As filed with the Securities and Exchange Commission on ___________, 1998
Registration No. 33-81896
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
POST-EFFECTIVE AMENDMENT NO. 4 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)
---------------------------
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, LLP
1111 Broadway, 24th Floor
Oakland, California 94607
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Security Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box [ ]
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CROSS REFERENCE SHEET
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY FORM S-11
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Item Number and Caption Location in Prospectus
1. Forepart of Registration Statement and Outside Front Outside Front Cover Page of Prospectus
Cover Page
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages
Prospectus
3. Summary Information, Risk Factors and Ratio of Summary of the Offering; Risk Factors
Earnings to Fixed Charges
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 Management's Discussion and Analysis of Financial
Condition and Results of Operations 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 Summary of the Offering; Summary of Partnership
Common Equity and Related Stockholder Matters 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 Compensation of the General Partners and Their
Investments 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 Fiduciary Responsibility
for Securities Act Liabilities
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PROSPECTUS DATED APRIL __, 1998
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
$27,109,309
LIMITED PARTNERSHIP UNITS
$1.00 per Unit--2,000 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 67% 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 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 27,109,309 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.
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 $1.00 per Unit on at least 61
days notice, subject to availability of funds and limitations on amount. See
"Summary of Partnership Agreement and Description of Units."
THIS OFFERING INVOLVES CERTAIN RISKS AND IS SUITABLE ONLY FOR INVESTORS
OF ADEQUATE MEANS. SEE "RISK FACTORS" AND "INVESTOR SUITABILITY STANDARDS." SUCH
RISKS INCLUDE:
RISKS INHERENT IN REAL ESTATE FINANCING
GENERAL PARTNERS SUBJECT TO CONFLICTS OF INTEREST WITH LIMITED PARTNERS
CONCENTRATION OF LOANS IN NORTHERN CALIFORNIA
TOTAL RELIANCE ON GENERAL PARTNERS WHO ARE PAID SUBSTANTIAL FEES
NO PUBLIC MARKET FOR THE UNITS AND CASH REPURCHASE BY PARTNERSHIP AND
TRANSFERABILITY OF UNITS SUBJECT TO SUBSTANTIAL LIMITATIONS.
RISKS OF REAL ESTATE OWNERSHIP
RISKS OF REAL ESTATE DEVELOPMENT
RESTRICTED VOTING RIGHTS OF LIMITED PARTNERS
DISTRIBUTIONS MAY NOT FOLLOW HISTORICAL LEVELS.
THIS PARTNERSHIP DOES NOT OFFER TAX BENEFITS COMMONLY ASSOCIATED WITH TAX
SHELTER INVESTMENTS; PROSPECTIVE INVESTORS SEEKING SUBSTANTIAL TAX DEDUCTIONS
SHOULD FIND ALTERNATIVE INVESTMENTS. SEE "FEDERAL INCOME TAX CONSEQUENCES."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS REGISTRATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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Price to Underwriting Discounts Proceeds to
Public(1) and Commissions(2) Partnership(3)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Per Unit.........$ 1 $ 0 $ 1
Maximum Total . .$27,109,309 $ 0 $27,109,309
- --------------------------------------------------------------------------------
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(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 also will
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) Before deduction of 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.
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.
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AVAILABLE INFORMATION
This Prospectus does not contain all information set forth in Post-Effective
Amendment No. 4 to the Registration Statement on Form S-11 (No. 33-81896) and
exhibits thereto which the Partnership has filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended and to which reference is hereby made. Additionally, 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. Copies of the Registration Statement on Form
S-11 and other reports and information filed by the Partnership can be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional
offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and at 7 World Trade Center, 13th Floor, New York, New York, 10048. 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.
The Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of this site is
http://www.sec.gov.
The General Partners 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
have available for review by each Limited Partner, a copy of the information
specified by the 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.
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TABLE OF CONTENTS
<PAGE>
AVAILABLE INFORMATION................................
SUMMARY OF THE OFFERING..............................
RISK FACTORS.........................................
GENERAL.........................................
RISKS OF REAL ESTATE FINANCING..................
RISKS OF REAL ESTATE OWNERSHIP..................
RISKS OF REAL ESTATE DEVELOPMENT................
LACK OF LIQUIDITY RISKS.........................
RISKS OF LIMITED PARTNER STATUS.................
TAXATION RISKS..................................
CONFLICTS OF INTEREST RISKS.....................
COMPETITION RISKS...............................
INVESTOR SUITABILITY STANDARDS.......................
NOTICE TO CALIFORNIA RESIDENTS.......................
HOW TO SUBSCRIBE.....................................
USE OF PROCEEDS......................................
CAPITALIZATION OF PARTNERSHIP........................
CAPITAL CONTRIBUTION OF THE GENERAL PARTNERS.........
COMPENSATION OF THE GENERAL PARTNERS AND THEIR AFFILIATES
Compensation and Reimbursement from the Partnership
Compensation from Borrowers.....................
CONFLICTS OF INTEREST................................
FIDUCIARY RESPONSIBILITY.............................
MANAGEMENT...........................................
Management of the Partnership...................
Summary of Management Responsibilities..........
Offering and Organization.......................
Research and Acquisition........................
Partnership Management..........................
Mortgage Investments............................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SELECTED FINANCIAL DATA..............................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations--For the Years Ended December 31, 1997, 1996 and 1995
Portfolio Review--For the Years Ended December 31, 1997, 1996 and 1995
Asset Quality...................................
Liquidity and Capital Resources.................
Contingency Reserves............................
Current Economic Conditions.....................
Year 2000 Issue.................................
BUSINESS.............................................
Delinquencies...................................
Unsecured Loan to Corporate General Partner.....
Real Estate Owned...............................
Development Limited Partnership.................
Development Limited Liability Company/Corporate Joint Venture
Reserve for Loans and Other Losses..............
Principal Investment Objectives.................
Types of Mortgage Loans.........................
First Mortgage Loans............................
Second and Wraparound Mortgage Loans............
Third Mortgage Loans............................
Construction Loans..............................
Leasehold Interest Loans........................
Variable Rate Loans.............................
Interest Rate Caps..............................
Assumability....................................
Prepayment Penalties............................
Balloon Payment.................................
Equity Interests and Participation In Real Property
Standards for Mortgage Loans....................
Mortgage Loans to Affiliates....................
Purchase of Loans from Affiliates...............
Borrowing.......................................
Sale and Repayment of Mortgages.................
No Trust or Investment Company Activities.......
Miscellaneous Policies and Procedures...........
Competition and General Economic Conditions.....
CERTAIN LEGAL ASPECTS OF THE PARTNERSHIP'S MORTGAGE INVESTMENTS
Introduction....................................
General.........................................
Foreclosure.....................................
Antideficiency Legislation and Other Limitations on Lenders
Junior Mortgage Loans; Rights of Senior Mortgagees
Due-on-Sale..........................................
Prepayment Charges..............................
Late Charges and Additional Interest on Delinquent Payments
Applicability of California Usury Law...........
FEDERAL INCOME TAX CONSEQUENCES......................
Taxation as a Partnership.......................
General Principles of Partnership Taxation......
Taxation of Nonexempt Limited Partners..........
Tax Treatment of Tax-Exempt Entities............
Partnership Tax Returns and Audits..............
Original Issue Discount Rules...................
Market Discount.................................
Subsequent Purchasers...........................
Taxation of Mortgage Loan Interest..............
Treatment of Compensation of General Partners...
Allocations.....................................
Possible Legislative Tax Changes................
State and Local Taxes...........................
ERISA Considerations............................
Annual Valuation................................
Plan Assets Generally...........................
SUMMARY OF PARTNERSHIP AGREEMENT AND DESCRIPTION OF UNITS
Nature of the Partnership.......................
The Responsibilities of the General Partners....
Liabilities of Limited Partners--Nonassessability
Term and Dissolution............................
Meetings........................................
Status of Units.................................
Distributions...................................
Reinvestments...................................
Assignment and Transfer of Units................
Repurchase of Units, Withdrawal from Partnership
Special Power of Attorney.......................
REPORTS TO LIMITED PARTNERS..........................
PLAN OF DISTRIBUTION.................................
LEGAL MATTERS........................................
EXPERTS..............................................
INDEMNIFICATION......................................
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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
This Prospectus contains certain forward-looking statements that are based on
current expectations. In light of the important factors that can materially
affect results, including those set forth in this Prospectus, the inclusion of
forward-looking information herein should not be regarded as a representation by
the Partnership, its General Partners or any other person that the Partnership's
objectives will be achieved. The Partnership may encounter financial, business
and competitive challenges that make it more difficult than expected to maintain
a diverse loan portfolio that generates sufficient income for the Partnership's
business. Factors that could cause actual results to differ from those in any
forward-looking statements include, but are not limited to, the Partnership's
ability to generate capital from sales of Units to be available when at the same
times product is available for investment, changes in the economy that affect a
borrower's ability to timely repay a Partnership loan, changes in the Corporate
General Partner's policy regarding purchasing interest receivables relating to
certain delinquent loans, purchasing loans from the Partnership subject to
foreclosure or purchasing foreclosed properties from the Partnership, increases
in foreclosures, increases in costs and expenses of owning and developing real
estate, and increases in competition from institutional and other traditional
lenders. Prospective investors in the Partnership should carefully consider the
matters set forth in "Risk Factors."
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 (925) 935-3840.
David Adler, David K. Machado, Milton N. Owens, William C. Owens 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, 1997, there were outstanding
189,063,122 Units held by 2,666 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 of real
property ownership, including environmental risks, 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 a Partnership loan and any
senior loans, the Partnership may suffer a loss on its investment. Although the
Partnership maintains a provision for loan losses ($3,500,000 at December 31,
1997), 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, 1997,
67% of outstanding loans were secured by properties in Northern California
(i.e., those counties north of and including Monterey, Kings, Fresno, Tulare and
Inyo counties). If property values in the area decline more than elsewhere, the
concentration poses an added risk of loss on Partnership investments. Although
the general commercial real estate market in Northern California is strong, the
values of commercial properties located in specific areas of Northern California
have decreased in recent years due to rescessionary influences, overbuilding of
commercial properties, lack of finance capital, and the relocation of businesses
to other states with lower operating and regulatory costs.
Risks Inherent in Real Estate Ownership. To the extent the Partnership
acquires title to real property through foreclosure or otherwise, the
Partnership is subject to general real estate risks, including the risks that
general and local economic conditions may adversely affect the value of property
owned by the Partnership and the income and expenses related thereto, changes in
laws and regulations, and risks of liability under environmental laws.
Risks Inherent in Real Estate Development. Where the Partnership elects
to develop real estate owned, the Partnership is subject to the general risks
associated with development and construction, such as construction delays, cost
overruns, the inability to sell the developed property and/or the inability to
sell such properties for more than the development costs and invested capital.
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
with respect to delinquent interest payments on loans originated prior to May 1,
1993, expenses of the Partnership, including fees payable to the General
Partners, increases in the amount of real estate owned, proceeds from the sale
of properties owned, including properties developed by the Partnership, the
amount of 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 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
Types of Investments. 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. No single Partnership loan, or the aggregate amount of
loans to a single borrower, may exceed 10% of the total Partnership assets as of
the date the loan is made.
As of December 31, 1997, the Partnership held investments in 215 mortgage loans
secured by fee or leasehold interests in real property. Based on the aggregate
principal amount of these loans ($174,715,000 as of December 31, 1997), 92.3%
represents first mortgage loans and 67% represents loans secured by properties
located in Northern California. Loans secured by income producing properties
account for 94.6% of the aggregate principal amount of loans outstanding at
December 31, 1997, and loans secured by unimproved property and single family
residences account for the remaining balance.
As of December 31, 1997, the Partnership had invested in construction loans in
the aggregate principal amount of $7,092,000, and had $9,546,000 of loans
partially secured by a leasehold interest. The Partnership has other assets in
addition to its mortgage investments ($20,110,000 at December 31, 1997),
consisting principally of funds held in conjunction with contingency reserve
requirements, cash pending investment, real estate owned, an investment in a
limited partnership formed to develop certain lots acquired by the Partnership
through foreclosure, and an investment in a corporate joint venture (limited
liability company) formed to develop a commercial office building on a lot
acquired by the Partnership through foreclosure.
See "Business."
Delinquencies. As of December 31, 1997, the Partnership's portfolio
includes $5,236,000 (compared with $11,348,000 as of December 31, 1996) of loans
delinquent over 90 days, representing 3.0% of the Partnership's investment in
mortgage loans. The balance of delinquent loans at December 31, 1997, includes
$3,279,000 (compared with $5,046,000 as of December 31, 1996) of loans in the
process of foreclosure and $184,000 (compared with $3,156,000 as of December 31,
1996) represents loans to borrowers who are in bankruptcy.
Although not obligated to do so, the Corporate General Partner in the past has
elected to limit the losses suffered by the Partnership by either (i) purchasing
from the Partnership, at an amount equal to the delinquent payment(s), certain
of the Partnership's receivables for delinquent interest and (ii) purchasing
loans from the Partnership either before or at the time of foreclosure. There
are no assurances however, that the Corporate General Partner will continue
these practices in the future, and in fact, the Corporate General Partner
recently has reduced such activities significantly.
See "Business - Delinquencies."
Real Estate Owned. As of December 31, 1997, the Partnership held title
to nine separate properties on which it had loans totaling $8,354,000 prior to
foreclosure. Although these properties, taken as a whole, generated gross
operating revenues of $374,000, they operated at a net loss of $70,000 in 1997.
See "Business--Real Estate Owned".
