sale
Real estate held for sale at December 31, 1995 consists of the following:
Industrial building, Oakland, California, net of
valuation allowance of $ $170,000 $ 702,064
Commercial building, Benicia, California 441,892
Residential lot, Oakland, California 126,046
---------
$ 1,270,002
=========
(8) Real Estate Held for Investment
Real estate held for investment at December 31, 1995 consists of the
following:
Land $ 98,125
Buildings 341,578
Leasehold improvements 50,810
---------
490,513
Less accumulated depreciation and amortization (104,879)
---------
$ 385,634
=========
(9) Mortgages Payable
Mortgages payable are secured by properties acquired through loan
foreclosures. Outstanding balances at December 31, 1995 consist of the
following:
Payable to bank, in monthly principal and interest
installments, including interest at a rate
tied to the Eleventh District Cost of Funds
Index and subject to adjustment on a monthly
basis, maturing September 2003 $ 285,346
Payable to OMIF, interest payable monthly at rates
ranging from 8-10%, due on demand 494,549
Payable to affiliated investors,
interest payable monthly at 10%,
due on demand 413,000
----------
$ 1,192,895
==========
<PAGE>
(9) Mortgages Payable, Continued
The aggregate maturities of mortgages payable at December 31, 1995 are as
follows:
1996 $ 911,811
1997 4,616
1998 4,999
1999 5,414
2000 5,864
Thereafter 260,191
---------
$ 1,192,895
=========
(10) Note Payable to Bank
The Company has a line of credit with a bank to provide interim financing
on mortgage loans originated by the Company for sale to OMIF or to
outside investors. The amount of credit available under this line is
$6,000,000, of which $1,045,324 was outstanding at December 31, 1995.
Borrowings under the line of credit bear interest at the bank's prime
rate, which was 8.5% at December 31, 1995. The line of credit expires
on May 31, 1996. Management expects to renew the line of credit in the
normal course of business.
(11) Notes Payable to Affiliate
During 1995, the Company assumed the obligation to OMIF for a shortfall on
the discounted pay-off of an OMIF loan and was foreclosed out of the
second position by the holder of the first deed of trust on an OMIF
loan which was assumed in 1995. Though under no obligation to do so,
the Company assumed the loss on these transactions of $902,357 and
added this amount to the outstanding balance of the unsecured note
payable to OMIF.
The balance of the note payable to affiliate totals $1,023,232 as of
December 31, 1995. The note bears interest at 8% and is due on demand.
(12) Profit Sharing and Pension Plans
The Company maintains defined contribution profit sharing and pension
plans (the Plans) covering substantially all full-time employees.
Contributions to the Plans are determined by the Board of Directors
and are dependent on net income, gross payroll and commissions of
eligible employees, and statutory limitations of the Internal Revenue
Code.
(13) Incentive Stock Options
Outstanding incentive stock options granted by the Company at an exercise
price of $44.96 per share totaled 5,000 as of December 31, 1995.
Options exercised during the year ended December 31, 1995 totaled
1,000 at an exercise price of $44.96 per share. One thousand options
are exercisable in each of the years ended December 31, 1996 through
2000. Any portion of an option not exercised in any year that the
option is exercisable may not be exercised in any subsequent year.
The shares issued under options exercised during 1995 were issued in
exchange for notes receivable of $44,960. The aggregate outstanding
balance of notes receivable from shareholders of $222,301 as of
December 31, 1995 bears interest at rates ranging from 4.92% to 7.83%,
with maturity dates ranging from December 1996 to December 1999.
(14) Leases
The Company leases its offices under a noncancelable operating lease from
a partnership in which the Company is a partner. The lease expires
March 15, 2000 and contains renewal options for two five year terms.
The Company is required to pay all operating expenses of the property.
The annual base rent of $137,760 is subject to adjustment each year
for increases in a defined index.
(15) Fair Value of Financial Instruments
Thereis no quoted market value available for any of the Company's
financial instruments. Management believes that the carrying amounts
of its financial instruments, which include cash and cash equivalents,
trust deeds, investment in OMIF, notes receivable and mortgage and
other notes payable, approximates fair value as of December 31, 1995.
(16) Loan Administration
As of December 31, 1995, the Company serviced 284 loans owned by private
and institutional investors, including OMIF. Such serviced loans
amounted to approximately $197,783,000 at December 31, 1995, including
approximately $151,351,000 of loans owned by OMIF. The serviced loans
are not included in the accompanying consolidated balance sheet.
<PAGE>
EXHIBIT A
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.
AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
Owens Mortgage Investment Fund
THIS LIMITED PARTNERSHIP AGREEMENT (the "Agreement") is made and
entered into by and among David Adler, David K. Machado, Milton N. Owens,
William C. Owens, Larry R. Schultz and Owens Financial Group, Inc. as General
Partners (hereinafter sometimes referred to as the "General Partners" and in the
case of Owens Financial Group, Inc. as the "Corporate General Partner"), and
each of the persons who execute this Agreement as a Limited Partner (hereinafter
referred to collectively as the "Limited Partners"). The General Partners and
the Limited Partners are hereinafter occasionally referred to collectively as
the "Partners."
The Partners hereby agree as follows:
I. FORMATION
1. Uniform Limited Partnership Act. The parties hereto have agreed to
form, and by executing this Agreement hereby enter into, a limited partnership
(the "Limited Partnership") pursuant to the provisions of the California
Corporations Code, Title 2, Chapter 2, known as the Uniform Limited Partnership
Act (the "Act"), which Act shall govern the rights and liabilities of the
Partners, except as otherwise herein expressly stated.
2. Name. The name of the Limited Partnership is Owens Mortgage
Investment Fund. Upon the execution of this Agreement (and thereafter as may
subsequently be required by law), the General Partners shall sign and cause to
be filed and published in the county in which the principal place of business of
the Limited Partnership is situated, a Fictitious Business Name Statement, as
required by Section 17900, et seq. of the California Business and Professions
Code.
3. Place of Business. The principal place of business for the Limited
Partnership shall be located at 2221 Olympic Blvd., Walnut Creek, CA 94595;
provided, however, that the General Partners may change the address of the
principal office by notice in writing to all Limited Partners. In addition, the
Limited Partnership may maintain such other offices and places of business as
the General Partners may deem advisable at any other place or places within the
United States.
4. Places of Business and Residence of the General Partners and
Limited Partners. The principal place of business of the General Partners and
the places of residence of the Limited Partnership shall be those addresses set
forth opposite their respective names at the end of this Agreement or in any
amendment hereto. The General Partners and Limited Partners may change such
places of business or residence by written notice to the Limited Partnership,
which notice shall become effective upon receipt.
5. Certificate of Limited Partnership. The Limited Partnership's
Certificate of Limited Partnership (the "Certificate") was filed and recorded in
Contra Costa County on June 14, 1984 pursuant to the provisions of Section 15502
of the Act. From time to time in their sole discretion, the General Partners
shall cause an amended Certificate to be filed in the office of the Secretary of
State of California and of the Recorder for any county in the State of
California, as appropriate. The Certificate shall be amended or canceled as
required by the above-mentioned Act, as from time to time in effect.
6. Term. The Limited Partnership commenced its existence and business
on June 14, 1984. Unless earlier dissolved under the provisions of this
Agreement, the Limited Partnership shall be dissolved on December 31, 2034.
7. Purpose. The business and purpose of the Limited Partnership shall
be to make first, second, third, wraparound and construction mortgage loans and
mortgage loans on leasehold interests as contemplated by the Limited
Partnership's Prospectus, as amended or supplemented from time to time (the
"Prospectus").
II. DEFINITIONS
The following terms shall have the following respective meanings:
"Adjusted capital contribution" means the capital contribution of the
Limited Partners and the General Partners reduced by all prior distributions of
net proceeds made to the Limited Partners and the General Partners.
"Affiliate" means: (i) any person directly or indirectly controlling,
controlled by, or under common control with another person; (ii) any person
owning or controlling ten percent (10%) or more of the outstanding voting
securities of such other person; (iii) any officer, director, or partner of such
person; and (iv) if such other person is an officer, director, or partner, any
company for which such person acts in such capacity.
"Capital contribution" means the total initial investment and
contribution to the capital of the Limited Partnership in cash by an investor
for a Limited Partnership interest (or the contribution to capital by the
General Partners which shall be deemed to be 1% of the aggregate capital
contributions of the Limited Partners) without deduction of selling,
organization, or other expenses, together with any and all reinvested
distributions. To the extent of the difference between the cash contributions to
the capital of the Limited Partnership by the General Partners and the aforesaid
1% amount, the General Partners will have a promotional interest in the Limited
Partnership.
"Cash available for distribution" means the excess of the total cash
revenues generated by the Limited Partnership's investments (other than net
proceeds) less aggregate cash disbursements, including debt amortization and
interest, operating expenditures, partnership expenses, and amounts set aside
for restoration or creation of reserves.
"First Mortgage" mens a mortgage which takes priority or precedence
over all other charges or liens upon the same real property, other than a
lessee's interest therein, and which must be satisfied before such other charges
are entitled to participate in the proceeds of any sale. Such priority shall not
be deemed as abrogated by liens for taxes, assessments which are not delinquent
or remain payable without penalty, contracts (other than contracts for repayment
of borrowed moneys), or leases, mechanic's and materialman's liens for work
performed and materials furnished which are not in default or are in good faith
being contested, and other claims normally deemed in the same local jurisdiction
not to abrogate the priority of a first mortgage.
"First mortgage loans" means mortgage loans secured or collateralized
by first mortgages.
"Mortgage loans" means notes, debentures, bonds, and other evidences
of indebtedness or obligations which are negotiable or nonnegotiable and which
are secured or collateralized by mortgages.
"Net proceeds" means the cash proceeds from any repayment of
principal or sale or other disposition of the Limited Partnership's mortgage
loans or other Limited Partnership asset remaining after deducting all expenses
relating to the transaction.
"Person" means any natural person, partnership, corporation,
association, or other legal entity.
"Real property" means and includes land and any buildings,
structures, improvements, fixtures, and equipment located on or used in
connection with land, but does not include mortgages, mortgage loan, or
interests therein.
"Unit" means an interest in the Limited Partnership, represents a
contribution of One Dollar ($1.00) to the capital of the Limited Partnership by
a Limited Partner, and entitles the holder thereof to the rights and interests
of Limited Partners as herein provided.
"Wraparound mortgage loan" means a loan in an amount equal to the
balance due under an existing mortgage loan plus an additional amount advanced
by the lender holding the wraparound mortgage loan, where the existing mortgage
loan will not be retired.
III. PARTNERSHIP INTEREST AND CAPITAL
1. Capital Contribution of Partners. The capital of the Limited
Partnership shall be contributed by the Limited Partners and the General
Partners. The Limited Partners shall contribute to the capital of the Limited
Partnership for each unit subscribed, cash in the amount of One Dollar ($1.00).
The General Partners shall contribute to the capital of the Limited Partnership
cash in an amount equal to one-half of one percent (1/2 of 1%) of the aggregate
capital contributions of the Limited Partners. Owens Financial Group, Inc., the
Corporate General Partner shall receive, as described in the Prospectus,
promotional interests in the capital of the Limited Partnership equal to 1/2 of
1% of the aggregate capital contributions of the Limited Partners.
2. Entry into Partnership. In the General Partners' sole discretion,
units up to an aggregate outstanding amount of $250,000,000 may be offered and
sold by the Limited Partnership, Purchasers of such units shall become Limited
Partners immediately on acceptance of subscriptions by a General Partner.
3. Nonassessability of Units. The units are nonassessable. Once a
unit has been paid for in full, the holder of the unit has no obligation to make
additional contributions to the Limited Partnership.
4. Capital Accounts. A capital account shall be established for each
Limited Partner and for the General Partners. Loans made by any Limited Partner,
or the General Partners, shall not be considered contributions to the Limited
Partnership. Neither a Limited Partner nor a General Partner shall be entitled
to withdraw any part of his or its capital account or to receive any
distributions from the Limited partnership except as specifically provided
herein. No interest shall be paid on any capital invested in the Limited
Partnership, whether by the General Partner or any Limited Partner.
5. Liability of Limited Partners. Notwithstanding anything to the
contrary contained in the foregoing, a Limited Partner shall not become liable
for the obligations of the Limited Partnership in an amount in excess of his
capital contribution.
IV. MANAGEMENT
1. Control in General Partners. Subject to the provisions of Article
IV.2., and except as otherwise expressly stated elsewhere in this Agreement, the
General Partners shall have exclusive control over the business of the Limited
Partnership, including the power to assign duties, to sign bills of sale, title
documents, leases, notes, security agreements, mortgage loans and contracts, and
to assume direction of the business operations. Without limiting the generality
of the foregoing, such powers include the right:
(a) To evaluate potential Limited Partnership investments and to
expend the capital and profits of the Limited Partnership in furtherance of the
Limited Partnership's business;
(b) To acquire, hold, lease, sell, trade, exchange, or otherwise
dispose of all or any portion of Limited Partnership property or any interest
therein at such price and upon such terms and conditions as the General Partners
may deem proper;
(c) To manage, operate, and develop Limited Partnership property, or
to employ and supervise a property manager who may be an affiliate of the
General Partners;
(d) To borrow money from banks and other lending institutions for any
Limited Partnership purpose, and as security therefor, to encumber Limited
Partnership property;
(e) To repay in whole or in part, refinance, increase, modify, or
extend, any obligation, affecting Limited Partnership property;
(f) To employ from time to time at the expense of the Limited
Partnership persons, including the General Partners or affiliates of any of the
Partners, required for the operation of the Limited Partnership's business,
including employees, agents, independent contractors, brokers, accountants,
attorneys, and others; to enter into agreements and contracts with such persons
on such terms and for such compensation as the General Partners determine to be
reasonable; and to give receipts, releases, and discharges with respect to all
of the foregoing and any matters incident thereto as the General Partners may
deem advisable or appropriate; provided, however, that any such agreement or
contract between the Limited Partnership and the General Partners or between the
Limited Partnership and an affiliate of the General Partners shall contain a
provision that such agreement or contract may be terminated by the Limited
Partnership without penalty on sixty (60) days' written notice and without
advance notice if a General Partner or affiliate who is a party to such contract
or agreement resigns or is removed pursuant to the terms of this Agreement and
whenever possible, contracts between the Limited Partnership and others shall
contain a provision recognizing that the Limited Partners shall have no personal
liability for performance or observance of the contract;
(g) To maintain, at the expense of the Limited Partnership, adequate
records and accounts of all operations and expenditures and furnish the Limited
Partners with annual statements of account as of the end of each calendar year,
together with all necessary tax-reporting information;
(h) To purchase, at the expense of the Limited Partnership, liability
and other insurance to protect the property of the Limited Partnership and its
business;
(i) To refinance, recast, modify, consolidate, or extend any mortgage
loans or other investments owned by the Limited Partnership;
(j) To pay all organization expenses incurred in connection with the
Limited Partnership, and to pay all operational expenses incurred in connection
with the operation of the Limited Partnership;
(k) To file tax returns on behalf of the Limited Partnership and to
make any and all elections available under the Internal Revenue Code of 1986, as
amended;
(l) To designate one of the General Partners as the "tax matters
partner" of the Limited Partnership as that term is defined in Section
6231(a)(7) of the Internal Revenue Code of 1986, as amended. With respect to
such designation, David Adler shall be the "tax matters partner" of the Limited
Partnership until another General Partner is appropriately designated as the new
"tax matters partner"; and
(m) Without consent of the Limited Partners, to modify, delete, add
to or correct from time to time any provision of this Agreement for one or more
of the following reasons:
(i) To cure any ambiguity or formal defect or omission herein;
(ii) To grant to Limited Partners any additional rights,
remedies, powers or authorities that may be lawfully granted or conferred upon
them;
(iii) To conform this Agreement to applicable laws or
regulations, including without limitation, changes in federal or state
securities or tax laws and regulations, and guidelines of the North American
Association of Securities Administrators; and
(iv) To make any other change in this Agreement which, in the
judgment of the General Partners is not to the prejudice of the Limited
Partners. The General Partners shall give prompt written notice to all Limited
Partners of each change to this Agreement made pursuant to this paragraph (m).
2. Limitations on General Partners' Authority. A General Partner
shall not have authority to:
(a) do any act in contravention of this Agreement or of the temporary
or permanent investment policies set forth in the Prospectus;
(b) do any act which would make it impossible to carry on the
ordinary business of the Limited Partnership;
(c) confess a judgment against the Limited Partnership;
(d) possess Limited Partnership property or assign the rights of the
Limited Partnership in property for other than a partnership purpose;
(e) admit a person as a General Partner without the prior affirmative
vote or consent of the Limited Partners (excluding units owned by any General
Partner) owning a majority in interest of the outstanding units, or such higher
vote as may be required by applicable law;
(f) sell, pledge, refinance, or exchange all or substantially all of
the assets of the Limited Partnership, without the prior affirmative vote or
consent of the Limited Partners (excluding units owned by any General Partner)
owning a majority in interest of the outstanding units;
(g) amend this Agreement without the prior affirmative vote or
consent of the Limited Partners (excluding units owned by any General Partner)
owning a majority in interest of the outstanding units, except as permitted by
Article IV.1 (m);
(h) dissolve the Limited Partnership without the prior affirmative
vote or consent of the Limited Partners (excluding units owned by any General
Partner) owning a majority in interest of the outstanding units;
(i) grant to himself or any of his affiliates an exclusive right to
sell any Limited Partnership assets;
(j) receive or permit any General Partner or any affiliate of the
General Partners to receive any insurance brokerage fee or write any insurance
policy covering the Limited Partnership or any Limited Partnership property;
(k) receive from the Limited Partnership a rebate or give-up or
participate in any reciprocal business arrangement which would enable any
General Partner or any of his affiliates to do so;
(l) commingle the Limited Partnership's funds with those of any other
person;
(m) make any loans to the Limited Partnership or otherwise directly
provide financing to the Limited Partnership; or
(n) 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 such advisor to advise the purchase of units; provided,
however, that this clause shall not prohibit the normal sales commissions
payable to a registered broker-dealer or other properly licensed person for
selling units.
3. Extent of General Partners' Obligation. The General Partners shall
devote such of their time to the business of the Limited Partnership as they
determine, in good faith, to be reasonably necessary to conduct its business.
The General Partners shall not be bound to devote all of their business time to
the affairs of the Limited Partnership, and the General Partners and their
affiliates may engage for their own account and for the account of others in any
business ventures and employments, including ventures and employments having a
business similar or identical or competitive with the business of the Limited
Partnership. As a fiduciary of the Limited Partnership, the General Partners
agree that the assets of the Limited Partnership will not be commingled with the
assets of the General Partners or any other person and will be used or expended
solely for the use of the Limited Partnership. The Limited Partnership shall not
permit a Limited Partner to contract away the fiduciary duty owed to such
Limited Partner by the General Partners under common law. If at any time any
General Partner owns any units as a Limited Partner, his rights to vote such
units will be waived and not considered outstanding in any vote for removal of a
General Partner or for amendment of this Agreement or otherwise.