Loan Loss and Other Reserves. A loan loss reserve of $3,500,000 is
maintained in the financial statements of the Partnership as of December 31,
1997. Additionally, the Partnership maintained in such financial statements a
reserve for losses on real property acquired through foreclosure equal to
$1,896,000. See "Business - Reserve For Loan Loss Reserves."
Compensation of General Partners and Their Affiliates
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, in an aggregate amount not to exceed 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 then current calendar year. As such, the Corporate General Partner
may collect a fee in any one month that is greater than the 2-3/4% calculated on
an annual basis. However, for the calendar year, the total fee collected may not
exceed the 2-3/4% limitation. 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 (which
advances are in the form of purchases by the Corporate General Partner of the
related delinquent interest receivables of 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.
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, as described below. 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 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 -- All late payment charges paid by borrowers are
retained by the Corporate General Partner.
The total compensation paid by the Partnership to the General Partners during
1997 was less than the maximum amount allowable. The total compensation paid by
borrowers during 1997 equaled the maximum amount allowable.
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 General Partners 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.
In making construction mortgage 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.
In making loans on leasehold interest mortgages, the Partnership 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 uncollectable 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 (see "Business--Real Estate Owned" and
"Development Limited Partnership").
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, resulting in 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 To Minimize
Losses Related to Delinquent Loans. The Corporate General Partner generally does
not purchase loans from the Partnership in anticipation of foreclosure nor
purchase delinquent interest receivables from the Partnership on delinquent
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. However, with
respect to certain delinquent loans originated prior to May 1, 1993, and held by
the Partnership, the Corporate General Partner minimizes the loss to the
Partnership by purchasing from the Partnership, at an amount equal to the
delinquent payment, the Partnership's interest in the related delinquent
interest receivable. If the Corporate General Partner ceases these practices
with respect to 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.
The Partnership maintains in its financial statements as of December 31, 1997,
(a) a loan loss reserve in the amount of $3,500,000 and (b) a reserve for losses
on real property acquired through foreclosure in the amount of $1,896,000.
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 56% of the
loans in which the Partnership is invested 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, 1997, was approximately $117,352,000.
Northern California for this purpose is defined as those counties north of and
including Monterey, Kings, Fresno, Tulare and Inyo counties. This represented
67% 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. Certain
areas of the Northern California economy have been affected in the past few
years by the generally prevailing rescessionary influences which have caused an
overall reduction in values of real property. Values in these areas 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. However, certain areas of Northern California have
experienced strong increases in demand for commercial and residential properties
which has increased leasing rates and values. The areas that have experienced
such increases are ones that have a strong influence of high technology and
biotechnical companies as these industries have experienced dramatic growth in
the past 36 months. Overall, Northern California's unemployment rate has dropped
steadily to the lowest level in many years.
Risks of Equity or Cash Flow Participation. If the Partnership shares
in the appreciation of mortgaged property or in its cash flow, the borrower
and/or creditors of the borrower 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.
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 assurances, however, that the Partnership, either as an owner or
lender, will not incur full recourse liability for the entire cost of any
removal and cleanup of a property owned by the Partnership, or that the cost of
such removal and cleanup will not exceed the value of the property. In addition,
the Partnership may incur liability to tenants and other users of the affected
property, or users of neighboring property, including liability for
consequential damages. The Partnership may 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.
RISKS OF REAL ESTATE OWNERSHIP. When the Partnership acquires an equity
or leasehold interest in real property by direct investment, foreclosure or
otherwise, the Partnership is exposed to the economic and liability risks
incident to real property ownership or tenancy. The economic risks include but
are not limited to variations affecting lease absorption, operating expenses and
property values such as interest rates, changes in general national, regional
and local economic and market conditions, changes in laws and governmental
regulations (including usage, zonage and tax laws and regulations) and supply of
competitive product. Liability risks include 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, including those governing environmental matters.
RISKS OF REAL ESTATE DEVELOPMENT. Where 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 reliance upon the skills and
abilities of developers selected by the Partnership, the inability to obtain
necessary entitlements to development, delays in construction due to weather,
strikes and other causes, 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.
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 General Partners. 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 Corporation. Under recently enacted Treasury
Regulations, the Partnership will retain its previous classification as a
partnership for tax purposes. However, there can be no assurance 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. Further, the Partnership has not and will not apply for a ruling
from the IRS that it is properly classified as a partnership rather than an
association 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" or "Roth IRA"); a Simplified Employee Pension ("SEP"); 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.
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 will
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.
<TABLE>
<CAPTION>
Maximum Offering
(27,109,309 Units to
be Sold)
---------------------- ---------------------
Percent of
Amount Offering
<S> <C> <C>
Gross Proceeds................................................. $ 27,109,309 100.0%
Less:
Offering Expenses (1) ......................................... 40,000 0.1%
------------ -----
Proceeds Available for Investment.............................. $ 27,069,309
Less:
Cash Reserves (2).............................................. 406,640 1.5%
------------ -----
Cash Available for Investment in Mortgage Loans (3) $ 26,662,669 98.4%
============ =====
- --------
<FN>
(1) Such expenses are not expected to exceed $40,000 for this 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 from
sales of Units. This reserve is available 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.
</FN>
</TABLE>
CAPITALIZATION OF PARTNERSHIP
The capitalization of the Partnership as of December 31, 1997, 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) $189,063,122 $216,132,431
- -------------
(1) Amounts after deduction of certain offering expenses aggregating $40,000.
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, 1997, have contributed cash aggregating $957,164. 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, 1997, had been credited with
promotional interests aggregating $957,164.
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, a management fee, payable monthly, in an aggregate amount of not to
exceed 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 then current calendar
year. As such, the Corporate General Partner may collect a fee in any one month
that is greater than the 2-3/4% calculated on an annual basis. However, for the
calendar year, the total fee collected may not exceed the 2-3/4% limitation. The
Corporate General Partner is entitled to receive a management fee on all loans,
including those that are delinquent. The Corporate General Partner believes this
is justified by the added effort associated with such loans and costs advanced
by the Corporate General Partner and for which the Partnership is not liable,
including legal fees, property taxes and the like.
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 (by purchasing interest receivables) 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.
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 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 reduces 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. All late payment charges paid by borrowers are
retained by the Corporate General Partner.
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, 1997, showing actual amounts and the maximum allowable
amounts for management and servicing fees. 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, 1997
Maximum
Form of Compensation Actual Allowable
PAID BY PARTNERSHIP
Management Fees.............. $ 3,879,000 $ 4,614,000
Promotional Interest......... 71,000 71,000
----------- ------------
Subtotal..................... $ 3,950,000 $ 4,685,000
----------- ------------
Reimbursement of Other Expenses
Total...................... $ 57,000 57,000
------------ ------------
$ 4,007,000 4,742,000
============ ============
PAID BY BORROWERS
Investment Evaluation Fees... $ 2,994,000 $ 2,994,000
Servicing Fees .............. 421,000 421,000
Late Payment Charges......... 409,000 409,000
------------- ------------
Total...................... $ 3,824,000 $ 3,824,000
============= ============
Aggregate actual compensation paid by the Partnership and by borrowers to the
General Partners during 1997, exclusive of expense reimbursement, was $7,774,000
or 4.1% of year end partners' capital. If the maximum amounts had been paid to
the General Partners during 1997, the aggregate amount of compensation,
excluding reimbursements, would have been $8,509,000 or 4.5% of year-end
partners' capital. The increase in pro forma compensation for 1997 would have
reduced net income allocated to Limited Partners by approximately 4.8%.
The General Partners believe that the overall maximum allowable 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 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. The Corporate General Partner has in the
past, but is under no obligation to, purchased the Partnership's receivables for
certain delinquent loans or purchased the Partnership's interest in defaulted
loans either before or following foreclosure. In determining whether to take
such actions, the interest of the Corporate General Partner in preserving its
capital and those of the Partnership likely are to conflict.
When the Corporate General Partner does acquire a property from the Partnership,
it does so for the principal balance of the loan, without adjustment upwards or
downwards for accrued interest or the underlying value of the property. Should
the Corporate General Partner subsequently realize a profit from a property
acquired from the Partnership, the Partnership will not be entitled to any such
profits, regardless of the amount, if any, of loss experienced by the
Partnership.
Interest in Adjacent Properties. The Corporate General Partner,
together with an unrelated developer, has an interest in 11 lots and an option
to acquire six additional lots that are contiguous to and interspersed with lots
in Carmel, California owned by a development limited partnership formed by the
Partnership and the same unrelated developer. The lots owned by the development
limited partnership were acquired by the Partnership through foreclosure and
subsequently contributed to the development limited partnership. Although there
is a potential conflict of interest between the Partnership and the Corporate
General Partner in determining how and when to develop particular lots, the
physical nature of the development site (which, due to economics, determines in
large part the order the lots are developed) and the active role of the common,
unaffiliated developer tend to minimize these conflicts. Further, neither the
Partnership, the development limited partnership or the Corporate General
Partner has any control over the sales of the homes constructed on the lots.
The Partnership has advanced funds to the development limited partnership for
infrastructure and certain other development expenses that were incurred by the
development limited partnership in connection with obtaining the necessary
permits. These benefit all 64 lots in the development, including the 30 lots
originally owned by the development limited partnership and the 34 lots in which
the Corporate General Partner originally had an interest. Upon sales of homes on
lots in which the Corporate General Partner has an interest, the Corporate
General Partner and developer are required to reimburse the development limited
partnership, without interest, the pro rata share of infrastructure and certain
other development expenses related to the lots sold. The development partnership
is obligated to reimburse the Partnership for the amount of funds advanced to
the development limited partnership, plus interest.
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.
Each of these present or former individual General Partners of the Partnership,
except Gerald D. Gains, Larry R. Schultz, David K. Machado 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 acquired 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, or
may be acquired for an amount greater than the Corporate General Partner's
purchase price, but in no event greater than the face value of the mortgage. The
Corporate General Partner may sell mortgages to the Partnership for an amount
greater than the purchase price, but in no event greater than the face value of
the mortgage. This difference may have an 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.
All decisions regarding mortgage loans to be made or invested in by the
Partnership are made by a committee of officers of the Corporate General
Partner, which committee currently is comprised of William Owens, a General
Partner, and William Dutra and Andrew J. Navone, both Vice-Presidents 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 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 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 (925) 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 and David K. Machado are
the four 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 $2,000,000 to over $5,000,000, and the Corporate
General Partner has a net worth of approximately $10,300,000 as of December 31,
1997. 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 76, 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 55, 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 loan officer with
Owens Financial Group, Inc. since December 1, 1989.
Milton N. Owens, General Partner, age 86, 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 47, 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 Corporate
General Partner, 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., a subsidiary of the Corporate General
Partner. Mr. Owens is a licensed real estate broker, and is the son of Milton
Owens, also a General Partner of the Partnership.
Bryan H. Draper, age 40, has been Controller and Chief Financial
Officer of Owens Financial Group, Inc. since December 1987. Mr. Draper is a
Certified Public Accountant and is responsible for all accounting, regulatory
agency filings, and tax matters for the Partnership, the Corporate General
Partner, and Owens Securities Corporation. Mr. Draper received a Masters of
Business Administration degree from the University of Southern California in
1981.
William E. Dutra, age 35, 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.
Andrew J. Navone, age 41, is a member of the Loan Committee of the
Corporate General Partner and has been an employee of the Corporate General
Partner since August 1985. As a Vice President, Mr. Navone has responsibilities
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 $219,000,000
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 chooses not to make advances on
delinquent loans (by purchasing the Partnership's interest in any delinquent
interest receivable) 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 is 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, 1997, by (i) each General
Partner of the Partnership, and (ii) all General Partners as a group.