4. Indemnification of a General Partner. Except in the case of
negligence or misconduct, the General Partners and agents acting on their behalf
shall not be liable, responsible, or accountable in damages or otherwise to the
Partnership (in any action including a Partnership derivative suit) or to any of
the Limited Partners for the doing of any act or the failure to do any act, the
effect of which may cause or result in loss or damage to the Partners, if done
in good faith to promote the best interests of the Partnership. The General
Partners and their agents shall be entitled to be indemnified by the Partnership
from the assets of the Partnership, or as an expense of the Partnership, but not
from the Limited Partners, against any liability or loss, as a result of any
claim or legal proceeding (whether or not the same proceeds to judgment or is
settled or otherwise brought to a conclusion) relating to the performance or
nonperformance of any act concerning the activities of the Partnership, except
in the case where the General Partners or their agents are guilty of bad faith,
negligence, misconduct, or reckless disregard of duty, provided such act or
omission was done in good faith to promote the best interests of the
Partnership. The indemnification authorized by this paragraph shall include the
payment of reasonable attorneys' fees and other expenses (not limited to taxable
costs) incurred in settling or defending any claims, threatened action, or
finally adjudicated legal proceedings.
Notwithstanding the foregoing, neither the General Partners nor any
officer, director, employee, agent, subsidiary or assign of the General Partners
or of the Limited Partnership shall be indemnified from any liability, loss or
damage incurred by them in connection with (i) any claim or settlement involving
allegations that the Securities Act of 1933, as amended, or any state securities
act was violated by the General Partners or by any such other person or entity,
except as and to the extent permitted by the Real Estate Programs Guidelines of
the North American Securities Administrators Association and applicable rules,
regulations or policies of the Securities and Exchange Commission, as in effect
from time to time, or (ii) any liability imposed by law, including liability for
fraud, bad faith, or negligence.
V. RIGHTS OF LIMITED PARTNERS
1. No Limited Partner, as such, shall take part in the management of
the business of, or transact any business for, the Limited Partnership, nor have
the power to sign for or bind the Limited Partnership to any agreement or
document. Notwithstanding the foregoing, a majority in interest of the Limited
Partners (excluding units owned by any General Partner) may, without the
concurrence of the General Partners, vote or consent (and such vote or consent
will be required) to:
(a) amend this Agreement except as permitted by Article IV.1 (m),
(b) dissolve the Limited Partnership,
(c) remove any General Partner and elect one or more new General
Partners (see Article XII.2.), or
(d) approve or disapprove the sale, pledge, refinancing, or exchange
of all or substantially all of the assets of the Limited Partnership.
2 The Limited Partners and their designated representatives shall
have access to all books and records of the Limited Partnership during normal
business hours. A list of the names and addresses of all Limited Partners shall
be maintained as a part of the records of the Limited Partnership and shall be
made available on request to any Limited Partner or his representative at his
cost for a stated purpose not contrary to the best interests of the Partnership.
VI. INVESTMENT AND OPERATING POLICIES
1. The Limited Partnership may make mortgage loans of such duration
and on such real property and with such additional security as the General
Partners in their sole discretion shall determine. Such mortgage loans may be
senior to other mortgage loans on such property, or junior to other mortgage
loans on such property, all in the sole discretion of the General Partners.
2. The Limited Partnership may not ordinarily incur indebtedness for
the purpose of making mortgage loans. However, the Limited Partnership may incur
indebtedness in order:
(a) to prevent default under prior loans or to discharge them
entirely if this becomes necessary to protect the Limited Partnership's mortgage
loans, and
(b) to assist in the operation of any property on which the
Partnership has theretofore made a mortgage loan and has subsequently taken over
the operation thereof as a result of default or to protect such mortgage loan.
3. The Limited Partnership will limit any single mortgage loan and
will limit its mortgage loans to any one borrower to not more than 10% of the
total Partnership assets as of the date the loan is made.
4. The Limited Partnership shall require that a mortgagee's or
owner's title insurance policy as to the priority of a mortgage or the condition
of title be obtained in connection with the making of each mortgage loan. The
Limited Partnership shall also receive an independent on-site appraisal for each
property on which it makes a mortgage loan. All such appraisals shall be
conducted by an independent fee appraiser qualified by or holding a designation
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, The National Association of Real Estate Appraisers or the
Class IV Savings and Loan Appraisers. Such appraisals will be retained at the
office of the Partnership and will be available for review by any Limited
Partner for a period of at least five years after the last day that the Limited
Partnership holds a mortgage secured by the subject property.
5. There shall at all times be title, fire, and casualty insurance in
an amount equal to the Partnership's loan plus any outstanding senior lien on
the security property naming the Partnership and any senior lienor as loss
payees, and Request for Notice of Default shall be recorded in the county where
the security property is situated.
6. Loans may be purchased from the General Partners or their
affiliates only if any such loan is not in default and otherwise satisfies all
requirements of this Article VI. If any such loan was not originated within the
previous 90 days, the General Partners or their affiliates shall at all times
retain at least a 10% interest in such loan.
7. The Limited Partnership will maintain a contingency reserve in an
aggregate amount of at least 1-1/2% of the gross proceeds from the sale of
Units. The cash capital contributions of the General Partners specified in
Article III.1. of this Agreement, up to a maximum of 1/2 of 1% of the aggregate
capital contributions of the Limited Partners, will be available as an
additional contingency reserve if necessary.
VII. ACCOUNTING RECORDS, REPORTS AND MEETINGS
1. Books of Accounts and Records. The Limited Partnership's books and
records and the Certificate shall be maintained at the principal office of the
Limited Partnership, and each Partner shall have access thereto at all
reasonable times as provided in Article V.2. The books and records shall be kept
in accordance with sound accounting practices and principles applied in a
consistent manner by the Limited Partnership and shall reflect all transactions
and be appropriate and adequate for the business of the Limited Partnership.
There shall be transmitted to each of the Limited Partners, within 120 days
after the end of each calendar year, an annual report including annual audited
financial statements of the Limited Partnership prepared in accordance with
generally accepted accounting principles and a summary of related party
transactions. Within a 60-day period after the close of each fiscal year, a
report shall be transmitted to each Limited Partner indicating the Limited
Partnership information necessary for Federal income-tax purposes. The Limited
Partnership shall file all required documents with the applicable regulatory
agencies.
2. Bank Accounts. Limited Partnership moneys shall be deposited in
the name of the Limited Partnership in one or more banks or savings and loan
associations to be designated by the General Partners and shall be withdrawn on
the signature of the General Partners or any person or persons authorized by
them.
3. Meetings of Limited Partners. Special meetings of the Limited
Partners to vote upon any matters as to which the Limited Partners are
authorized to take action under this Agreement may be called at any time by the
General Partners or by one or more Limited Partners holding more than ten
percent (10%) of the outstanding units by delivering written notice, either in
person, or by registered mail, of such call to the General Partners. Within ten
(10) days following receipt of such request, the General Partners shall cause a
written notice, either in person or by registered mail, to be given to the
Limited Partners entitled to vote at such meeting, that a meeting will be held
at a time and place fixed by the General Partners, convenient to the Limited
Partners, which is not less than fifteen (15) days nor more than sixty (60) days
after the filing of the notice of the meeting. Included with the notice of the
meeting shall be a detailed statement of the action proposed, including a
verbatim statement of the wording of any resolution proposed for adoption by the
Limited Partners and of any proposed amendment to this Limited Partnership
Agreement. There shall be deemed to be a quorum at any meeting of the Limited
Partnership at which Limited Partners (excluding units owned by any General
Partner) attending such meeting own a majority of the outstanding units. The
General Partners shall be entitled to notice of and to attend all meetings of
the Limited Partners, regardless of whether called by the General Partners. In
lieu of special meetings, Limited Partners may take action by written consent.
4. Reports. The General Partners shall distribute to the Limited
Partners such other reports as are described under the caption "Reports to
Limited Partners" in the Prospectus.
VIII. ALLOCATIONS AND DISTRIBUTIONS
1. Allocations.
(a) General Allocation. The profits, gains and losses of the Limited
Partnership and each item of gain, loss, deduction, or credit entering into the
computation thereof shall be determined in accordance with the accounting
methods followed for Federal income-tax purposes, and otherwise in accordance
with generally accepted accounting principles and procedures. Such profits,
gains, and losses shall be allocated to each Limited Partner and the General
Partners in the ratio that its capital contribution bears to the aggregate
capital contributions.
(b) Provisional Allocation. In the event that any amount claimed by
the Limited Partnership to constitute a deductible expense in any tax year of
the Limited Partnership is treated as a payment made to a Partner in his
capacity as a member of the Limited Partnership for income-tax purposes, income
and gains of the Limited Partnership for such year shall first be allocated to
such payment and no deductions and losses of the Limited Partnership shall be
allocated thereto.
2. Distributions.
(a) Cash Available for Distribution. The Limited Partnership shall
make distributions of cash available for distribution to those Limited Partners
who have on file with the Limited Partnership their written election to receive
such distributions. A pro rata share of the total cash available for
distribution to Limited Partners shall be distributed monthly to each Limited
Partner making such election, in proportion to the weighted average units owned
during the preceding calendar month. All sums of cash available for distribution
not so distributed shall be credited proportionately to the capital accounts of
the remaining Limited Partners and either credited or distributed to the General
Partners, according to their respective partnership interests.
(b) Net Proceeds. Net proceeds, if any, may be reinvested in new
loans in the sole discretion of the General Partners or may be distributed at
such times and in such intervals as the General Partners may determine in their
sole discretion. In the event of any distributions of net proceeds, such
distributions shall be made to the Partners according to their respective
partnership interests as described in Subsection 2(a) above, provided that no
such distributions are to be made to the General Partners with respect to that
portion of their adjusted capital contribution represented by a promotional
interest, until the Limited Partners shall have received 100% of their capital
contributions.
(c) Uninvested Proceeds. Any proceeds from the sale of units that
have not been invested by the Limited Partnership within two years of the date
of the Offering Circular or within two years of any amendment or supplement
thereto (except for reserves and necessary operating capital) shall be
distributed pro rata to the Partners as a return of their capital contributions.
IX. TRANSACTIONS BETWEEN THE LIMITED PARTNERSHIP AND AFFILIATES
1. Investment Evaluation Fee. An affiliate of the General Partners or
the Corporate General Partner may receive investment evaluation fees payable by
borrowers for services rendered in connection with the evaluation of potential
investments of the Limited Partnership as described in the Prospectus.
2. Loan Servicing and Management Fees. The Corporate General Partner
may act as servicing agent with respect to all Limited Partnership loans, in
consideration for which it shall be entitled to receive from borrowers up to 1/4
of 1% per annum of the unpaid balance of the Limited Partnership mortgage loans.
The Corporate General Partner shall act as manager of the Limited Partnership,
which duties shall include, but not be limited to, dealings with limited
partners, accounting, tax and legal matters, communications and filings with
regulatory agencies and all other needed management duties. The Corporate
General Partner may also, at its sole discretion and subject to change at any
time (1) advance its own funds to the Limited Partnership or to any senior
lienholder to cover delinquent interest or principal payments on mortgage loans
held by the Limited Partnership, (2) advance its own funds to cover any other
costs associated with delinquent loans held by the Limited Partnership
including, but not limited to, property taxes, insurance and legal expense and
(3) purchase such defaulted loans at their book value from the Limited
Partnership. In consideration of the management services referred to in this
paragraph, the Corporate General Partner is entitled, effective September 1,
1992, to receive from the Limited Partnership a management fee payable monthly
equal to a maximum of 2-3/4% per annum (1-3/4% per annum if the Corporate
General Partner has not provided during the preceding calendar year any of the
services set forth in the preceding sentence) of the unpaid balance of the
Limited Partnership's mortgage loans at the end of each of the preceding 12
months. The Corporate General Partner may also receive from the delinquent
borrowers of loans, on which it has advanced funds or which it has purchased,
the overdue interest payments and late payment charges.
3. Partnership Expenses. All of the Limited Partnership's expenses
shall be billed directly, to the extent practicable, to and paid by the Limited
Partnership. Reimbursement to the General Partners, or their affiliate, for
organization and offering expenses including, but not limited to, legal and
accounting expenses, printing costs, and filing fees will be made from cash
available for distribution during the first five years following the
expenditure. Reimbursement (other than for said organization and offering
expenses) to the General Partners or any affiliates shall not be allowed, except
for reimbursement of actual cost to the General Partners or such affiliates of
advances, services, goods and materials used for or by the Partnership. Except
as indicated in this Article IX.3, the General Partners or any affiliate shall
not be reimbursed by the Limited Partnership for any indirect expenses incurred
in performing services for the Limited Partnership, such as officers' salaries,
rent, utilities, and other overhead items. The Partnership, however, may
reimburse the General Partners and any affiliate for salaries (and related
salary expenses, but excluding expenses incurred in connection with the
administration of the Partnership) for nonmanagement and nonsupervisory services
which could be performed, directly for the Partnership by independent parties,
such as legal, accounting, transfer agent, data processing and duplicating.
There shall be no reimbursement for management and supervisory personnel (e.g.,
services of employees of the General Partners or their affiliates who oversee
the work which would have been performed by an independent party if such party
had been so engaged). The amounts charged to the Limited Partnership shall not
exceed the lesser of (a) the actual cost of such services, or (b) the amounts
which the Limited Partnership would be required to pay to independent parties
for comparable services. Reimbursement may also be made for the allocable cost
charged by independent parties for maintenance and repair of data processing and
other special purpose equipment used for or by the Limited Partnership. In the
Limited Partnership's annual report to Limited Partners, there shall be provided
an itemized breakdown of reimbursements made to the General Partners and any
affiliates in the categories of legal, accounting, transfer agent, data
processing, and duplicating services. The reimbursement for expenses provided
for in this Article IX.3 shall be made to the General Partners regardless of
whether any distributions are made to the Limited Partners under the provisions
of Article VIII.2.
4. Mortgage Loans to Affiliates. The Limited Partnership may not make
mortgage loans to the General Partners or to any affiliate of the General
Partners, except that such person may become an obligor on a mortgage loan held
by the Limited Partnership following the foreclosure of the property securing
such mortgage loan.
X. ASSIGNMENT OF INTEREST: SUBSTITUTED LIMITED PARTNERS
1. General Partner. The interest of a General Partner shall not be
assignable in whole or in part, except when a substitution is made by vote of
the Limited Partners or as provided in Article XII.2.
2. Limited Partnership Interests. A Limited Partner's interests in
the Partnership may be transferred by written instrument satisfactory in form to
the General Partners, accompanied by such assurance of the genuineness and
effectiveness of each signature and the obtaining of any necessary governmental
or other approvals as may be reasonably required by the General Partners,
provided, however, that:
(a) no transfer may be made of a fractional unit, and no transfer may
be made if, as a result of such transfer, a Limited Partner (other than one
transferring all of his units) will own fewer than two thousand (2,000) units
except where such transfer occurs by operation of law;
(b) for a period ending nine (9) months after the termination of the
offering of units (which time shall be determined by the General Partners and
which determination shall be binding upon all Partners), no transfer may be made
except to a bona fide resident of the State of California;
(c) no transfer may be made if, in the opinion of tax counsel for the
Partnership, it would jeopardize the status of the Partnership as a partnership
for Federal or any applicable state income tax purposes; and
(d) the transferor will pay in advance all legal, recording, and
accounting costs in connection with any transfer, and the cost of any tax advice
necessary under Subsection 2(c) above.
Assignments complying with the above shall be recognized by the
Partnership not later than the last day of the calendar month in which the
written notice of assignment is received by the Partnership.
No assignee shall have the right to become a substituted Limited
Partner in place of his assignor unless the General Partners have consented in
writing to the substitution, the granting or denial of which shall be within the
absolute discretion of the General Partners. The General Partners will amend the
Certificate of Limited Partnership at least once each calendar quarter, if
necessary, to effect the substitution of Limited Partners.
XI. DEATH, INCOMPETENCY, OR WITHDRAWAL OF A LIMITED PARTNER
1. Effect of Death or Incompetency on Limited Partnership. The death
or incompetency of a Limited Partner shall not cause a dissolution of the
Limited Partnership or entitle the Limited Partner or his estate to a return of
capital.
2. Rights of Personal Representative. On the death or incompetency of
a Limited Partner, his personal representative shall have all the rights of a
Limited Partner for the purpose of settling his estate, including the rights of
assignment and withdrawal.
3. Withdrawal of Limited Partners. A Limited Partner may withdraw, or
partially withdraw, from the Limited Partnership and obtain the return of his
outstanding capital account within 61 to 91 days after written notice of
withdrawal is delivered to the General Partners, subject to the following
limitations:
(a) any such cash payments in return of an outstanding capital
account shall be made by the Limited Partnership only from cash available for
distribution, net proceeds, and capital contributions, during the ninety (90)
day period following receipt by the General Partners of the Limited Partner's
written notice of withdrawal;
(b) a maximum of $75,000 may be withdrawn during any calendar
quarter, except that the estate of any deceased Limited Partner may withdraw up
to $100,000 per calendar quarter;
(c) the Limited Partners shall have the right to receive such
distributions of cash only to the extent such funds are available; the General
Partners shall not be required to establish a reserve fund for the purpose of
funding such payments; the General Partners shall not be require to use any
other sources of Partnership funds other than those set forth in Subsection 3(a)
above; the General Partners shall not be required to sell or otherwise liquidate
any portion of the Limited Partnership's loan portfolio in order to make a cash
distribution of any capital account;
(d) during the ninety (90) days following receipt of written notice
of withdrawal from a Limited Partner, the General Partners shall not refinance
any loans of the Limited Partnership or reinvest any cash available for
distribution or net proceeds unless and until the Limited Partnership has
sufficient funds available to distribute to the withdrawing Limited Partner all
of his capital account in cash;
(e) the amount to be distributed to any withdrawing Limited Partner
shall be a sum equal to his outstanding capital account as of the date of such
distribution, notwithstanding that such sum may be greater or lesser than such
Limited Partner's proportionate share of the current fair market value of the
Limited Partnership's net assets;
(f) in no event shall the General Partners permit the withdrawal
during any calendar year of Limited Partners representing more than 10% of the
outstanding Limited Partnership interests in the Partnership, except upon the
vote of the Limited Partners to dissolve the Partnership pursuant to Article V
above. Capital accounts shall be distributed to withdrawing Limited partners in
the same order of priority as notices of withdrawals are received by the General
Partners; and
(g) if a Limited Partner's capital account would have a balance of
less that $2,000 following a requested withdrawal, the General Partners, at
their discretion, may distribute to such Limited Partner the entire balance in
such account.
XII. BANKRUPTCY, DEATH, RETIREMENT, REMOVAL, OR DISSOLUTION OF A GENERAL PARTNER
1. Removal of a General Partner. A majority in interest of the
Limited Partners (excluding units owned by any General Partner) may remove any
or all of the General Partners. Written notice of such removal setting forth the
effective date thereof shall be served upon the removed General Partner and, as
of the effective date, shall terminate all of his rights and powers as a General
Partner.
2. Dissolution of Limited Partnership and Continuance of Limited
Partnership. The dissolution, death, retirement, removal, or adjudication of
bankruptcy of a General Partner (any of which events are referred to hereafter
as the "Terminating Event," and the General Partner affected as the "Terminated
General Partner") shall immediately destroy the agency relationship between the
Limited Partnership and the Terminated General Partner. A Terminating Event
shall also dissolve the Limited Partnership unless the Limited Partnership is
continued by a remaining General Partner or the General Partners or by a general
partner elected in place of the Terminated General Partner by a majority in
interest of the Limited Partners. If no General Partner remains after a
Terminating Event, the Limited Partners shall meet or act by written consent
within sixty (60) days of such Terminating Event and either:
(a) elect to continue the Limited Partnership, provided that a new
general partner (or partners) is available, and is so elected by a majority in
interest of the Limited partners, in which event a new Certificate of Limited
Partnership shall be recorded naming the new general partner; or
(b) elect to terminate and liquidate the Limited partnership under
the provisions of Article XIII hereof.