<TABLE>
<CAPTION>
Amount of
Title of Beneficial Percent
Class Name and Address Ownership(1) of Class
<S> <C> <C>
Units David Adler, P.O. Box 2308, Walnut Creek, CA 94595 $ 807,656 .41%
David K. Machado, P.O. Box 2308, Walnut Creek, CA 94595 145,381 .07%
Milton N. Owens, P.O. Box 2308, Walnut Creek, CA 94595 148,836 .08%
William C. Owens, P.O. Box 2308, Walnut Creek, CA 94595 3,853 .00%
Owens Financial Group, Inc., P.O. Box 2308, Walnut Creek,
CA 94595(2) 2,313,520 1.18%
--------- -----
All General Partners as a group (5 persons) $ 3,419,246 1.74%
========= =====
- -----------
<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: 33.33% by
Milton N. Owens, 20.83% each by David Adler and William C. Owens, 8.33% by Bryan
H. Draper, 6.67% each by William E. Dutra and Andrew J. Navone, and an aggregate
of 3.34% 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
____________________________________________
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Loans secured by
<S> <C> <C> <C> <C> <C>
trust deeds.......... $ 174,714,607 $ 154,148,933 $ 151,350,591 $ 145,050,213 $ 133,549,495
Less: Allowance
for loan losses...... (3,500,000) (3,500,000) (3,250,000) (2,750,000) (2,750,000)
Real estate held for Sale 16,047,141 13,221,093 9,612,359 5,028,325 2,608,000
Less: Allowance for
losses on real estate (1,896,000) (600,000) (600,000) (400,000) 0
Cash, cash equivalents
and other assets..... 5,959,306 14,105,992 8,288,818 5,697,459 5,202,246
------------ ------------- ------------ ------------ ------------
Total assets........... $ 191,325,054 $ 177,376,018 $ 165,401,768 $ 152,625,997 $ 138,609,741
============ ============ ============ ============ ============
Liabilities............ $ 593,919 $ 535,914 $ 657,325 $ 779,269 $ 1,026,578
Partners' capital
General partners..... 1,864,033 1,731,874 1,623,526 1,488,360 1,342,578
Limited partners..... 188,867,102 175,108,230 163,120,917 150,358,368 136,240,585
------------ ------------ ------------ ------------ ------------
Total partners' capital $ 190,731,135 $ 176,840,104 $ 164,744,443 $ 151,846,728 $ 137,583,163
------------ ------------ ------------ ------------ ------------
Total liabilities/
partners' capital..... $ 191,325,054 $ 177,376,018 $ 165,401,768 $ 152,625,997 $ 138,609,741
============ ============ ============ ============ ============
Revenues............... $ 21,325,850 $ 16,824,479 $ 16,415,301 $ 15,503,534 $ 14,979,065
Operating expenses
Promotional interest 70,747 57,395 69,255 72,984 72,359
Management fee ...... 3,879,454 866,985 1,431,616 1,475,155 2,234,968
Servicing fee ....... 420,742 384,004 371,000 338,000 323,000
Net Real Estate
Operations .......... 70,216 344,298 224,108 270,038 75,844
Provision for losses on
loans............... 0 250,000 500,000 0 2,750,000
Provision for losses on
real estate held for
sale.............. 1,296,000 0 200,000 400,000 0
Other................ 168,444 163,385 127,947 237,933 204,249
----------- ----------- ----------- ----------- -----------
Net income............. $ 15,420,247 $ 14,758,412 $ 13,491,375 $ 12,709,424 $ 9,318,645
=========== =========== =========== =========== ===========
Net income allocated to
general partners..... $ 154,202 $ 146,960 $ 135,584 $ 127,726 $ 90,218
=========== =========== =========== =========== ===========
Net income allocated to
limited partners..... $ 15,266,045 $ 14,611,452 $ 13,355,791 $ 12,581,698 $ 9,228,427
========== =========== =========== =========== ===========
Net income per limited
partnership unit..... $ .08 $ .08 $ .08 $ .09 $ .07
=== === === === ===
</TABLE>
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
for the Years Ended December 31, 1997, 1996, and 1995
Results of Operations--For the Years Ended December 31, 1997, 1996 and 1995
The net income increase of $662,000 (4.5%) for 1997 as compared to 1996, was
attributable to (i) the increase in interest income of $1,997,000 from mortgage
investments held by the Partnership, which mortgage investments increased from
$154,149,000 to $174,715,000 as of December 31, 1996 and 1997, respectively,
(ii) the decrease in net real estate operations losses from $344,000 to $70,000
for the years ended December 31, 1996 and December 31, 1997, respectively, (iii)
the increase in gain on sale of real estate by the development limited
partnership (see "Business-Development Limited Partnership," below) from
$171,000 to $2,355,000 for the years ended December 31, 1996 and 1997,
respectively, (iv) the decrease in nonperforming loans from $10,012,000 to
$3,751,000 as of December 31, 1996 and 1997, respectively and (v) the decrease
in provision for loan losses from $250,000 to $0 for the years ended December
31, 1996 and 1997, respectively. The net income increase in 1997 as compared to
1996, was negatively affected by (i) the increase in management fees paid to
general partner from $867,000 to $3,879,000 for the years ended December 31,
1996 and 1997, respectively, and (ii) an increase in the provision for losses on
real estate acquired through foreclosure from $0 to $1,296,000 for the years
ended December 31, 1996 and 1997, respectively. The increase in management fees,
which fees represented .56% and 2.31% of the average monthly trust deed
investment for the years ended December 31, 1996, and 1997, respectively, was
due to increased income in 1997. This increase in income was due primarily to
the increase in gains on the sale of real estate owned by the development
limited partnership of which the Partnership is a limited partner.
The net income increase of $1,267,000 (9.4%) for 1996 as compared to 1995 was
attributable to (i) the increase in mortgage investments held by the Partnership
from $151,351,000 to $154,149,000 as of December 31, 1995 and 1996,
respectively, (ii) the decrease in management fees from $1,432,000 to $867,000,
for the years ended December 31, 1995 and December 31, 1996, respectively, and
(iii) the decrease in provision for losses on loans and real estate held for
sale from $700,000 to $250,000 for the years ended December 31, 1995 and 1996,
respectively. The net income increase in 1996, as compared to 1995, was
negatively affected by (i) the increase in net operating loss from real estate
held for sale from $224,000 to $344,000 for the years ended December 31, 1995
and 1996, respectively, and (ii) an increase in nonperforming loans from
$8,309,000 to $10,012,000 as of December 31, 1995 and 1996, respectively.
Nonperforming loans for the purposes of this discussion and analysis are defined
as those loans which are 90 days or more delinquent in payment and on which the
Corporate General Partner has not purchased the related Partnership receivables
for delinquent interest payments to the Partnership. All income was derived from
investments in mortgage loans and shortterm interestbearing accounts, notes
receivable from the Corporate General Partner, income from real estate held for
sale and real estate acquired through foreclosure and gain from the disposition
of real estate.
The Partnership has experienced a decrease in its average net yield per Unit
from 8.79% in 1995 to 8.72% and 8.69% in 1996 and 1997, respectively. The
average net yield represents the net income of the Partnership after all
expenses, other than the provision for losses on loans or real estate acquired
through foreclosure. If the provisions for losses on loans or real estate
acquired through foreclosure are included, the Partnership experienced an
increase in its average yield per Unit from 8.31% in 1995 to 8.58% in 1996, and
a decrease in its average yield per Unit from 8.58% in 1996 to 8.17% in 1997.
For 1997, the decrease in average net yield before provisions for losses was
negligible. However, both income and operating expenses of the Partnership
increased substantially. Income increased primarily due to the gain on the sale
of real estate by the development limited partnership in which the Partnership
had invested (see "Business-Development Limited Partnership"). The expenses
increased due to the increased management fees paid to the Corporate General
Partner. Although, this fee increased substantially from the prior year, the
annualized fee represented 2.31% of the average trust deed investments held by
the Partnership. This is less than the maximum fee of 2.75% per annum permitted
by the Partnership Agreement.
For 1996, the decrease was the result of the overall decrease in general market
rates and changes in the Corporate General Partner's policies regarding
purchasing delinquent interest receivables, purchasing loans subject to
foreclosure and purchasing at foreclosure sale certain properties which provided
security for Partnership loans. The amount of nonperforming loans held by the
Partnership had increased from $8,309,000 (5.49% of loan portfolio) to
$10,012,000 (6.50% of loan portfolio) as of December 31, 1995 and 1996,
respectively, due to the diminishing amount of loans for which the Corporate
General Partner purchases delinquent interest receivables. However, the yield
decreases were partially offset due to a decrease in the management fees paid to
the Corporate General Partner from $1,432,000 to $867,000 for 1995 and 1996,
respectively. This represented a decrease in the annualized rate of management
fees to total trust deed investments of the Partnership from 0.95% to 0.56% for
1995 and 1996, respectively. In 1996, due to the increase in nonperforming loans
and the general decrease in market interest rates, the Corporate General Partner
voluntarily reduced the fees it collects in order to maximize the yield to
investors.
The Corporate General Partner has not yet determined the level of management
fees for 1998.
Portfolio Review--For the Years Ended December 31, 1997, 1996 and 1995
The number of Partnership mortgage investments decreased from 254 and 238 as of
December 31, 1995, and 1996, respectively, to 215 as of December 31, 1997. The
average loan balance in these periods increased from $635,927 and $639,622 as of
December 31, 1995 and 1996, respectively, to $812,626 as of December 31, 1997.
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, 1997,
the Partnership's loans secured by deeds of trust on real property collateral
located in Northern California totaled approximately 67% ($117,352,000) of the
loan portfolio.
As of December 31, 1997, approximately 94.6% of the loan portfolio was invested
in loans on income-producing property, 4.2% in land loans and 1.2% in
residential loans. Also, as of December 31, 1997, approximately 92.3% of the
loan portfolio was invested in first deeds of trust, 7.3% in second deeds of
trust and 0.4% 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, 1997, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
Principal Amount
------------------- ----------------- -------------------
1997 1996 1995
---- ---- ----
(000) (000) (000)
<S> <C> <C> <C>
SingleFamily Residences............................... $ 2,089 $ 3,935 $ 2,250
IncomeProducing Properties............................ 165,202 146,000 142,598
Unimproved Land....................................... 7,424 4,214 6,503
---------- ---------- ----------
Total............................................... $ 174,715 $ 154,149 $ 151,351
======= ======= =======
</TABLE>
As of December 31, 1997, there were delinquent loans aggregating $3,751,000 for
which the Corporate General Partner elected not to purchase delinquent interest
receivables. As of December 31, 1997, the Corporate General Partner purchased
from the Partnership receivables for delinquent interest related to delinquent
loans held by the Partnership that aggregated $1,485,000 and that were
originated or invested in prior to May 1, 1993.
Purchases of Partnership receivables for delinquent interest for loans
originated prior to May 1, 1993, and advances for payments, such as property
taxes, insurance, legal fees and mortgage interest pursuant to senior
indebtedness, made to or an behalf of the Partnership by the Corporate General
Partner during 1997 and 1996, but not collected as of December 31, 1997 and
1996, totaled approximately $219,000 and $541,000, respectively.
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 $3,500,000 as of December 31, 1997 and 1996. As of December 31,
1997, 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 1996 and 1997.
At December 31, 1997, the Partnership held title to nine separate properties
that, prior to foreclosure by the Partnership, secured Partnership loans
aggregating $8,354,000. At December 31, 1996 and 1995, the Partnership held
title to 10 and 11 properties, respectively. Prior to foreclosure, these
properties secured Partnership loans aggregating $6,877,000 and $6,115,437 in
1996 and 1995, respectively. See "Business - Real Estate Owned" for a discussion
of these properties.
In 1993, the Partnership foreclosed on a $600,000 loan and obtained title to 30
lots in Carmel Valley, California, subject to a senior loan in the amount of
$500,000. In 1994, the Partnership paid off the $500,000 senior loan and
incurred $503,000 of additional costs in protecting its investment. The
Partnership began to develop the lots in 1995, and incurred an additional
$671,000 in costs. In 1995, the Partnership entered into a development limited
partnership with an unrelated builder/developer for the purpose of constructing
single-family residences on the lots, and, in 1996, the Partnership contributed
the lots to the development limited partnership in exchange for a limited
partner interest. The $671,000 in costs incurred in 1995 became an obligation of
the development limited partnership in 1996 when the lots were contributed to
the development limited partnership.
The Partnership is obligated to fund the costs of developing the lots owned by
the development limited partnership. During 1997 and 1996, the Partnership
advanced additional development costs totaling $4,153,000 and $2,895,000,
respectively. The Partership has invested in the development limited
partnership, net of reimbursements, $3,123,000 and $3,388,000 as of December 31,
1997 and 1996, respectively.
During 1997, 15 homes sold for aggregate proceeds of $8,012,000, and the
Partnership received distributions from the development limited partnership
totaling $7,574,000, including $2,355,000 in gain and interest. The
Partnership's net investment in the development limited partnership totaled
$3,812,000 and $4,878,000 as of December 31, 1997, and 1996, respectively. See
"Business - Development Limited Partnership" for a discussion of this
investment.
In 1995, the Partnership foreclosed on a $571,853 loan and obtained title to a
commercial lot in Los Gatos that secured the loan. In 1997, the Partnership
contributed the lot to a limited liability company formed with an unaffiliated
developer to develop and sell a commercial office building on the lot. The
Partnership may, and is expected to, provide construction financing to the
limited liability company at an annual rate equal to prime plus two percent. See
"Business- Development Limited Liability Company" for a discussion of this
investment.
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 uncollectable, 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 and independent auditors. 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, 1997, management
has determined that the allowance for loan losses of $3,500,000 is adequate in
amount. As of December 31, 1997, loans secured by trust deeds include $5,236,000
in loans delinquent over 90 days of which $3,279,000 was invested in loans which
were in the process of foreclosure. 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 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."
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
Although the current economic climate in Northern California is generally
strong, many areas outside of the San Francisco Bay Area continue to experience
depressed values created by the real estate recession of the early 1990's. Other
than the loss incurred in February 1998 on the sale to the Corporate General
Partner of the Sonora property acquired by the Partnership through foreclosure,
the Partnership has not sustained any material losses to date due primarily to
the Corporate General Partner's prior practice of advancing delinquent interest
and purchasing loans prior to foreclosure. The Corporate General Partner has
ceased such practices, with very limited exceptions. Assuming the Corporate
General Partner continues in this manner, the Partnership is likely to sustain
losses with respect to loans secured by properties located in areas of declining
real estate values. Despite the Partnership's ability to purchase mortgage loans
with relatively strong yields during 1997 from the Corporate General Partner,
there is increased competition from a variety of lenders that could have the
affect of reducing mortgage yields in the future. As such, current loans with
relatively high yields could be replaced with loans with lower yields, which in
turn could reduce the net yield paid to the Limited Partners. In addition, when
there is a reduction in the demand by borrowers 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.
As of December 31, 1997, the Partnership held title to nine separate properties
acquired through foreclosure of Partnership loans from 1993 through 1997. A
$1,896,000 provision for losses on real estate held for sale was recorded in the
Partnership's financial statements as of December 31, 1997. The Corporate
General Partner considers this allowance to be adequate as of December 31, 1997.
See "Business--Real Estate Owned."
The Partnership continues to receive substantial additional investments from new
and existing Limited Partners, which investments provide capital for loans and
repurchases of existing Units.
Year 2000 Issue
The Corporate General Partner depends on the use of computers to timely provide
accurate information essential to the management and operation of the
Partnership. The computer programs used by the Corporate General Partner to
account for mortgage loan investments, investments in Units and other items is
in the process of being reviewed, remedied and tested by independent consultants
engaged to determine whether these programs are able to recognize the year 2000.
To the extent the programs recognize calendar years by their last two digits
only, there exists what commonly is referred to as a Year 2000 issue.
Based on the preliminary results of the consultants' testing, the General
Partners do not anticipate significant cost, uncertainties or problems
associated with becoming Year 2000 compliant. The total cost to remedy Year 2000
issues which will be paid by the Corporate General Partners. None of such costs
will be reimbursed by the Partnership. The consultants expect all problems to be
remedied by December 31, 1998. Although not anticipate by the General Partners,
a failure by the Corporate General Partner or its independent consultants to
adequately address the Year 2000 issue, however, could result in the
misstatement of reported information, the inability to accurately track mortgage
investments and payments due or other operational problems.
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 (925) 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 in limited instances acquires an equity interest in the underlying
real property in the form of a shared appreciation interest. To date, the
Partnership has not acquired any material shared appreciation interests. 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, 1997,
1996, 1995, 1994 and 1993.
Capital Mortgage Net
Investments Income
1997......................$ 190,731,135 $ 174,714,607 $ 15,420,247
1996......................$ 176,840,104 $ 154,148,933 $ 14,758,412
1995......................$ 164,744,443 $ 151,350,591 $ 13,491,375
1994......................$ 151,846,728 $ 145,050,213 $ 12,709,424
1993......................$ 137,583,163 $ 133,549,495 $ 9,318,645
As of December 31, 1997, the Partnership held investments in 215 mortgage loans,
secured by ownership and leasehold interests in real property, 67% of which are
situated in Northern California. The remaining 33% are located in Southern
California, Oregon, Nevada, Arizona and Hawaii. The following table sets forth
the types and maturities of mortgage investments held by the Partnership as of
December 31, 1997:
<TABLE>
<CAPTION>
TYPES AND MATURITIES OF MORTGAGE INVESTMENTS
(As of December 31, 1997)
Number
of
Loans Amount Percent
<S> <C> <C> <C>
1st Mortgages................................ 177 $161,275,350 92.31%
2nd Mortgages................................ 35 12,744,274 7.29%
3rd Mortgages or wraparound deeds of trust... 3 694,983 .40%
--- ------------ -------
215 $174,714,607 100.00%
=== ============ =======
Maturing on or before
December 31, 1999 (1)....................... 130 $103,387,402 59.18%
Maturing on or between January 1, 2000
and December 31, 2002....................... 45 44,060,802 25.22%
Maturing on or between January 1, 2003
and May 1, 2015............................. 40 27,266,403 15.60%
--- ------------ -------
215 $174,714,607 100.00%
=== ============ =======
IncomeProducing Properties................... 193 $165,201,582 94.56%
SingleFamily Residences...................... 11 2,088,606 1.20%
Unimproved land.............................. 11 7,424,419 4.24%
--- ------------ -------
215 $174,714,607 100.00%
=== ============ =======
- --------
<FN>
(1) $22,295,000 was past maturity as of December 31, 1997.
</FN>
</TABLE>
The average loan balance of the mortgage loan portfolio of $812,626 as of
December 31, 1997, is considered by the General Partners to be a reasonable
diversification of investments concentrated in mortgages secured by commercial
properties. Of such investments, 44% earn a variable rate of interest and 56%
earn a fixed rate of interest. All were negotiated according to the
Partnership's investment standards.
Due to general economic conditions, certain sectors of the commercial real
estate market have recently experienced increases in both values and rental
rates and decreases in vacancy rates. Although these conditions have created
increased competition for quality loans, 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, 1997, the Partnership had invested in construction loans in
the aggregate amount of $7,092,000 and in loans partially secured by a leasehold
interest of $9,546,000.
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 acquired through
foreclosure, including an investment in the development limited partnership
formed to develop certain property in Carmel Valley, California, real estate
held for sale and mortgage interest receivable. As of December 31, 1997,
$4,073,115 ($3,829,000 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, 1997,
the Partnership held $14,151,141 in real estate held for sale, including
$3,812,122 in the development limited partnership formed to develop the property
located in Carmel Valley, California, and $1,773,608 in mortgage interest
receivable from borrowers.
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
leasing activity of 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 and in its sole discretion, will work with the borrower to bring the
loan current.
Although the Corporate General Partner is not obligated to do so, it purchases
the Partnership's receivables for delinquent interest from the Partnership with
respect to certain Partnership loans originated prior to May 1, 1993, and which
are delinquent more than 90 days. The amount of such purchases made and not
reimbursed by borrowers during 1997 was $87,000. In exchange for purchasing such
delinquent interest receivables or purchasing delinquent loans, the Corporate
General Partner is entitled to receive 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, 1997, the Partnership's portfolio included $5,236,000
(compared with $11,348,000 as of December 31, 1996) of loans delinquent more
than 90 days, representing 3.0% of the Partnership's investment in mortgage
loans. The balance of delinquent loans at December 31, 1997, includes $3,279,000
(compared with $5,046,000 as of December 31, 1996) in the process of foreclosure
and $184,000 (compared with $3,156,000 as of December 31, 1996) involving 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 $3,500,000 allowance for losses on loans which is
maintained in the financial statements of the Partnership as of December 31,
1997 is sufficient to cover any potential losses of principal.
Of the $11,348,000 that was delinquent as of December 31, 1996, $2,704,000
remained delinquent as of December 31, 1997, $3,024,000 was paid off, $1,300,000
became current, $3,886,000 became real estate acquired through foreclosure of
the Partnership (see "Properties") and $434,000 became real estate owned by the
Corporate General Partner. The General Partners believe that there could be
partial losses of principal on these loans.
Where payments on delinquent loans are not made currently by the borrowers, the
Corporate General Partner has chosen to continue to purchase the Partnership's
receivables for delinquent interest on a monthly basis only on certain loans
originated prior to May 1, 1993. Such loans totaled $1,485,000 as of December
31, 1997. At December 31, 1997, the amount of delinquent interest receivables
purchased by the Corporate General Partner, together with amounts advanced by
the Corporate General Partner in connection with these and other loans,
including property taxes, insurance, legal fees, and interest to senior lenders
that has not been repaid to the Corporate General Partner by borrowers was
approximately $414,000. The Partnership is not obligated to reimburse the
Corporate General Partner for such advances or to reacquire the delinquent
interest receivables purchased by the Corporate General Partner.
Finally, although not required to do so, the Corporate General Partner has
purchased certain loans from the Partnership at the time of foreclosure of such
loans, for the unpaid principal amount, in order to prevent the Partnership from
suffering a loss upon such foreclosure. This generally occurs where there is
more than one investor in the loan for which the property provides security and
because the General Partners want to avoid administrative problems associated
with multiple ownership of real property. In most other instances, the Corporate
General Partner will cause the Partnership to foreclose on a loan and obtain
title to the real property securing the loan.
In 1996 the Partnership foreclosed on an $870,000 loan and acquired title to the
property providing security on the loan. Thereafter, the Corporate General
Partner purchased the property from the Partnership for the amount of the loan
by increasing the unsecured note payable to the Partnership by such amount. See
"Unsecured Loan to Corporate General Partner." The Partnership foreclosed on
another loan in the amount of $1,450,000 and acquired title to the property
providing security for the loan also. The Corporate General Partner purchased
the property from the Partnership, and the Partnership carried back a loan in
the same amount as the original loan it had on the property prior to
foreclosure. The loan is secured and due on demand.
During 1997, the Corporate General Partner purchased three loans from the
Partnership prior to foreclosure in which the Partnership had a partial interest
and had invested $613,400 in principal. The Corporate General Partner
subsequently foreclosed on these loans and obtained title to the properties
providing security on the loans.
With the exception of the sale of the Sonora residential lots to the Corporate
General Partner at a loss of $710,000 in February 1998 (See "Real Estate Owned,"
below), the Partnership has not suffered material losses on defaults or
foreclosures, partially due to 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. Although the Corporate General
Partner does not generally purchase the Partnership's receivables for delinquent
interest on delinquent loans, the amount of nonperforming delinquent loans
(i.e., loans delinquent in payment over 90 days on which the Corporate General
Partner historically has not purchased the Partnership's receivables for
delinquent interest) has decreased to $5,236,000 of the loan portfolio (3.0%).
However, $4,320,000 of the delinquent loans as of December 31, 1996, became
either real estate acquired by the Partnership through foreclosure or purchased
by the Corporate General Partner so as to become real estate owned by the
Corporate General Partner as of December 31, 1997. There is no assurance that
the Corporate General Partner will continue to make payments to the Partnership
on any delinquent loan.
Following is a table representing the Partnership's delinquency experience (over
90 days) as of December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Delinquent Loans ............................. $ 12,037,000 $ 11,348,000 $ 5,236,000
Nonperforming Delinquent Loans................ $ 8,309,000 $ 10,012,000 $ 3,751,000
Total Mortgage Investment..................... $151,351,000 $154,149,000 $174,715,000
Percent of Delinquent Loans to Total Loans.... 7.95% 7.36% 3.00%
Percent of Nonperforming Delinquent Loans
to Total Loans .............................. 5.49% 6.50% 2.15%
</TABLE>
The following delinquent loans held by the Partnership have been acquired by the
Corporate General Partner from January 1, 1993, through December 31, 1997,
either by (i) purchasing the loan from the Partnership and then foreclosing on
the property or (ii) purchasing the property from the Partnership following the
Partnership's foreclosure of same.
Principal Delinquent
Balance Interest Year Foreclosed
$ 1,025,581 (1) $ 150,295 1993
$ 58,000 (2) $ 4,417 1994
$ 1,184,223 $ 252,810 1995
$ 2,320,000 (3) $ 86,981 1996
$ 613,400 (4) $ 50,625 1997
(1) Of the $1,025,581 of the above Partnership loans foreclosed on by the
Corporate General Partner in 1993, $490,332 continues to be Real Estate
Owned by the Corporate General Partner as of December 31, 1997. Another
property which provided security for a Partnership loan of $511,500 was
foreclosed on and disposed of by the Corporate General Partner in 1993
with no loss of principal or delinquent interest to the Partnership, but
the Corporate General Partner sustained a loss of $112,795 of purchased
interest receivable.
(2) 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 to the Partnership.
(3) Of the $2,320,000 of the above Partnership loans foreclosed on by the
Corporate General Partner or purchased by the Corporate General Partner
subsequent to foreclosure in 1996, one of the properties that provided
security for a loan in the amount of $870,000 was disposed of by the
Corporate General Partner during 1996 at a principal loss to the Corporate
General Partner of $205,000. Carryback financing on the sale of this
property of $629,000 was assigned to the Partnership to reduce the
Corporate General Partner's obligation under its unsecured note. See
"Business-Unsecured Loan to Corporate General Partner". The other property
foreclosed on by the Partnership and purchased by the Corporate General
Partner in 1996 provided security for a loan in the amount of $1,450,000.
This property was purchased by delivering a secured note in the same
amount and was still held by the Corporate General Partner as of December
31, 1997.
(4) Of the $613,400 of the above Partnership loans foreclosed on in 1997,
$523,900 continues to be Real Estate Owned by the Corporate General
Partner. The Partnership continues to hold a mortgage on one of the
properties of $273,000 at December 31, 1997. One of the loans purchased by
the Corporate General Partner in the amount of $179,000 represented a
partial investment in a loan securing two separate properties. One of the
properties was sold by the Corporate General Partner during 1997 at a gain
of $42,000.
As of December 31, 1997, the Corporate General Partner continues to own real
property which provides security on $2,215,549 of loans payable to the
Partnership. The Corporate General Partner is required to make payments on such
loans in accordance with the terms thereof.
Should the Corporate General Partner realize any further gain or loss on the
disposition or operation of a property acquired by the Corporate General Partner
through foreclosure of 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.
During 1994 and 1995, the Partnership sold loans in the amounts of $591,000 and
$377,000, respectively, to the Corporate General Partner. Senior lienholders on
these loans subsequently foreclosed the Corporate General Partner out of the
mortgages and the Corporate General Partner determined that there was not
substantial equity to justify foreclosing on the junior loans and taking title
to the underlying properties. In addition, in 1995 the Partnership was paid off
on a loan at a discount of $525,085. Although not obligated to do so, the
Corporate General Partner purchased the Partnership's loans and the
Partnership's receivables related to the discounted payoff of $591,000 and
$902,000 in 1994 and 1995, respectively, and increased its unsecured loan
payable to the Partnership by the same amount. The unsecured loan payable to the
Partnership had been paid in full as of December 31, 1997 (See "Business -
Unsecured Loan to Corporate General Partner).
If the Corporate General Partner ceases purchasing the Partnership's receivables
for interest on additional delinquent loans, or if the delinquency rate
increases on loans held by the Partnership, the interest income of the
Partnership will be reduced by a proportionate amount. For example, if an
additional 10% of the Partnership loans become delinquent and the Corporate
General Partner does not purchase the Partnership's receivables for such
delinquent interest, the trust deed interest income of the Partnership would 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.