3. Rights of Terminated General Partner. Upon the occurrence of a
Terminating Event, the Limited Partnership shall pay to the Terminated General
Partner all amounts then accrued and owing to the Terminated General Partner.
The Limited Partnership shall also terminate the Terminated General Partner's
interest in Limited Partnership profits, gains, losses, net proceeds,
distributions, and capital by payment of an amount equal to the then present
fair market value of the Terminated General Partner's interest determined by
agreement of the Terminated General Partner and the Limited Partnership, or, if
they cannot agree, by arbitration in accordance with the then current rules of
the American Arbitration Association. The expense of arbitration is to be borne
equally by the Terminated General Partner and the Limited Partnership. The
method of payment to the Terminated General Partner should not threaten the
solvency or liquidity of the Limited Partnership.
XIII. DISSOLUTION AND LIQUIDATION
1. Upon the vote or written consent of a majority in interest of the
Limited Partners (excluding units owned by a General Partner), or as otherwise
herein provided, the Limited Partnership shall be dissolved and the assets shall
be liquidated and the net proceeds distributed to the Partners after payment of
the debts of the Limited Partnership as provided herein and by applicable law.
In settling accounts after liquidation, the monies of the Limited Partnership
shall be applied in the following manner:
(a) the liabilities of the Limited Partnership to creditors other
than Partners shall be paid or otherwise adequately provided for; and
(b) the remaining assets shall be distributed to the Limited Partners
and the General Partners in the same manner as net proceeds are distributed
under Article VIII.2(b) hereof.
2. In the event that, immediately prior to the dissolution and
termination of the Limited Partnership following the sale or other disposition
of all of its assets, and after crediting any gain or charging any loss pursuant
to Section VIII, any General Partner shall have a deficient balance in his
capital account, then such General Partner shall contribute in cash to the
capital of the Limited Partnership an amount which is equal to such deficit in
his capital account.
XIV. SIGNATURES
Any security agreement, chattel mortgage, lease, contract of sale,
bill of sale, or other similar document to which the Limited Partnership is a
party, shall be executed by one or more of the General Partners, and no other
signatures shall be required.
XV. SPECIAL POWER OF ATTORNEY
Concurrently with the execution or written acceptance and adoption of
the provisions of this Agreement, each Limited Partner shall execute and deliver
to the General Partners a special power of attorney in form acceptable to the
General Partners in which the General Partners, and each of them, is constituted
and appointed as the attorney-in-fact for such Limited Partner with power and
authority to act in his name and on his behalf to execute, acknowledge, and
swear to in the execution, acknowledgment, and filing of documents, which shall
include, by way of illustration but not of limitation, the following:
1. This Agreement, any separate Certificates of Limited Partnership,
as well as any amendments to the foregoing which, under the laws of the State of
California or the laws of any other state, are required to be filed or which the
General Partners deem it advisable to file;
2. Any other instrument or document which may be required to be filed
by the Limited Partnership under the laws of any state or by any governmental
agency, or which the General Partners deem it advisable to file; and
3. Any instrument or document which may be required to effect the
continuation of the Limited Partnership, the admission of an additional or
substituted Limited Partner, or the dissolution and termination of the Limited
Partnership, provided such continuation, admission, or dissolution and
termination are in accordance with the terms of this Agreement.
The special power of attorney to be concurrently granted by each
Limited Partner:
1. is a special power of attorney coupled with an interest, is
irrevocable, shall survive the death of the granting Limited Partner, and is
limited to those matters herein set forth;
2. shall survive an assignment by a Limited Partner of all or any
portion of his units except that, where the assignee of the units owned by a
Limited Partner has been approved by the General Partners for admission to the
Limited Partnership as a substituted Limited Partner, the special power of
attorney shall survive each assignment for the purpose of enabling the General
Partners to execute, acknowledge, and file any instrument or document necessary
to effect such substitution.
XVI. MISCELLANEOUS
1. Notices. Any notice, payment, demand, or communication required or
permitted to be given by any provision of this Agreement shall be deemed to have
been sufficiently given or served for all purposes if delivered personally to
the party or to an officer of the party to whom the same is directed, or if sent
by registered or certified mail, postage and charges prepaid addressed as
follows:
If the General Partners:
David Adler, David K. Machado,
Milton N. Owens, William C. Owens,
Larry R. Schultz, and/or
Owens Financial Group, Inc.
P. O. Box 2308
Walnut Creek, CA 94595
If to a Limited Partner, at such Limited Partner's address for
purposes of notice which is set forth on the signature page hereof or on a
schedule hereto, or in either case as the General Partners or a Limited Partner
shall designate pursuant to the notice provision hereof. Any such notice shall
be deemed to be given on the date on which the same was deposited in a regularly
maintained receptacle for the deposit of United States mail, addressed and sent
as aforesaid.
2. Application of California Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of California.
3. Execution in Counterparts. This Agreement may be executed in any
number of counterparts with the same effect as if all parties hereto had all
signed the same document. All counterparts shall be construed together and shall
constitute one agreement.
4. Waiver of Action for Partition. Each of the parties hereto
irrevocably waives during the term of the Limited Partnership any right that he
or it may have to maintain any action for partition with respect to the property
of the Limited Partnership.
5. Assignability. Except as expressly limited herein, 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.
6. Interpretation. As used herein, the masculine includes the
feminine and neuter and the singular includes the plural.
7. Captions. Paragraphs, titles, or captions in no way define, limit,
extend, or describe the scope of this Agreement nor the intent of any of its
provisions.
8. Adjustment of Basis. The General Partners may elect, pursuant to
Internal Revenue Code Section 754, to adjust the basis of Limited Partnership
property under the circumstances and in the manner provided in Internal Revenue
Code Sections 734 and 743. The General Partners shall, in the event of such an
election, take all necessary steps to effect the election.
9. Integrated Agreement. This Agreement constitutes the entire
understanding and agreement among the parties hereto with respect to the subject
matter hereof.
IN WITNESS WHEREOF, the undersigned have executed this Agreement this
___ day of ________________, 199__.
GENERAL PARTNERS:
2221 Olympic Blvd. _______________________________________________________
P. O. Box 2308
Walnut Creek, CA 94595 _______________________________________________________
LIMITED PARTNERS: _______________________________________________________
as Attorney-in-Fact for the persons listed on Schedule A
<PAGE>
EXHIBIT B
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
Owens Mortgage Investment Fund, A California Limited Partnership
1. SUBSCRIPTION. The undersigned investor hereby applies to become a
Limited Partner in Owens Mortgage Investment Fund, a California Limited
Partnership (the "Partnership"), and agrees to purchase the number of units of
limited partnership interest in the Partnership (the "Units") stated below in
accordance with the terms and conditions of the Amended and Restated Limited
Partnership Agreement (the "Agreement"), a copy of which is contained in the
Prospectus of the Partnership, and tenders the amount required to purchase the
Units ($1.00 per Unit, 2000 Unit minimum purchase). The Units which the investor
offers to purchase hereby shall not be deemed issued to, or owned by, the
investor until: (a) the investor has fully paid in cash for such Units, and (b)
the General Partners have in their sole discretion accepted his or her offer of
purchase.
2. REPRESENTATIONS BY THE UNDERSIGNED. The undersigned investor
represents and warrants that the undersigned:
(a) has received the Prospectus of the Partnership dated May ___,
1996;
(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) understands that Units are offered for a minimum investment of
$2,000 (two thousand Units);
(d) recognizes that the Units as an investment involve a high degree
of risk;
(e) understands that there will be no public market for the Units,
that there are substantial restrictions on sale, assignment or transfer of the
Units, and that it may not be possible readily to liquidate this investment;
(f) has (i) a minimum net worth (exclusive of home, furnishings, and
automobiles) of $30,000 ($50,000 in the State of Washington), plus an annual
gross income of at least $30,000 ($50,000 in the State of Washington); or (ii) a
minimum net worth (exclusive of home, furnishings, and automobiles) of $75,000
($150,000 in the State of Washington); or (iii) is purchasing in a fiduciary
capacity for a person meeting the requirements of either (i) or (ii) above;
(g) if an individual, has attained the age of majority (as
established in the state in which domiciled), and, in any event, is under no
disability with respect to entering into a contractual relationship with the
Partnership;
(h) 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;
(i) fully indemnifies and holds harmless the Partnership, General
Partners, and their 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 or alleged breach of any of the representations
contained herein; and
(j) meets the suitability standards established by the Partnership
and by the state in which domiciled.
3. ADOPTION OF AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT.
The undersigned investor hereby adopts, accepts, and agrees to be bound by all
terms and provisions of the Agreement and to perform all obligations therein
imposed upon a Limited Partner with respect to Units to be purchased. Upon
acceptance of this subscription by the General Partners on behalf of the
Partnership, payment in full of the subscription price and the filing of a
Certificate of Limited Partnership of the Partnership, the undersigned shall
become a Limited Partner for all purposes of the Agreement.
4. LIMITATION ON ASSIGNMENT. The undersigned investor acknowledges
that the Units may be assigned only as provided in the Agreement and further
acknowledges the restrictions on resale, transfer, or assignment of the Units
set forth in the Partnership Agreement and as described in the Prospectus.