Unsecured Loan to Corporate General Partner
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 during 1993
and 1994, sold the four properties it had acquired through foreclosure. The net
proceeds 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
increased the amount of this unsecured loan by $591,000, and purchased a loan
from the Partnership which subsequently was foreclosed upon by a senior
lienholder. During 1995, again in order to enable the Partnership to avoid the
recognition of loss, the Corporate General Partner purchased a $377,272 mortgage
loan that subsequently was foreclosed upon and purchased the Partnership's
receivable related to a shortfall in a discounted payoff of $525,085 in
connection with a Partnership loan. The Corporate General Partner purchased the
loan and receivable by increasing the principal amount of the unsecured loan by
$902,357. In 1996, in order to protect the Partnership from operating losses and
potential loss on disposition, the Corporate General Partner purchased a
property from the Partnership which the Partnership had foreclosed on by
increasing the amount of the unsecured loan from the Corporate General Partner
in the amount of $870,000, the original loan amount on the foreclosed property.
The Corporate General Partner disposed of the property in 1996 at a loss
carrying back a mortgage in the amount of $629,000. The Corporate General
Partner assigned this mortgage to the Partnership reducing the unsecured loan in
the same amount. Since disposing of the four properties acquired prior to
January 1, 1993, the Corporate General Partner has made additional principal
payments against its unsecured loan aggregating $3,820,450.
At December 31, 1997, there is no outstanding principal balance under the
Corporate General Partner's unsecured loan to the Partnership.
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.
Real Estate Owned
As of May 1, 1993, the Corporate General Partner changed its policy so as to
generally not purchase mortgage loans from the Partnership prior to
foreclosures. During 1993, subsequent to this change in policy, the Partnership
acquired title to four properties through foreclosure in which it had loans
totaling $2,612,122. Of these four properties, two were disposed of prior to
1997, and the Partnership sustained no loss of principal. One of the four
properties, consisting of 30 residential lots in Carmel Valley, California, was
contributed to a partnership formed in 1995 between the Partnership and a
developer to develop and sell the lots. (See "Business - Development Limited
Partnership).
During 1994, the Partnership acquired title to four more properties through
foreclosure on which it had loans totaling $2,005,000. One of these properties,
which originally provided security on a $55,000 loan, was disposed of during
1996 in a transaction in which the Partnership sustained no loss of principal.
One which originally provided security on $925,000 was disposed of in 1997 at a
gain of $64,000.
The Partnership acquired title to seven properties during 1995 through
foreclosure which had provided security on six loans totaling $2,778,239. Of
these seven properties, two had been disposed of prior to 1997 in transactions
where the Partnership sustained no loss of principal and two that originally
provided the security for one loan in the amount of $661,531 were disposed of in
1996 and 1997 at a gain of $14,000. One property, that originally provided
security for an $850,000 loan that was partially paid down in 1996 by a personal
judgment obtained against the borrower, was sold in 1997 at a gain of $66,000.
During 1996, the Partnership acquired title to four properties through
foreclosure on which it had loans totaling $4,233,000. Two of these properties
which provided security for $2,230,000 of Partnership loans were sold to the
Corporate General Partner at no loss of principal to the Partnership in 1996.
During 1997, the Partnership acquired title to two properties through
foreclosure on which it had loans totaling $3,265,737. In addition, during 1997
the Partnership sold two second deeds of trust secured by a single property to
the Corporate General Partner for their aggregate face value of $600,000.
Subsequent to this, the Partnership purchased the property that originally
provided security for these second deeds of trust at the foreclosure sale for
$1,350,000 and wiped out the second deeds of trust held by the Corporate General
Partner. The Corporate General Partner incurred a loss of $600,000 as a result
of this transaction.
The Partnership continues to own its interest in the development limited
partnership that owns the residential lots in Carmel Valley, California (see
"Development Limited Partnership," below) and the limited liability company that
owns a commercial lot in Los Gatos (see "Development Limited Liability
Company/Corporate Joint Venture," below) and to hold title to the following nine
properties as of December 31, 1997:
<TABLE>
<CAPTION>
REAL ESTATE OWNED
(As of December 31, 1997)
Additional Delinquent
Year Partnership Capitalized Senior Interest at
Description Foreclosed Loan Amount Costs Loans Foreclosure(1)
Light Industrial Warehouse
<S> <C> <C> <C> <C> <C>
Merced, CA.................. 1993 $ 1,000,000 $ 0 $ 0 $ 175,333
Commercial Lot
Sacramento, CA ............. 1994 $ 500,000 $ 49,828 $ 0 $ 39,042
Commercial Lot/Residential
Development
Vallejo, CA ................ 1994 $ 525,000 $ 506,240(2) $ 0 $ 83,949(3)
Office Building
Monterey, CA ............... 1995 $ 550,000 $ 156,174 $ 1,425,000(4) $ 30,077
Residential Lots
Sonora, CA.................. 1996 $ 1,683,000 $ 178,710 $ 0 $ 701,274
High Density Residential Lot
Reno, NV ................... 1996 $ 230,000 $ 0 $ 0 $ 12,937
Commercial Storage
Oakland, CA............... 1997 $ 444,063 $ 0 $ 0 $ 214,581
Light Industrial
Paso Robles, CA........... 1997 $ 600,000(5) $ 941,251(5) $ 0 $ 131,416
Residential Lots
Ione, CA ............... 1997 $ 2,821,674 $ 13,612 $ 0 $ 746,316
- --------
<FN>
(1) Approximately $1,219,000 of the aggregate delinquent interest receivable
due to the Partnership or to the senior lienholder at foreclosure was
purchased from the Partnership by the Corporate General Partner. Except for
$83,949 that was reimbursed by the Partnership in connection with the
Vallejo, California property, the Partnership has not reimbursed or
repurchased receivables from the Corporate General Partner for any amounts,
has no rights to any subsequent repayments of these amounts and has no
obligation to reimburse the Corporate General Partner for such advances or
repurchase of receivables purchased by the Corporate General Partner.
(2) Of this additional capitalized cost, $450,000 represents the purchase of a
minority investor's interest in the property to provide the Partnership
with complete ownership. Prior to the purchase, the Partnership owned 70%
of the property. The Corporate General Partner believes that based on the
value of these properties, the Partnership benefits from owning 100% of the
assets.
(3) The delinquent interest receivable was purchased by the Corporate General
Partner on behalf of the Partnership, which held a 70% interest in the
property and on behalf of the former co-owner of the property, an
independent, third-party. Under applicable law, the Partnership could only
repurchase such receivable if all other lenders/owners of the property
repurchased their respective receivables. Consequently, the Partnership
repurchased from the Corporate General Partner $83,949 of the interest
receivable purchased by the Corporate General Partner, although it was not
obligated to do so. The remaining $38,550 of the delinquent interest
receivable purchased by the Corporate General Partner was paid by the other
owner of the property.
(4) 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.
(5) The Partnership held two junior deeds of trust secured by this property.
Prior to foreclosure by the senior lienholder, the Corporate General
Partner purchased the $600,000 of loans from the Partnership. The
Partnership then purchased the property at the foreclosure sale for
$1,350,000, and wiped out the Corporate General Partner's junior deeds of
trust. The Corporate General Partner incurred a loss of $600,000 at
foreclosure.
</FN>
</TABLE>
The light industrial warehouse located in Merced, California is currently
vacant. A prior tenant of the property in the business of tire recycling left
approximately 450,000 used tires on the property. Although the Corporate General
Partner has not determined the amount, the Partnership may have a liability to
dispose of these tires. Due to this and declining values on the property, the
Partnership may sustain a loss and has recorded a $350,000 allowance for loss on
this property in its financial statements as of December 31, 1997.
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, 1997.
The properties located in Vallejo, California are in a secluded golf course
community. There are approximately 1,100 fully developed lots owned by other,
nonrelated entities that have not been made available for sale. The Corporate
General Partner believes that sales of these lots will occur during 1998 and
that residential construction will begin in 1999. The Partnership owns the only
commercial real property, other than the golf course and club house, in the
development. The Partnership is in the process of obtaining development rights
on the residential parcels.
The majority of the office building located in Monterey, California is currently
leased; however, the tenant has vacated the building continuing to make lease
payments. The lease terminates in September, 1998. The Partnership is attempting
to lease the building and place the property on the market for sale or sell to
an owner-user. The Partnership may sustain a loss on this property and has
recorded a $200,000 allowance for loss on this property in its financial
statements as of December 31, 1997.
The Partnership sold the Sonora property to the Corporate General Partner
subsequent to December 31, 1997 at a substantial loss of approximately $712,000.
The Corporate General Partner purchased the property because it believes that
the property will have to be held for years before it is economically feasible
to develop. The property's appraised value is less than the amount for which the
Corporate General Partner paid for it. The purchase terms were for no cash down
and interest-only payments for ten years at a rate of 8%. The loan is due at the
end of the ten-year period. The Partnership has recorded a $712,000 allowance
for loss on this property in its financial statements as of December 31, 1997.
The Partnership successfully rezoned the Reno lot from commercial to high
density residential suitable for apartment construction. The Partnership likely
will either build out the lot or sell it to a developer.
The commercial property located in Oakland, California is an industrial storage
site. The Partnership is attempting to lease additional space and sell the
property.
The light industrial property in Paso Robles, California is leased out to a
variety of tenants. The Partnership will attempt to lease out the few remaining
vacant spaces and rollover certain existing leases at higher rates. The
Corporate General Partner expects to hold this property until 1999 or 2000.
The Partnership owns 133 residential lots in Ione, California. As of December
31, 1997, 53 of the lots had homes on them owned by unrelated individuals on
which the Partnership is collecting rent. The Partnership is attempting to sell
all lots with houses on them to the renters of the houses. The Partnership will
develop the other lots and sell them as single family residences. The
Partnership may sustain a loss on this property and has recorded a $384,000
allowance for loss on this property in its financial statement as of December
31, 1997.
Due to potential losses on several of the Partnership's properties, a $1,296,000
additional reserve for losses on real estate was recorded booked in 1997,
bringing the total allowance in the Partnership's financial statements to
$1,896,000 as of December 31, 1997.
Development Limited Partnership
In 1993, the Partnership foreclosed on a $600,000 loan secured by a junior lien
on 30 residential lots located in Carmel Valley, California, and, in 1994, paid
off the $500,000 senior loan. The Partnership incurred additional costs of
$503,000 in protecting its investment, thus increasing the carrying value of the
lots to $1,603,000. During 1995, the Partnership began to develop the lots and
in 1995 incurred an additional $671,000 in costs.
In 1995, the Partnership became the sole limited partner in a limited
partnership formed with Wood Valley Development, Inc., an unrelated
developer/builder and sole general partner, for the development and buildout of
these lots. In exchange for its interest in this development limited
partnership, the Partnership in 1996 contributed the lots to the development
limited partnership and agreed to make additional advances to fund the
development costs. During 1997, the Partnership had advanced additional
development costs aggregating $4,153,000. The amount invested in or advanced by
the Partnership at December 31, 1997, equaled $3,812,000, net of distributions
through such date.
Under the terms of the agreement governing the development limited partnership,
the Partnership is entitled to receive certain distributions of cash before the
developer receives any funds. The cash received by the development limited
partnership from sales of developed lots is distributed as follows: (i) to third
parties (e.g., contractors, taxing authorities, etc.) for amounts incurred by
the development limited partnership and related to the lots sold; (ii) to the
Partnership, in an amount equal to $70,000 per lot sold; (iii) to the
Partnership, in an amount equal to a pro rata portion of the development costs
advanced, plus interest at prime plus 2%; (iv) to the Partnership, in an amount
equal to other out-of-pocket expenses incurred by Partnership with respect to
the lots sold, plus interest at prime plus 2%; and (v) the balance, if any, 70%
to the Partnership, and 30% to the developer.
The development limited partnership is building single-family residences of
between approximately 2,200 and 2,800 square feet on the lots. As of December
31, 1997, a total of 16 homes had been completed and sold and construction had
been completed or commenced on the remaining 14 lots. During 1997, 15 homes were
sold for aggregate proceeds of $8,012,000. In 1997, the development limited
partnership distributed $7,574,000 to the Partnership, $2,355,000 of which
represented profit and interest.
The Corporate General Partner has entered into a joint venture with Wood Valley
Development, Inc. to purchase and build out up to 34 lots that are contiguous to
and interspersed with the lots in Carmel Valley owned by the development limited
partnership formed between the Partnership and Wood Valley Development, Inc. As
of December 31, 1997, the joint venture between the Corporate General Partner
and Wood Valley Development, Inc. had purchased 28 lots and developed and sold
17 of these lots. The remaining six lots are expected to be purchased by this
joint venture during 1998.
The Partnership does not have any direct or indirect interest in these 34 lots
nor do any of these lots provide any security for the original Partnership loan
which was foreclosed on in 1993. The development limited partnership has,
however, incurred certain infrastructure and soft costs that benefited not only
the 30 lots owned by the development limited partnership, but the 34 contiguous
lots owned by the Corporate General Partner/Wood Valley Development, Inc. joint
venture. As sales of these 34 lots occur, the development limited partnership is
being reimbursed on a pro rata basis, without interest, for such development,
infrastructure and soft costs incurred by the development limited partnership.
Upon receipt of any such funds the development limited partnership will
distribute monies as outlined above. During 1997, the development limited
partnership received reimbursement of $648,000 in development costs and the
balance of development advances receivable is $103,000 as of December 31, 1997.
Development Limited Liability Company/Corporate Joint Venture
In 1995, the Partnership foreclosed on a $571,853 loan and obtained title to a
commercial lot in Los Gatos, California. In 1997, the Partnership formed a
limited liability company (the "Company") with BGC Properties LLC, an
unaffiliated developer, and contributed the land valued at $760,000 to the
newly-formed limited liability company in exchange for a 70% interest in the
profits and losses of the Company. The sole purpose of the Company is to
develop, construct and operate a commercial office building on the land, to be
held for investment or sale. The Partnership is required to provide construction
financing to the Company in the form of additional contributions or loans to the
Company, or to obtain such financing from third parties. To the extent the
Partnership lends such funds, it will receive interest at a rate of prime plus
2%. Upon completion of construction of improvements, the Partnership is required
to obtain or provide permanent financing.
The Partnership is the sole manager of the Company. As such, the Partnership has
exclusive control and authority over the Company's affairs, subject to certain
rights of BGC. The Partnership will not receive any compensation for serving as
manager of the Company.
BGC will provide certain development services to the Company and will receive a
development fee. At BGC's election, BGC may defer payment of all or a portion of
the fee, and earn interest thereon at the rate of 8% per annum, simple.
Additionally, an affiliate of BGC will serve as property manager and earn an
asset management fee.
Prior to contributing the land to the Company, the Partnership invested
approximately $629,000 (including $57,000 in capitalized costs subsequent to
foreclosure) in such land. Since contributing the land to the Company the
Partnership has loaned $10,600 to the Company, which amount will be repaid, with
interest, as discussed above. The Company expects to have development rights by
mid-1998 and have construction completed in 1999.
Reserves for Loans and Other Losses
The General Partners believe that, based on historical experience, the recorded
loan loss reserve of $3,500,000 as of December 31, 1997, is adequate.
In addition, the Partnership has recorded an additional reserve for losses on
real property acquired through foreclosure of $1,296,000 bringing the total to
$1,896,000 in the Partnership's financial statements as of December 31, 1997.
The General Partners believe that this allowance is adequate.
Principal Investment Objectives
The Partnership invests primarily in mortgage loans on commercial, industrial
and residential income producing real property. 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 Corporate General Partner locates and identifies virtually all mortgages the
Partnership invests in, and makes all investment decisions on behalf of the
Partnership in the Corporate General Partner's 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 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. 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 during the
loan approval process.
The Partnership may purchase existing loans which were originated by other
lenders. Such a loan might be obtained by the Corporate General Partner from a
third party and sold to the Partnership at an amount less than its face value.
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. Such appraisals will ordinarily take into account
factors including: property location; age; condition; estimated building cost;
community and site data; valuation of land; valuation by cost; economic market
analysis; valuation by 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%-75% 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.
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 generally 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 an assignment of 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 leasehold interest loans either are
amortized over a period which is shorter than the lease term or have a maturity
date prior to the date the lease terminates. These loans all contain provisions
allowing the Corporate General Partner to cure any default under the lease.
Variable Rate Loans
Approximately $77,310,000 (44.2%) of the Partnership's loan portfolio as of
December 31, 1997, 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, 1997, through December 31, 1997, the one year Treasury Constant
Maturity Index has increased from 5.50% to 5.51%, the five-year Treasury
Constant maturity Index has decreased from 6.12% to 5.71%, the Prime Rate Index
remained constant at 8.50% and the Monthly Weighted Average Cost of Funds Index
for the Eleventh District Savings Institutions has increased from 4.84% to
4.96%.
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. In addition, most variable rate loans originated by the Corporate
General Partner contain provisions under which the interest rate cannot fall
below the starting rate.
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, 1997, $77,310,000 (approximately 44.2%) 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 sell the property, 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 on senior liens 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, 1997, the Partnership had
secured loans outstanding to the Corporate General Partner of $2,215,549.
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 or
development 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 may 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, conduit lenders, 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.
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, many 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 may drop in the
near future, reducing the net yield earned by the Limited Partners.
In past years, due to general economic conditions, the commercial real estate
market in California had 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.
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
business 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. Where the default consists of a
failure to pay installment payments and in certain other cases, 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/or 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. Three months from the date of recordation of the Notice of
Default, and at least 20 days before the trustee's sale, notice of trustee's
sale must be posted in a public place and published once a week for three weeks
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
attorney's/trustee's fees and expenses. A beneficiary under a deed of trust
junior to the deed of trust has no right to credit bid, at the senior creditor's
sale, 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, including real estate taxes.
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 that may be 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
(i.e., personal) 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) 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) and may remain in possession during this redemption period.
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. Exceptions to this purchase money
limitation are sometimes made in cases of "nonstandard" loans, as where a seller
carryback is subordinated to a large construction loan. 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,
and that it do so in a single lawsuit. 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 (or the successful bid price, if higher), thereby preventing a
beneficiary from obtaining a large deficiency judgment against the debtor as a
result of low bids at the judicial sale. This fair value rule also requires that
deficiency claims be brought promptly after the foreclosure sale (within three
months).
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. This statute has provided little
practical help to lenders holding trust deeds on contaminated property.
The California Supreme Court has held that, except as provided below, 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 who has not conducted his own
foreclosure 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, but both the fair value rule and the three-month
limitation period are applied to "sold out" juniors who purchase at the senior
lender's foreclosure sale. The only other 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 even 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. It is anticipated, however, 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 or, at
a minimum to require restoration of the security. 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 unless the junior bought the property at the senior's sale,
in which case fair value limitations and a three-month statute of limitations
apply. 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. A federal
statute, the Garn-St. Germain Depository Institutions Act of 1982 (the "Garn
Act") and a U.S. Supreme Court case provide that, with certain exceptions and
restrictions, any lender may enforce a due-on-sale clause with respect to a
mortgage on real property thereby preempting much of California law.
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. Such provisions are permitted if the amount of the late charges is
not unreasonably high. 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." 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, LLP ("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 be subject to federal income tax if it is
classified as a partnership for federal income tax purposes, but rather each
Partner will be required to report on such Partner's federal income tax return
the Partner's 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 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.
Under the recently enacted check-the-box Regulations, a domestic limited
partnership that was classified for tax purposes as a partnership prior to
January 1, 1997 will retain such classification unless it makes an election to
be classified as an association taxable as a corporation. The Partnership was
classified as a partnership for tax purposes prior to January 1, 1997, and
accordingly will retain such classification prospectively.
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, due either 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 any Partnership's deductions or credits, 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. 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 the taxpayer Relief Act of 1997, for noncorporate taxpayers, long-term
capital gain for assets held longer than 18 months is subject to a maximum rate
of 20% (10% for individuals in the 15% tax bracket). (The maximum capital gain
rate for assets held for more than one year and not more than 18 months is 28%.)
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 1998, the first bracket is
at 15% (on taxable income not over $42,350 in the case of married taxpayers
filing joint returns), the second at 28% (on taxable income from
$42,350-$102,300), the third at 31% (on taxable income from $102,300-$155,950),
the fourth at 36% (on taxable income from $155,950-$278,450), and the fifth at
39.6% (on taxable income over $278,450). Long-term capital gain for assets held
longer than 18 months is subject to a 20% tax rate (10% for individuals in the
15% bracket). (The maximum capital gain rate for assets held for more than one
year and not more than 18 months is 28%.)
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,
generally 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, and 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. A taxpayer's
net capital gain for assets held more than 18 months, however, is subject to a
maximum rate of 20% (10% for individuals in the 15% regular tax bracket). 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, Roth 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, 1997, there were 2,666 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,
manage, operate and develop property acquired by the Partnership through
foreclosure or otherwise, 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 27,109,309 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. 189,063,122 Units were outstanding as of
December 31, 1997, held by 2,666 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 may 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
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 are
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 is not prohibited. 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 140,010 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, LLP, Oakland,
California. Certain members of the firm own or control an aggregate of 976,624
Units, none of which were received in connection with the preparation of any
offering of Units. ertain 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, 1997, is $941,000.
EXPERTS
The financial statements and financial statement schedule of Owens Mortgage
Investment Fund as of December 31, 1997 and 1996, and for each of the years in
the three-year period ended December 31, 1997, and the balance sheet of Owens
Financial Group, Inc. as of December 31, 1997, 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>
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, 1997 and 1996, and
the related statements of income, partners' capital and cash flows for each of
the years in the three-year period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Oakland, California
February 13, 1998
<PAGE>
See accompanying notes to financial statements.
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
<TABLE>
<CAPTION>
Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
------ ------------- ------------
<S> <C> <C>
Cash and cash equivalents $ 3,073,115 11,386,661
Certificates of deposit 1,000,000 850,000
Loans secured by trust deeds 174,714,607 154,148,933
Less allowance for loan losses (3,500,000) (3,500,000)
-------------- --------------
171,214,607 150,648,933
Unsecured loans due from general partner -- 488,764
Interest receivable 1,773,608 1,321,493
Other receivables 112,583 59,074
Real estate held for sale, net of allowance for losses of
$1,896,000 in 1997 and $600,000 in 1996 14,151,141 12,621,093
-------------- --------------
$ 191,325,054 177,376,018
============== ==============
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued liabilities 49,534 24,458
Accrued distributions payable 544,385 511,456
-------------- --------------
Total liabilities 593,919 535,914
-------------- --------------
Partners' Capital:
General partners 1,864,033 1,732,726
Limited partners (units subject to redemption):
Authorized 250,000,000 units in 1997 and 1996;
280,569,612 and 253,948,052 units issued and 189,063,122
and 175,303,398 units outstanding in 1997 and 1996,
respectively 188,867,102 175,107,378
-------------- --------------
Total partners' capital 190,731,135 176,840,104
-------------- --------------
$ 191,325,054 177,376,018
============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
<TABLE>
<CAPTION>
Statements of Income
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ------------- -------------
Revenues:
Interest income on loans secured by
<S> <C> <C> <C>
trust deeds $ 18,241,427 16,424,906 16,132,544
Other interest income 451,009 228,849 282,757
Gain on sale of real estate 2,633,414 170,724 --
------------- ------------- -------------
Total revenues 21,325,850 16,824,479 16,415,301
------------- ------------- -------------
Operating expenses:
Management fees paid to general partner 3,879,454 866,985 1,431,616
Mortgage servicing fees paid to general
partner 420,742 384,004 371,000
Promotional interest 70,747 57,395 69,255
Administrative 56,687 56,516 56,516
Legal and accounting 102,914 97,175 60,254
Net real estate operations 70,216 344,298 224,108
Other 8,843 9,694 11,177
Provision for loan losses -- 250,000 500,000
Provision for losses on real estate acquired
through foreclosure 1,296,000 -- 200,000
------------- ------------- -------------
Total operating expenses 5,905,603 2,066,067 2,923,926
------------- ------------- -------------
Net income $ 15,420,247 14,758,412 13,491,375
============= ============= =============
Net income allocated to
general partners $ 154,202 146,960 135,584
============= ============= =============
Net income allocated to
limited partners $ 15,266,045 14,611,452 13,355,791
============= ============= =============
Net income per weighted average
limited partner unit $ .08 .08 .08
============= ============= =============
</TABLE>
<PAGE>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
<TABLE>
<CAPTION>
Statements of Partners' Capital
Years ended December 31, 1997, 1996 and 1995
Total
General Limited Partners Partners'
Partners Units Amount Capital
<S> <C> <C> <C> <C>
Balances, December 31, 1994 1,488,360 150,554,388 150,358,368 151,846,728
Net income 135,584 13,355,791 13,355,791 13,491,375
Sale of partnership units 138,507 15,119,315 15,119,315 15,257,822
Partners' withdrawals -- (10,090,062) (10,090,062) (10,090,062)
Partners' distributions (138,925) (5,622,495) (5,622,495) (5,761,420)
----------- ------------ ------------ ------------
Balances, December 31, 1995 1,623,526 163,316,937 163,120,917 164,744,443
Net income 146,960 14,611,452 14,611,452 14,758,412
Sale of partnership units 114,781 16,834,406 16,834,406 16,949,187
Partners' withdrawals -- (13,665,872) (13,665,872) (13,665,872)
Partners' distributions (152,541) (5,793,525) (5,793,525) (5,946,066)
----------- ------------ ------------ ------------
Balances, December 31, 1996 1,732,726 175,303,398 175,107,378 176,840,104
Net income 154,202 15,266,045 15,266,045 15,420,247
Sale of partnership units 141,493 17,064,537 17,064,537 17,206,030
Partners' withdrawals -- (12,515,336) (12,515,336) (12,515,336)
Partners' distributions (164,388) (6,055,522) (6,055,522) (6,219,910)
----------- ------------ ------------ ------------
Balances, December 31, 1997 $ 1,864,033 189,063,122 $ 188,867,102 190,731,135
=========== ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 15,420,247 14,758,412 13,491,375
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of real estate by limited partnership (2,355,075) (170,724) --
Gain on sale of real estate properties (278,339) -- --
Provision for losses on real estate properties held
for sale 1,296,000 -- 200,000
Provision for loan losses -- 250,000 500,000
Changes in operating assets and liabilities:
Interest and other receivables (505,624) (21,339) (165,464)
Accrued distributions payable 32,929 22,299 42,532
Accounts payable 25,076 8,290 16,168
Due to general partner -- (152,000) (180,644)
------------- ------------- -------------
Net cash provided by operating activities 13,635,214 14,694,938 13,903,967
------------- ------------- -------------
Cash flows from investing activities:
Investment in loans secured by trust deeds (78,449,432) (51,365,781) (43,563,067)
Principal collected on secured and unsecured loans 2,484,071 2,773,553 2,513,912
Loan payoffs 53,449,102 44,978,479 32,452,735
Investment in limited partnership (4,152,918) (2,895,261) --
Distributions received from limited partnership 7,573,669 462,103 --
Investment in corporate joint venture (67,510) -- --
Additions to real estate properties held for sale (2,061,944) (96,540) (2,638,630)
Disposition of real estate properties held for sale 955,418 441,563 577,395
Investment in certificates of deposit, net (150,000) -- 250,000
------------- ------------- -------------
Net cash used in investing activities (20,419,544) (5,701,884) (10,407,655)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from sale of partnership units 17,206,030 16,949,187 15,257,822
Cash distributions (6,219,910) (5,946,066) (5,761,420)
Capital withdrawals (12,515,336) (13,665,872) (10,090,062)
------------- ------------- -------------
Net cash used in financing activities (1,529,216) (2,662,751) (593,660)
------------- ------------- -------------
Net (decease) increase in cash and cash equivalents (8,313,546) 6,330,303 2,902,652
Cash and cash equivalents at beginning of year 11,386,661 5,056,358 2,153,706
------------- ------------- -------------
Cash and cash equivalents at end of year $ 3,073,115 11,386,661 5,056,358
============= ============= =============
</TABLE>
See notes 3, 4, 5, and 6 for supplemental disclosure of non-cash investing
activities.