5. SPECIAL POWER OF ATTORNEY. The undersigned investor hereby makes,
constitutes, and appoints the General Partners of the Partnership, and each of
them, with full power of substitution, to be such person's true and lawful
attorney in fact, for such person and in such person's name, place and stead for
such person's use and benefit to sign and acknowledge, file and record:
(a) the Agreement and an amended Certificate of Limited Partnership,
as well as all amendments thereto required under the laws of the State of
California or of any other state required to be filed or which the General
Partners deem advisable to file;
(b) any other instrument or document which may be required to be
filed by the Partnership by any governmental agency or by the laws of any state,
or which the General Partners deem it advisable to file; and
(c) any documents which may be required to effect the continuation of
the Partnership, the admission of a substituted Limited Partner, or the
dissolution and termination of the Partnership, provided such continuation,
admission, or dissolution and termination are in accordance with the terms of
the Agreement.
The foregoing grant of authority:
(i) is a Special Power of Attorney coupled with an interest, is
irrevocable, shall survive the death of the undersigned and shall not be
affected by the subsequent incapacity of the investor;
(ii) may be exercised by any of the General Partners for each
Limited Partner by a facsimile signature of or on behalf of one of the General
Partners or by listing all of the Limited Partners and by executing any
instrument with a single signature of or on behalf of one or more of the General
Partners, acting as attorney-in-fact for all of them; and
(iii) shall survive the delivery of an assignment by a Limited
Partner of the whole or any portion of his interest; except that where the
assignee thereof has been approved by the General Partners for admission to the
Partnership as a substituted Limited Partner, 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.
6. PAYMENT OF SUBSCRIPTION. The amount of the undersigned investor's
subscription is set forth below and payment of such amount is enclosed by a
check payable to Owens Mortgage Investment Fund. The undersigned hereby
authorizes and directs the General Partners to deliver this Subscription
Agreement to the Partnership and pay the funds delivered herewith to the
Partnership, to the extent the undersigned's subscription has been accepted. If
the undersigned's subscription is rejected in part, the funds delivered herewith
will, to the extent his application is so rejected, be returned to him as soon
as practicable without interest or deduction, except to the extent of any
interest actually earned.
7. PURCHASE BY FIDUCIARY. If the undersigned is purchasing the Units
subscribed hereby in a fiduciary capacity, the above representations and
warranties are be deemed to have been made on behalf of the person(s) for whom
the undersigned is so purchasing except that such person(s) need not be over 18
years of age.
8. NOTIFICATION OF GENERAL PARTNERS. The undersigned agrees to notify
the General Partners immediately if any of the foregoing statements made herein
shall become untrue.
9. PARTNERSHIP AGREEMENT GOVERNS. In the event of any conflict
between the provisions of the Partnership Agreement and any instrument or
document executed, acknowledged, filed or recorded by the General Partners
pursuant to this special power of attorney, the Partnership Agreement will
govern.
10. SUBSCRIPTION AMOUNT. The undersigned investor wishes to subscribe
$______________ and encloses such sum herewith as the purchase price of
___________ Units.
11. REINVESTMENT OF DISTRIBUTIONS. Check the appropriate line:
___ The undersigned investor wishes to reinvest distributions
received from the Partnership in additional Units.
___ The undersigned investor does not wish to reinvest distributions
received from the Partnership in additional Units.
12. OWNERSHIP OF UNITS. The undersigned's interest will be owned and
should be shown on the Partnership's records as follows:
Check one: ___Individual Ownership
___JTROS (all parties must sign)
___Tenants in Common (all parties must sign)
___Community Property (one signature required)
___Custodian
___Trustee
___Corporation
___Partnership
___Nonprofit Organization
(Please Print)
Name_______________________________________________________________________
First Middle Last
or Entities legal name
-------------------------------------------------------------------------
Resident Address
- --------------------------------------------------------------------------
City State Zip Code
- --------------------------------------------------------------------------
Home Telephone Number (if applicable) Business Telephone Number
(include area code) (include area code)
Date of Birth _____________________________________(Individual Investors Only)
Occupation ________________________________________(Individual Investors Only)
Marital Status (check one) Single___ Married___(Individual Investors Only)
Citizenship U.S.___ Other_____________(Individual Investors Only)
Investment Objective:
Current income with retention of capital___ (check)
Other (please explain)___________________________________________
Name_______________________________________________________________________
First Middle Last
or Entities legal name
----------------------------------------------------------------------------
Resident Address
----------------------------------------------------------------------------
City State Zip Code
----------------------------------------------------------------------------
Home Telephone Number (if applicable) Business Telephone Number
(include area code) (include area code)
Date of Birth ______________________________________(Individual Investors Only)
Occupation _________________________________________(Individual Investors Only)
Marital Status (check one) Single___ Married___(Individual Investors Only)
Citizenship U.S.___ Other_____________ (Individual Investors Only)
13. IF APPLICABLE, THE ACCOUNT REPRESENTATIVE AND INVESTMENT FIRM
PRINCIPAL MUST EACH SIGN BELOW IN ORDER TO SUBSTANTIATE COMPLIANCE WITH APPENDIX
F TO ARTICLE 3, SECTION 34 OF THE NASD'S RULES OF FAIR PRACTICE.
IN WITNESS WHEREOF, the undersigned investor has executed this
Subscription Agreement and Power of Attorney.
Dated: _____________, 19___
- --------------------------------------- ---------------------------------------
Authorized Signature of Subscriber Social Security Number or Federal Tax
Identification Number
- ---------------------------------------
Authorized Signature of Subscriber _______________________________________
(if more than one) Social Security Number or Federal Tax
Identification Number
ACCEPTED:
Owens Mortgage Investment Fund
A California Limited Partnership
---------------------------------------
General Partner
Dated: ____________, 19__
The Account Representative and Principal signing below each have
reasonable grounds to believe, based on information obtained from the above
investor concerning his or her investment objectives, other investments,
financial situation and needs and any other information known by either of them,
that investment in the Partnership is suitable for such investor in light of his
or her financial position, net worth and other suitability characteristics, and
that the investor meets the suitability requirements applicable to this
offering.
The undersigned account representative and principal have advised the
above investor that no market for the securities being offered exists nor is one
expected to develop, and that the investor may not be able to liquidate his or
her investment in the event of an emergency or for any other reason.
- --------------------------------------- ---------------------------------------
Signature of Investment Firm Principal Signature of Account Representative
Owens Securities Corporation
- --------------------------------------- ---------------------------------------
Please PRINT Name and Title Please PRINT Account Representative Name
<PAGE>
$67,327,788
$250,000,000 Authorized Including Prior Subscriptions
LIMITED PARTNERSHIP UNITS
$1.00 per Unit
2,000 Units Minimum Investment ($2000)
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
--------------------
PROSPECTUS
-------------------
__________________, 199___
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 30. Other Expenses of Issuance and Distribution
The expenses, exclusive of sales expense and commissions payable by the
Corporate General Partner, incurred and estimated to be incurred in connection
with this offering are as follows:
Securities and Exchange Commission Registration Fee.....................$0
National Association of Securities Dealers, Inc. and Blue Sky
Registration Fees 0
Accounting Fees and Expenses 13,500
Legal Fees and Expenses 13,500
Printing and Engraving Expenses 10,000
Mailing 2,500
Miscellaneous 500
-------
Total $40,000
=======
Item 31. Sales to Special Parties
Not Applicable
Item 32. Recent Sales of Unregistered Securities
Not Applicable
Item 33. Indemnification of Directors and Officers
Indemnification of the Partners, and any officer, director, employee,
agent, subsidiary or assign thereof, is provided for in Section IV.4 of the
Amended and Restated Limited Partnership Agreement which is included in the
Prospectus.
Item. 34. Treatment of Proceeds from Stock Being Registered
Not Applicable
Item 35. Financial Statements and Exhibits
(a) Financial Statements:
Owens Mortgage Investment Fund
Report of KPMG Peat Marwick LLP, Independent
Auditors Balance Sheets --- December 31, 1995
and 1994
Statements of Income for the three years ended
December 31, 1995, 1994 and 1993 Statements of
Partners' Capital for the three years ended
December 31, 1995, 1994 and 1993 Statements of
Cash Flows for the three years ended December
31, 1995, 1994 and 1993 Notes to Financial
Statements
Owens Financial Group, Inc,
Report of KPMG Peat Marwick LLP, Independent
Auditors Consolidated Balance Sheet -December
31, 1995 Notes to Consolidated Balance Sheet
(b) Exhibits:
*1.1 Underwriting Agreement
*1.2 Selling Group Agreement
3 Amended and Restated Agreement of Limited Partnership
(included as Exhibit A to the Prospectus) 4.1 Amended and
Restated Agreement of Limited Partnership (Included as
Exhibit A to the Prospectus) 4.2 Subscription Agreement
and Power of Attorney (included as Exhibit B to
Prospectus) 5 Opinion of A. Nick Shamiyeh with Respect to
Legality of the Securities 5 Opinion of Wendel, Rosen,
Black & Dean with Respect to Federal Income Tax Matters
23.1 Consent of A. Nick Shamiyeh
23.2 Consent of Wendel, Rosen, Black & Dean
23.3 Consent of KPMG Peat Marwick LLP
24 Power of Attorney
*99 Assignment dated January 29, 1987 by and between Owens
Financial Group, Inc., and David Adler, Gerald D. Gains,
David K. Machado, Milton C. Owens, William C. Owens,
Larry R. Schultz, and Lorraine Spingolo
*Previously filed under Registration No. 33-81896 and incorporated herein by
this reference
(c) Schedules:
Schedule IV - Mortgage Loans on Real Estate as of December
31, 1995
Item 36. 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 any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the 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;
(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.
(4) To remove from regulation by means of a protective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(6) To send to each Limited Partner at least on an annual
basis a detailed statement of any transactions with the General
Partners or their Affiliates, and of fees, commissions, compensation
and other benefits paid, or accrued to the General Partners or their
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
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 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.
<PAGE>
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 Post-Effective Amendment No. 2
to the Form S-11 Registration Statement (No. 33-81896) and has duly caused this
Post-Effective Amendment No. 2 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Walnut Creek, State of California on
May 1, 1996.
OWENS MORTGAGE INVESTMENT FUND,
A CALIFORNIA LIMITED PARTNERSHIP
By: OWENS FINANCIAL GROUP, INC.
Corporate General Partner
By: /s/ BRYAN H. DRAPER
Bryan H. Draper, Controller/Secretary
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Post-Effective Amendment No. 2 to the Form S-11 Registration
Statement (No. 33-81896) has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ DAVID ADLER* General Partner of the Partnership and May, 1, 1996
David Adler Director of the Corporate General Partner
/s/ MILTON N. OWENS* General Partner of the Partnership and May 1, 1996
Milton N. Owens Director of the Corporate General Partner
/s/ LARRY R. SCHULTZ* General Partner of the Partnership and May 1, 1996
Larry R. Schultz Director of the Corporate General Partner
/s/ WILLIAM C. OWENS* General Partner of the Partnership and May 1, 1996
William C. Owens Director of the Corporate General Partner
/s/ DAVID K. MACHADO*
David K. Machado General Partner May 1, 1996
OWENS FINANCIAL GROUP INC.
Corporate General Partner May 1, 1996
By /s/ BRYAN H. DRAPER
Bryan H. Draper
Controller/Secretary
*By/s/ BRYAN H. DRAPER
Bryan H. Draper,
As Attorney-in-Fact
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE IV
OWENS MORTGAGE INVESTMENT FUND
MORTGAGE LOANS ON REAL ESTATE -- DECEMBER 31, 1995
Principal Amount
of Loans Subject
to Delinquent
Final Carrying Amount Principal or
Description Interest Rate Maturity date of Mortgage Interest
TYPE OF LOAN
<S> <C> <C> <C> <C> <C>
Income Producing 6.62 14.50% Current to Oct., 2010 $142,597,751 $10,622,750
Single Family Residence 8.00-15.00% Current to Apr., 2000 2,249,616 184,000
Land 10.00-15.00% Current to Jul., 1998 6,503,224 1,230,170
------------ -----------
TOTAL $151,350,591 $12,036,920
============ ===========
AMOUNT OF LOAN
$0-250,000 6.81-15.00% Current to Aug., 2005 $10,852,336 $ 688,987
$250,001-500,000 8.00-14.00% Current to Aug., 2010 19,392,222 2,447,415
$500,001-1,000,000 7.62-14.50% Current to Feb., 2010 27,942,137 3,289,455
Over $1,000,000 6.62-14.50% Current to Oct., 2010 93,163,896 5,611,063
------------ -----------
TOTAL $151,350,591 $12,036,920
============ ===========
POSITION OF LOAN
First 6.62-15.00% Current to Oct., 2010 $136,110,802 $10,437,920
Second 9.50-14.50% Current to Dec., 2004 14,660,759 1,599,000
Third or all-inclusive
deeds of trust 10.50% Current to Feb., 1996 579,030 0
------------ ------------
TOTAL $151,350,591 $12,036,920
============ ===========
- -----------------------------
<FN>
NOTE 1: All loans are acquired from an affiliate of the Partnership, namely
Owens Financial Group, Inc., the Corporate General Partner.
NOTE 2: Reconciliation of carrying amount of mortgages.
Balance at beginning of period (1/1/95) $145,050,213
Additions during period
New mortgage loans 63,029,067
-----------
Subtotal 208,079,280
Deductions during period
Collection of principal 53,325,022
Foreclosures 2,501,308
Conversion to Unsecured Loan to
Corporate General Partner 902,359
-----------
Balance at end of period (12/31/95) $151,350,591
===========
NOTE 3: Included in the above loans is the following loan which
exceeds 3% of the total loans as of December 31, 1995. There are no other loans
which exceed 3% of the total loans as of December 31, 1995.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Principal Amount of
Final Carrying Loans Subject to
Interest Maturity Periodic Payment Prior Face Amount of Amount of Delinquent Principal
Description Rate Date Terms Liens Mortgages Mortgages or Interest
----------- ---- ---- ----- ----- --------- --------- -----------
Commercial Retail Center, Interest only, balance
<S> <C> <C> <C> <C> <C> <C> <C>
So. Lake Tahoe, CA 10.0% 7/27/04 due at maturity None $5,344,002 $5,344,002 $0
</TABLE>
<PAGE>
OWENS MORTGAGE INVESTMENT FUND, A CALIFORNIA LIMITED PARTNERSHIP
INDEX TO EXHIBITS
Exhibit
No. Description Page
---- ------------- ----
*1.1 Underwriting Agreement
*1.2 Selling Group Agreement
3 Amended and Restated Agreement of Limited
Partnership (included as Exhibit A to the Prospectus)
4.1 Amended and Restated Agreement of Limited Partnership
(Included as Exhibit A to the Prospectus)
4.2 Subscription Agreement and Power of Attorney (included as
Exhibit B to Prospectus)
5 Opinion of A. Nick Shamiyeh with Respect to Legality of
the Securities
8 Opinion of Wendel, Rosen, Black & Dean with Respect to
Federal Income Tax Matters
23.1 Consent of A. Nick Shamiyeh
23.2 Consent of Wendel, Rosen, Black & Dean
23.3 Consent of KPMG Peat Marwick LLP
24 Power of Attorney
*99 Assignment dated January 29, 1987 by and between Owens
Financial Group, Inc. and David Adler, Gerald D. Gains,
David K. Machado, Milton C. Owens, William C. Owens,
Larry R. Schultz, and Lorraine Spingolo
*Previously filed under Registration No. 33-81896 and incorporated
herein by this reference.
<PAGE>
EXHIBIT 5
<PAGE>
Law Offices of
A. NICK SHAMIYEH
Reply to Walnut Creek Office
2221 Olympic Boulevard, Suite 100 San Francisco Branch Office
Walnut Creek, California 94595-0308 703 Market Street, 20th Floor
Telephone: (510) 935-9401 San Francisco, CA 94103
Facsimile: (510) 935-9407 Telephone: (415) 777-0700
May 1, 1996
Owens Mortgage Investment Fund
2221 Olympic Boulevard
Walnut Creek, California 94595
RE: OWENS MORTGAGE INVESTMENT FUND -
A CALIFORNIA LIMITED PARTNERSHIP -
LEGALITY OF SECURITIES BEING REGISTERED
Gentlemen:
In connection with the registration of the limited partnership units (the
"Units") of Owens Mortgage Investment Fund, a California limited partnership
(the "Partnership"), under the Securities Act of 1933, as amended, you have
requested our opinion as to whether the Units, when issued, will be lawfully and
validly issued, fully paid, and nonassessable. All capitalized terms used and
not expressly defined herein shall have the meanings given to such terms in the
Amended and Restated Limited Partnership Agreement of the Partnership (the
"Partnership Agreement").
In rendering the opinion hereinafter expressed, we have examined and relied upon
such documents as we have deemed appropriate, including the following:
I. The Partnership Agreement;
II. The Certificate of Limited Partnership of the Partnership, as
recorded as Document No. 84-82553 with the Recorder's Office of Contra Costa
County, California on June 14, 1984;
III. The Certificate of Limited Partnership of the Partnership on Form
LP-1, as filed with the California Secretary of State (File No. 8418500081) on
July 1, 1984;
IV. Amendment to the Certificate of Limited Partnership of the
Partnership on Form LP-2, as filed with the California Secretary of State (File
No. 8418500081) on March 20, 1987;
V. Amendment to the Certificate of Limited Partnership of the
Partnership on Form LP-2, as filed with the Secretary of State (File No.
8418500081) on August 29, 1989.
VI. Amendment to the Certificate of Limited Partnership on Form LP-2
as filed with the Secretary of State (File No. 8418500081) on October 22, 1992.
VII. Amendment to the Certificate of Limited Partnership on Form LP- 2
as filed with the Secretary of State (File No. 841850081) on January 24, 1994.
VIII. The Partnership's Post-Effective Amendment No. 2 to the
Registration Statement (the "Registration Statement"), which is to be filed with
the Securities and Exchange Commission by the Partnership concurrently with the
delivery of this opinion; and
IX. The Subscription Application and Power of Attorney.
In conducting our examination, we have assumed, without investigation, the
genuineness of all signatures, the correctness of all certificates, the
authenticity of all the documents submitted to us as originals, the conformity
to original documents of all documents submitted to us as certified or
photographic copies and the authenticity of the originals of such copies, and
the accuracy and completeness of all records made available to us by the
Partnership. In addition, we have assumed, without investigation, the accuracy
of the representations and statements as of factual matters made by the
Partnership in the Registration Statement, and the accuracy of representations
and statements as to factual matters made by the General Partners, their
partners, offices, and employees, and by public officials. In making our
examination of documents, we have assumed, without investigation, that each
party (other than the Partnership) to such documents has: (i) the power and
capacity to enter into and perform all its obligations under such documents,
(ii) duly authorized all requisite actions with respect to such documents, and
(iii) duly executed and delivered such documents.
The opinion hereinafter expressed is subject, without investigation, to the
following assumptions:
A. All offers, sales, and issuances of the Units will be made and
consummated in a manner complying with the terms of the Registration Statement,
as amended.
B. The Registration Statement, as amended, will become and remain
effective, and the Prospectus which is a part thereof, and the Prospectus
delivery procedures with respect thereto, will fulfill all of the requirements
of the Securities Act of 1933, as amended, throughout all periods relevant to
this opinion.
C. All offers and sales of the Units will be in compliance with the
securities laws of the states having jurisdiction thereof.