<PAGE>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(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 189,063,122, 175,303,398 and 163,316,937 at December 31, 1997,
1996 and 1995, 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.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
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.
In June 1996, the Financial Accounting Standards Board issued
Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. Statement
125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of
liabilities and provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that
are secured borrowings. The Partnership implemented Statement
125 effective January 1, 1997 which did not result in a material
impact on the financial statements.
The Partnership does not recognize interest income on loans once
they are determined to be impaired until the interest is
collected in cash. 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.
(c) Allowance for Loan Losses
The Partnership maintains an allowance for loan losses equal to
$3,500,000 as of December 31, 1997 and 1996. 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.
The outstanding balance of all loans delinquent greater than
ninety days is $5,236,400 and $11,348,000 as of December 31,
1997 and 1996, 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 the borrower or when the payment of principal
or interest is ninety days past due, unless OFG purchases the
interest receivable from the Partnership. As of December 31,
1997 and 1996, the aforementioned loans totaling $5,236,400 and
$11,348,000 respectively, are classified as non-accrual loans.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
OFG advances certain payments to the Partnership on behalf of
borrowers, such as property taxes, mortgage interest pursuant to
senior indebtedness, and development costs. Purchases of
interest receivable and payments made on loans by OFG during
1997 and 1996, but not collected as of December 31, 1997 and
1996, totaled approximately $219,000 and $541,000, respectively.
During 1995, OFG purchased the Partnership's receivable related
to a shortfall in the discounted payoff of a Partnership loan in
the amount of $525,000 and purchased the Partnership's interest
in loans in the amount of $377,000.
(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.
Certain real estate held for sale acquired by the Partnership is
held in a limited partnership and corporate joint venture. The
Partnership accounts for its investments in limited partnership
and corporate joint venture under the equity method of
accounting. The limited partnership and corporate joint venture
investment in real estate is carried at the lower of cost or
estimated fair value, less estimated costs to sell. The
Partnership increases its investment by advances made to the
limited partnership and corporate joint venture. Any profit
generated from the investment in limited partnership and
corporate joint venture is recorded as a gain on sale of real
estate.
Effective January 1, 1996, the Partnership adopted the
provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121 (FAS 121),
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. The adoption of FAS 121 did
not result in a material impact on the Partnership's financial
position.
<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.
(h) Reclassifications
Certain reclassifications not affecting net income have been
made to the 1994 and 1995 financial statements to conform to the
1996 presentation.
(3) Loans Secured by Trust Deeds
Loans secured by trust deeds as of December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
Income-producing properties $ 165,201,582 145,999,756
Single-family residences 2,088,606 3,935,546
Unimproved land 7,424,419 4,213,631
-------------- --------------
$ 174,714,607 154,148,933
============== ==============
First mortgages 161,275,350 139,542,698
Second mortgages 12,744,274 14,006,235
Third mortgages or all-inclusive deeds of trust 694,983 600,000
-------------- --------------
$ 174,714,607 154,148,933
============== ==============
</TABLE>
Scheduled maturities of loans secured by trust deeds as of December 31,
1997 and the interest rate sensitivity of such loans is as follows:
<TABLE>
<CAPTION>
Fixed Variable
Year ending interest interest
December 31, rate rate Total
<S> <C> <C> <C>
1998 $ 54,307,183 10,013,453 64,320,636
1999 33,863,909 7,418,189 41,282,098
2000 1,206,747 26,619,531 27,826,278
2001 1,067,671 2,987,933 4,055,604
2002 1,486,884 10,692,035 12,178,919
Thereafter (through 2012) 5,471,874 19,579,198 25,051,072
------------- ------------- -------------
$ 97,404,268 77,310,339 174,714,607
============= ============= =============
</TABLE>
Variable rate loans use as indices the one and five year Treasury
Constant Maturity Index (5.51% and 5.71%, respectively, as of December
31, 1997), the prime rate (8.50% as of December 31, 1997) and the
weighted average cost of funds index for Eleventh District savings
institutions (4.96% as of December 31, 1997). Premiums over these
indices have varied from 250-550 basis points depending upon market
conditions at the time the loan is made.
<PAGE>
(3) Loans Secured by Trust Deeds, Continued
The scheduled maturities for 1998 include approximately $22,295,000 of
loans which are past maturity as of December 31, 1997, of which
$3,433,482 represents loans for which interest payments are delinquent
over 90 days. During the years ended December 31, 1997, 1996 and 1995,
the Partnership refinanced loans totaling $6,562,000, $5,400,000 and
$19,466,000, respectively, thereby extending the maturity dates of such
loans.
The Partnership's total investment in loans delinquent over 90 days is
$5,236,400 and $11,348,000 as of December 31, 1997 and 1996,
respectively. OFG has purchased the Partnership's receivables for
delinquent interest of $87,000, $173,000 and $456,000 related to
delinquent loans for the years ended December 31, 1997, 1996 and 1995,
respectively.
The Partnership's investment in delinquent loans as of December 31,
1997 totals approximately $5,236,000, of which $4,428,000 has a
specific related allowance for credit losses totaling approximately
$2,274,000. There is a non-specific allowance for credit losses of
$1,226,000 for the remaining balance of $808,000 and for other current
loans. There was no additional allowance for credit losses during the
year ended December 31, 1997.
Interest income received on impaired loans during the years ended
December 31, 1997, 1996 and 1995 totaled approximately $722,000,
$691,000 and $896,000, respectively, $670,000, $518,000 and $440,000 of
which was paid by borrowers and $52,000, $173,000 and $456,000 of which
related to purchases of interest receivable by OFG, respectively.
As of December 31, 1997 and 1996, the Partnership's loans secured by
deeds of trust on real property collateral located in Northern
California totaled approximately 67% ($117,352,406) and 69%
($106,403,384), respectively, of the loan portfolio. The Northern
California region (which includes the following counties and all
counties north: Monterey, Fresno, Kings, Tulare and Inyo) is a large
geographic area which has a diversified economic base. The ability of
borrowers to repay loans is influenced by the economic 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.
<PAGE>
(4) Unsecured Loan Due from General Partner
During 1996, the Partnership sold a property to OFG which had been
acquired through foreclosure proceedings by the Partnership on a
Partnership loan. The purchase of the property in the amount of
$870,000 was added to the outstanding balance of the unsecured loan due
from general partner. OFG sold the property during 1996 for $21,700 in
cash and a trust deed receivable in the amount of $629,000. The trust
deed receivable was assigned by OFG to the Partnership in exchange for
a reduction in the unsecured loan balance.
During 1995, OFG purchased the Partnership's receivable related to a
shortfall in 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 purchased in 1995. The purchase of the receivable
and the loan in the amount of $902,000 was added to the outstanding
balance of the unsecured loan due from general partner.
OFG is under no obligation to enter into such transactions with the
Partnership.
There was no balance on the unsecured loan due from general partner as
of December 31, 1997. The balance of the unsecured loan due from the
general partner was $488,764 as of December 31, 1996.
The loan bore interest at 8% and was due on demand.
(5) Real Estate Held for Sale
Real estate held for sale includes the following components as of
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------- ----------
<S> <C> <C>
Real estate properties held for sale $ 9,699,656 7,743,295
Investment in limited partnership 3,812,122 4,877,798
Investment in corporate joint venture 639,363 --
------------- -------------
$ 14,151,141 12,621,093
============= =============
</TABLE>
Gain on sale of real estate includes the following components for the
years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Gain on sale of real estate properties $ 278,339 --
Gain on sale of real estate by limited partnership 2,355,075 170,724
------------- -------------
$ 2,633,414 170,724
============= =============
</TABLE>
<PAGE>
(5) Real Estate Held for Sale, Continued
(a) Real Estate Properties Held for Sale
Real estate properties held for sale at December 31, 1997 and
1996 consists of the following properties acquired through
foreclosure in 1993 through 1997:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Warehouse, Merced, California, net of valuation
allowance of $350,000 as of December 31, 1997 and
1996 $ 650,000 650,000
Light industrial building, Emeryville, California -- 919,806
100%and 70% interest in undeveloped land, Vallejo, California,
as of December 31, 1997 and 1996,
respectively 1,030,566 568,569
Commercial lot, Sacramento, California, net of valuation
allowance of $250,000 as of December 31, 1997 and 1996 299,828 299,828
Residence and commercial building, Campbell and
Milpitas, California -- 42,079
Commercial property, Sacramento, California -- 550,000
Developed land, Los Gatos, California (see note 5(c)) -- 571,853
Office building and undeveloped land, Monterey,
California, net of valuation allowance of $200,000
as of December 31, 1997 1,902,855 2,097,810
Manufactured home subdivision development, Ione,
California, net of valuation allowance of $384,000
as of December 31, 1997 2,451,286 --
Commercial storage and office buildings, Oakland,
California 444,063 --
Undeveloped land, Reno, Nevada 230,000 230,000
Manufactured home subdivision development, Sonora,
California, net of valuation allowance of $712,000
as of December 31, 1997. 1,149,807 1,813,350
Light industrial building, Paso Robles, California 1,541,251 --
$ 9,699,656 7,743,295
========== ==========
</TABLE>
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 $3,279,349, $1,913,000 and
$2,501,308 for the years ended December 31, 1997, 1996 and 1995,
respectively.
During 1997, the Partnership sold three properties for a sales
price of approximately $1,659,000. On one of the three
properties, the Partnership took back a loan secured by a trust
deed in the amount of $840,000. During 1996, the Partnership
sold three properties for a sales price of approximately
$845,000. On one of the three properties, the Partnership took
back a loan secured by a trust deed in the amount of $563,125.
(5) Real Estate Held for Sale, Continued
During 1997, the Partnership sold two loans secured by second
deeds of trust to OFG for $600,000 (face value). The Partnership
subsequently purchased the property (located in Paso Robles,
California) securing the loans at the senior lienholders trustee
sale for $1,350,000; thus, wiping out OFG's junior deeds of
trust. OFG recorded a loss of $600,000 as a result of this
transaction.
In February 1998, OFG purchased the manufactured home
subdivision development property located in Sonora, California,
from the Partnership for $1,152,000.
(b) Investment in Limited Partnership
In 1993, the Partnership foreclosed on a loan in the amount of
$600,000 secured by a junior lien on 30 residential lots located
in Carmel Valley, California, and in 1994, paid off the senior
loan in the amount of $500,000. The Partnership incurred
additional costs of $502,798 in 1994 to protect its investment,
increasing the carrying value of the lots to $1,602,798. The
Partnership began to develop the lots and incurred an additional
$671,118 in costs during 1995.
During 1995, the Partnership entered into a limited partnership,
WV-OMIF Partners, L.P. (WV-OMIF Partners) with an unrelated
developer/builder, Wood Valley Development, Inc. (Woodvalley),
for the purpose of constructing single-family homes on the 30
lots. The Partnership contributed the lots to WV-OMIF Partners
in 1996 in exchange for a limited partnership interest. The
$671,118 in capitalized costs incurred in 1995 were considered
an advance to WV-OMIF Partners pursuant to the limited
partnership agreement in 1996 when the lots were contributed.
The Partnership provides advances to the WV-OMIF Partners to
develop and construct the homes. The Partnership is entitled to
receive interest at a rate of prime plus 2% on the advances to
WV-OMIF Partners.
OFG and Woodvalley have the option of purchasing and developing
34 similar lots which are interspersed among the 30 lots being
developed by WV-OMIF Partners. WV-OMIF Partners is incurring the
infrastructure costs which benefit all 64 lots, including the 34
lots that can be developed by OFG and Woodvalley. OFG and
Woodvalley are reimbursing WV-OMIF Partners their pro rata share
of the infrastructure costs with the funds received from the
sale of the developed homes. As of December 31, 1997, Woodvalley
had purchased twenty-eight lots and developed and sold seventeen
of them. The remaining six lots as of December 31, 1997 are
expected to be purchased during fiscal year 1998. As of December
31, 1997, OFG and Woodvalley had reimbursed $648,069 in
development costs to WV-OMIF Partners from the sale of homes.
The balance of development costs due by OFG and Woodvalley
totals $102,579 as of December 31, 1997.
(5) Real Estate Held for Sale, Continued
During 1997 and 1996, the Partnership advanced an additional
$4,152,918 and $2,895,261, respectively, to WV-OMIF Partners for
the continued development and construction of the homes. WV-OMIF
Partners sold fifteen homes in 1997 for proceeds of $8,011,960
and the net gain allocable to the Partnership was $2,355,075,
including interest income of $295,957. WV-OMIF Partners
distributed $7,573,669 (including $648,069 in reimbursements
from OFG and Woodvalley) to OMIF in 1997. WV-OMIF Partners sold
one home in 1996 and distributed $462,103 to OMIF. The
Partnership's investment in WV-OMIF Partners totaled $3,812,122
and $4,877,798 as of December 31, 1997 and 1996, respectively.