The opinion hereinafter expressed is subject to the following
qualifications:
(a) Our opinion below is limited to the matters expressly set forth in
this opinion letter, and no opinion is to be implied or may be inferred beyond
the matters expressly so stated.
(b) We disclaim any obligation to update this opinion letter for
events occurring after the date of this opinion letter.
(c) Our opinion below is limited to the effect of the state laws of
the State of California and of the federal laws of the United States;
accordingly, we express no opinion with respect to the laws of any other
jurisdiction, or the effect thereof on the transactions contemplated by the
Registration Statement.
Based upon and subject to the foregoing and the effect, if any, of the matters
discussed below, after having given due regard to such issues of law as we have
deemed relevant, we are of the opinion that the Units, when issued, will be
lawfully and validly issued, fully paid, and nonassessable.
We note, however, California Uniform Partnership Act as set forth in Section
15517(4) of the California Corporation Code, under which the Partnership was
formed, provides that when a contributor has rightfully received a return, in
whole or in part, of his capital contribution, he is nevertheless liable to the
partnership for any sum, not in excess of such return with interest, necessary
to discharge the partnership's liabilities to all creditors who extended credit
or whose claims arose before such return.
This opinion is furnished to you in connection with the registration of the
Units and may be relied upon by you and by the Limited Partners, but may not be
relied on, nor may copies be delivered to, any other person or entity without
our prior written consent. Notwithstanding the preceding sentence, we hereby
consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
LAW OFFICES OF A. NICK SHAMIYEH
/s/ A. Nick Shamiyeh
By A. NICK SHAMIYEH
<PAGE>
EXHIBIT 8
<PAGE>
May 1, 1996
Owens Mortgage Investment Fund
2221 Olympic Boulevard
Walnut Creek, California 94595
Re: Owens Mortgage Investment Fund Partnership Status
Dear Gentlemen:
This is an opinion as to the summaries of federal income tax
consequences set forth in the section entitled "Federal Income Tax Consequences"
of the Prospectus for Owens Mortgage Investment Fund, a California limited
partnership (the "Partnership"), to be filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended, as a part of its
Post-Effective Amendment No. 2 (the "Amendment") to Form S-11 Registration
Statement (No. 33-81896). All terms not otherwise defined herein shall have the
meaning set forth in the Amendment.
I. BASES OF OPINION
For purposes of this opinion, we have relied upon:
A. The following instruments:
1. The Amendment;
2. The Limited Partnership Agreement for the Partnership that is
included in Exhibit A to the Prospectus that is part of the Amendment (the
"Partnership Agreement"); and
3. Such other documents and records pertaining to the
organization of the Partnership as we have considered necessary for rendering
the opinion hereinafter set forth.
In our examination, we have assumed the authenticity of
original documents and the accuracy of copies and the genuineness of signatures.
You have represented to us that the Partnership Agreement has been signed in
counterparts by a General Partner and on behalf of the Limited Partners in
substantially the same form as the copy of the Partnership Agreement which is
included in the Amendment.
B. The Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations issued thereunder, Revenue Rulings and Revenue Procedures
issued by the Internal Revenue Service ("Service") and case law.
C. The representations of the General Partners that:
1. The Partnership is organized and will be operated in
compliance with the Partnership Agreement and the applicable state statutes
governing limited partnerships;
2. The Partnership was formed principally to make first, second,
third, wraparound and construction mortgage loans, and mortgage loans on
leasehold interests.
3. The aggregate deductions to be claimed by the Partnership's
partners as their distributive shares of Partnership losses, if any, for the
first two years of Partnership operations did not exceed the amount of equity
capital invested in the Partnership;
4. A creditor who made or makes a non-recourse loan to the
Partnership did not have and will not have or acquire at any time, as a result
of making such loan, any direct or indirect interest in the profits, capital or
property of the Partnership other than as a secured creditor;
5. As of the date of the Amendment, the General Partners have and
will maintain during the remaining life of the Partnership an aggregate net
worth of at least $20.0 million; and
6. To the best of the knowledge of the General Partners, all
other statements of fact contained in the Registration Statement are true and
correct.
While we have not been requested to conduct, nor have we undertaken to
make, independent investigations to verify the above representations, based upon
our discussions with the General Partners and our limited review of certain
background material, we believe that it is reasonable for us to rely on such
representations.
II. OPINION
Based on the foregoing and on such other materials as we have deemed
appropriate and relevant, we are of the opinion that it is more likely than not
that:
1. The Partnership will be classified as a partnership rather
than as an association taxable as a corporation for federal income tax purposes.
2. The summaries of income tax consequences set forth in the
section of the Registration Statement entitled "Federal Income Tax Consequences"
are accurate statements of all material matters discussed therein.
Our opinion is limited to the specific opinions expressed above; no
other opinions are intended, nor should they be inferred therefrom. In
particular, no opinion is expressed herein as to whether or not the Partnership
will be classified as a publicly traded partnership for federal income tax
purposes.
No opinion, favorable or unfavorable, is expressed on the availability
of any deduction or credit contemplated by the Partnership.
Our opinion is based on our current understanding of the applicable
federal law. There can, of course, be no assurance that a court or the Internal
Revenue Service, when faced with the same facts, would reach the same
conclusions as we have or that the law will not be changed after the date of
this opinion. The information and opinion that is given in this letter are
effective as of the date of this letter.
In rendering this opinion, we have not been asked to give nor do we
express any opinion as to questions or issues arising out of the investment by
Limited Partners in the Partnership other than those questions specifically
discussed.
In reviewing this opinion, prospective investors should be aware that:
(i) this firm represents the Partnership and the General Partners in connection
with this transaction and expects to continue to represent the General Partners
in other matters; (ii) as of December 31, 1995, certain members of the firm
owned or controlled an aggregate of 926,387 Units, none of which were received
in connection with the preparation of any offering of Units; and (iii) certain
members of the firm, as well as the firm's retirement plans and plans for
certain trusts for which members of the firm are trustees, own interests in
notes secured by deeds of trust originated and placed directly with such
members, plans or trustees by the Corporate General Partner as a result of
transactions separate and distinct from any transaction involving the
Partnership. The principal amount of all notes described in (iii) as of December
31, 1995, is $1,165,523.
Very truly yours,
WENDEL, ROSEN, BLACK & DEAN
<PAGE>
EXHIBIT 23.1
<PAGE>
CONSENT OF A. NICK SHAMIYEH
With regard to the Post-Effective Amendment No. 2 to the Form S-11
Registration Statement (No. 33-81896) to be filed with the Securities and
Exchange Commission by Owens Mortgage Investment Fund, we hereby consent to all
references to our firm under the captions "Certain Legal Aspects of the
Partnership's Mortgage Investments" and "Legal Matters" in the Prospectus which
is part of said Amendment.
Law Offices of A. Nick Shamiyeh
By: /s/ A. Nick Shamiyeh
A. Nick Shamiyeh
Walnut Creek, California
May 1, 1996
<PAGE>
EXHIBIT 23.2
<PAGE>
CONSENT OF WENDEL, ROSEN, BLACK & DEAN
With respect to the Post-Effective Amendment No. 2 Form S-11
Registration Statement (No. 33-81896) to be filed with the Securities and
Exchange Commission on or about May 1, 1996, by Owens Mortgage Investment Fund,
a California Limited Partnership, we hereby consent to all references to our
firm under the captions "Federal Income Tax Consequences" and "Legal Matters" in
the Prospectus which is part of said Amendment.
WENDEL, ROSEN, BLACK & DEAN
Oakland, California
May 1, 1996
<PAGE>
EXHIBIT 23.3
<PAGE>
CONSENT OF KPMG PEAT MARWICK LLP
The Partners
Owens Mortgage Investment Fund:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
KPMG PEAT MARWICK LLP
Oakland, California
May 1, 1996
<PAGE>
EXHIBIT 24
<PAGE>
Exhibit 24
POWER OF ATTORNEY
Each person or entity whose name is signed hereto, hereby constitutes
and appoints Bryan H. Draper with full power of substitution in the premises,
his or its true and lawful attorney-in-fact and agent, and in his or its name,
place and stead, to do any and all acts and things and to execute any and all
instruments and documents which said attorney-in-fact and agent may deem
necessary or advisable to enable Owens Mortgage Investment Fund to comply with
the Securities Act of 1933, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the registration under said Act pursuant to a Registration
Statement on Form S-11 ( the "Registration Statement"), of up to 67,327,788
Units of Limited Partnership interests, including specifically but without
limiting the generality of the foregoing, power and authority to sign the name
of Owens Mortgage Investment Fund and the names of the General Partners thereof,
in the capacities indicated below, to the Registration Statement and any
Amendment or Post Effective Amendment thereto and to any instruments or
documents filed as a part of or in connection therewith, and each of the
undersigned hereby ratifies and confirms all of the aforesaid that said
attorney-in-fact and agent shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Power of Attorney has been executed below by the following in the
capacities indicated, as of the 1st day of May, 1996. This Power of Attorney may
be executed in any number of counterparts.
Owens Financial Group, Inc.,
Corporate General Partner
By:/s/ Bryan H. Draper
BRYAN H. DRAPER
Secretary and Chief Financial Officer
/s/ David Adler
DAVID ADLER General Partner
/s/ David Machado
DAVID MACHADO General Partner
/s/ Milton N. Owens
MILTON N. OWENS General Partner
/s/ William C. Owens
WILLIAM C. OWENS General Partner
/s/ Larry R. Schultz
LARRY R. SCHULTZ General Partner
<PAGE>
<TABLE> <S> <C>
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<LEGEND>
(Replace this text with the legend)
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<CIK> 841501
<NAME> OWENS MORTGAGE INVESTMENT FUND
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,056,358
<SECURITIES> 0
<RECEIVABLES> 1,359,228
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 165,401,738
<SALES> 0
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<LOSS-PROVISION> 700,000
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