WV-OMIF Partners is distributing cash received from the sale of
the lots in the following priority: (1) to third parties, such
as real property taxes and assessments, lenders, contractors,
etc.; (2) to pay the Partnership the amount of $70,000 per lot,
as each lot sells; (3) to pay the Partnership the interest on
the cash advances in full, as each lot sells; (4) to reimburse
the Partnership for its out-of-pocket cash advances for each
lot, as each lot sells; and (5) the remainder to Woodvalley and
the Partnership at a rate of 30% to Woodvalley and 70% to the
Partnership.
The WV-OMIF Partners Partnership Agreement states that the
Partnership shall take no part in the conduct or control of
WV-OMIF Partner's business or in the operation, right or
authority to act for WV-OMIF Partners. Thus, the Partnership
does not have control of WV-OMIF Partners and accounts for its
investment in WV-OMIF Partners under the equity method of
accounting.
(c) Investment in Corporate Joint Venture
In 1995, the Partnership foreclosed on a loan in the amount of
$571,853 secured by a senior lien on a commercial parcel of land
located in Los Gatos, California. During 1997, the Partnership
contributed the land into 720 University, LLC (the Company), a
corporate joint venture formed between the Partnership and BGC
Properties, LLC (BGC). The purpose of the Company is to develop,
construct and operate a commercial office building or R&D
facility on the land to be held for investment and eventual
sale. The Partnership may provide loans to the Company to
develop and construct the building or the Partnership will
obtain loans from third parties for such purposes. The
Partnership is entitled to receive interest at a rate of prime
plus 2% on the loans it makes to the Company.
During 1997, the Partnership capitalized $56,889 in costs prior
to the property being contributed to the Company and advanced
$10,621 to the Company for development. The total investment in
the corporate joint venture totals $639,363 as of December 31,
1997.
<PAGE>
(5) Real Estate Held for Sale, Continued
The net cash flows from the operations of the Company are to be
distributed in accordance with the following priorities: 1) 70%
to the Partnership and 30% to BGC until the sum of all current
and prior distributions of net cash flows equals the members'
priority return on capital as of the end of the calendar quarter
immediately preceding distribution; and 2)
thereafter, 70% to the Partnership and 30% to BGC.
The distribution upon dissolution shall be made in accordance
with the following priorities: 1) to third parties to pay all
debts; 2) to the members to pay all debts; 3) to the members in
accordance with and to the extent of their respective positive
capital account balances; 4) 70% to the Partnership and 30% to
BGC.
The Company is considered a corporate joint venture, and, thus,
the Partnership accounts for its investment in the Company under
the equity method of accounting.
(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.
(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 $10,077,144,
$8,975,209 and $8,395,180 for the years ended December 31, 1997,
1996 and 1995, respectively. Reinvested distributions are not
shown as partners' distributions or sales of partnership units
in the accompanying statements of partners' capital.
The limited partners may withdraw, or partially withdraw, from
the Partnership and obtain the return of their outstanding
capital accounts at $1.00 per unit (book value) within 91 days
after written notices are delivered to the general partners,
subject to the following limitations:
(6) Partners' Capital, Continued
o 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.
o 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).
o The general partners are not required to establish a reserve
fund for the purpose of funding such payments.
o 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, 1997, the general partners had made cash capital
contributions of $957,164 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
$70,747, $57,395 and $69,255 for the years ended December 31,
1997, 1996 and 1995, 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 $957,164 at December 31, 1997), 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, 1997 and 1996 were
approximately $3,829,000 and $3,400,000, respectively. Certificates of
deposit and certain cash equivalents as of the same dates were
accordingly maintained as reserves.
<PAGE>
(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:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Partners' capital per financial statements $ 190,731,135 176,840,104
Accrued interest income (1,773,608) (1,321,493)
Allowance for loan losses 3,500,000 3,500,000
Valuation allowance - real estate held for sale 1,896,000 600,000
Accrued distributions 544,385 511,456
-------------- --------------
Partners' capital per federal income tax return $ 194,897,912 180,130,067
============== ==============
</TABLE>
(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
is remitted monthly to the Partnership, net of servicing fees earned by
OFG. Interest receivable from OFG amounted to $1,773,608 and $1,321,493
at December 31, 1997 and 1996, respectively.
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 calculated on an annual basis. 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. Even though the fees for a month may exceed one-twelfth of the
maximum limits, at the end of the calendar year the sum of the fees
collected for each of the twelve months is equal to or less than the
stated limits. Management fees amounted to approximately $3,879,000,
$867,000 and $1,432,000 for the years ended December 31, 1997, 1996 and
1995, respectively, and are included in the accompanying statements of
income. Service fee payments to OFG approximated $421,000, $384,000 and
$371,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, and are included 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 $409,000, $241,000 and $152,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
(9) Transactions with Affiliates, Continued
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 $2,994,000, $1,930,000 and
$1,865,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
During the year ended December 31, 1997, OFG purchased three loans
secured by trust deeds from OMIF at face values in the total amount of
$613,000 for cash of $340,000 and assumption of a loan in the amount of
$273,000. OFG then foreclosed on the loans and sold one of the
properties during 1997 for a gain of approximately $42,000.
Included in loans secured by trust deeds at December 31, 1997 and 1996
are notes totaling $2,215,549 and $1,942,332, respectively, which are
secured by properties owned by OFG. The loans bear interest at 8% per
annum and are due on demand. The Partnership received interest income
of $188,044, $72,427 and $131,482 during the years ended December 31,
1997, 1996 and 1995, respectively, from OFG under loans secured by
trust deeds and the unsecured loan due from 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 186,954,376, 172,364,058 and 160,636,164 for the years ended
December 31, 1997, 1996 and 1995, respectively.
(11) Fair Value of Financial Instruments
The Financial Accounting Standards Board's Statement No. 107,
Disclosures about Fair Value of Financial Instruments, 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.
(b) Loans Secured by Trust Deeds
The carrying value of these instruments of $174,714,607
approximates the fair value as of December 31, 1997. The fair
value 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 $3,500,000 at
December 31, 1997 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 (the Company) as of December 31, 1997. This
consolidated balance sheet 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 includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit 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 balance sheet provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above present fairly,
in all material respects, the financial position of Owens Financial Group, Inc.
and subsidiaries as of December 31, 1997 in conformity with generally accepted
accounting principles.
/s/KPMG Peat Marwick LLP
Oakland, California
February 13, 1998
<PAGE>
<TABLE>
<CAPTION>
OWENS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1997
Assets
<S> <C>
Cash and cash equivalents $ 6,391,511
Investment in delinquent loans, less allowance for losses of $400,000 227,285
Trust deeds receivable, less allowance for losses of $325,000 869,829
Trust deeds held for sale 2,008,815
Receivables from affiliates 723,399
Investment in limited partnership 2,313,520
Investment in real estate joint venture 3,065,807
Real estate held for sale, net of allowance for losses of $415,000 3,660,704
Property and equipment, net of accumulated depreciation of $529,203 8,708
Other assets 288,046
------------
$ 19,557,624
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and other accrued expenses 100,331
Accrued bonus, pension and profit sharing expense 105,426
Mortgages payable 2,630,549
Note payable to bank 6,022,375
Note payable to affiliate --
Deferred income 419,541
------------
Total liabilities 9,278,222
Shareholders' equity:
Common stock, $1 par value, authorized 100,000 shares; issued and
outstanding 76,500 76,500
Additional paid-in capital 1,868,646
Retained earnings 8,646,477
Notes receivable from shareholders (312,221)
------------
Total shareholders' equity 10,279,402
$ 19,557,624
</TABLE>
See accompanying notes to consolidated balance sheet.
<PAGE>
OWENS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1997
(1) Organization
Owens Financial Group, Inc. (the Company) was incorporated in 1951 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 wholly owned subsidiaries,
Investors' Yield, Inc. (IY) and Owens Securities Corporation
(OSC). The Company had ownership interests in IY and OSC of 75%
and 79%, respectively, as of December 31, 1996. The additional
ownership in IY and OSC was acquired during 1997. The primary
business of IY 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 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 balance sheet. 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
$1,840,000 invested in money market funds at December 31, 1997.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
(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 $2,994,000 for
the year ended December 31, 1997.
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 $421,000 for the year
ended December 31, 1997.
The Company is entitled to receive from OMIF a management fee of
up to 2.75% per annum of the average unpaid balance of OMIF's
mortgage loans at the end of each of the preceding twelve months
for services rendered as manager of OMIF. The maximum management
fee is reduced to 1.75% per annum if the Company has not
provided during the preceding calendar year any of the certain
services defined in the limited partnership agreement. Such fees
totaled approximately $3,879,000 for the year ended December 31,
1997.
The Company, at its sole discretion may, on a monthly basis,
adjust the management and servicing fees charged to OMIF as long
as they do not exceed the allowable limits calculated on an
annual basis. Even though the fees for a month may exceed
one-twelfth of the maximum limits, at the end of the calendar
year the sum of the fees collected for each of the twelve months
is equal to or less than the stated limits.
The Company receives late payment charges from borrowers who
make delinquent payments. Such charges are in addition to the
normal monthly loan payments and are recognized as revenue by
the Company when collected. Late payment fees earned on loans
serviced for OMIF totaled approximately $409,000 for the year
ended December 31, 1997.
In June 1996, the Financial Accounting Standards Board issued
Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. Statement
125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of
liabilities and provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that
are secured borrowings. The Company implemented Statement 125
effective January 1, 1997 which did not result in a material
impact on the Company's financial position.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
(d) Investment in Delinquent Loans
Prior to May 1, 1993, the Company purchased all interest
receivable and made 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. In 1993 the Company discontinued its practice of
purchasing receivables for delinquent interest for loans
originated on or after May 1, 1993 and, effective November 1,
1994, discontinued such practice on certain loans originated
prior to May 1, 1993. The outstanding balance of loans
originated for OMIF which were originated prior to May 1, 1993
and OFG has indicated it may continue its practice of purchasing
interest receivable totals approximately $4,542,000 as of
December 31, 1997.
The allowance for losses on the investment in delinquent loans
is maintained at a level considered by management to provide
adequately for potential losses related to purchases of
receivables for interest and advances of 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) Investment in Joint Venture
The Company accounts for its investment in joint venture under
the equity method of accounting. The joint venture investment in
real estate is carried at the lower of cost or estimated fair
value, less estimated costs to sell. The Company increases its
investment by advances made to the joint venture. Any profit
generated from the investment in joint venture is recorded as a
gain on sale of real estate.
(g) Real Estate Held for Sale
Real estate held for sale is carried at the lower of cost or
estimated fair value, less estimated costs to sell. 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.
After acquisition of the real estate, a valuation allowance may
be established to provide for estimated selling costs and any
subsequent declines in fair value. Such valuation allowances are
charged to provision for real estate held for sale in the
expense section of the statements of income. Any other operating
or holding costs associated with the ownership and operation of
real estate held for sale are charged to net rental operations
in the expense section of the statements of income. Net rental
operations includes rental income, operating expenses, and
interest costs of mortgages encumbering the real estate.
(2) Summary of Significant Accounting Policies, Continued
Effective January 1, 1996, the Partnership adopted the
provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121 (FAS 121),
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. The adoption of FAS 121 did
not result in a material impact on the Company's financial
position.
(h) Property and Equipment
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.
(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 for
financial institutions at 3.5% 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) Investment in Delinquent Loans and Allowance for Losses
Investment in delinquent loans include approximately $370,000 of
interest receivable purchased from OMIF and advances made on behalf of
borrowers on OMIF loans as of December 31, 1997. Interest receivables
purchased and advances made during 1997 on OMIF loans which are still
outstanding as of December 31, 1997 approximate $219,000.
(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 2010
and have interest rates ranging from 7.5% to 13.0%.
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.
(4) Trust Deeds, Continued
During 1997, the Company purchased two loans secured by second deeds of
trust from OMIF for $600,000 (face value). OMIF subsequently purchased
the property securing the loans at the senior lienholders trustee sale
for $1,350,000; thus, wiping out the Company's junior deeds of trust.
The Company recorded bad debt expense of $600,000 as a result of this
transaction.
(5) Receivables from Affiliates
Included in receivables from affiliates is a note receivable from a
shareholder of $21,399 at December 31, 1997. This receivable bears
interest at 9.5% and is due in December 2001.
Receivables of $2,000 at December 31, 1997 represent OMIF expenses paid
by the Company in December of each year and reimbursed by OMIF in
January. As of December 31, 1997, the Company has a $700,000 receivable
from OMIF which represents a deferred loan origination fee on a loan
originated by the Company and sold to OMIF during 1997.
(6) Investment in Limited Partnership
OMIF is engaged in the business of investing in real estate loans
secured by trust deeds. As of December 31, 1997, OMIF's total
investment in loans was approximately $174,715,000. 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 $401,493 as of December 31,
1997.
(7) Investment in Joint Venture
During 1996, the Company entered into a joint venture with Wood Valley
Development, Inc. (Woodvalley) where the company provides advances to
Woodvalley to purchase 34 lots located at the Carmel Valley Ranch and
develop single family homes.
Woodvalley entered into an option to purchase real property agreement
(Option Agreement) with Carmel Valley Ranch, L.P. (Carmel Valley), the
owners of the 34 lots. The Option Agreement states that Woodvalley has
the option to purchase a minimum of 8 lots per year. If the minimum is
not purchased, then the Option Agreement will be deemed terminated. The
purchase price for the lots is specified at $90,000 per lot. As of
December 31, 1997, Woodvalley had purchased 28 lots. The remaining 6
lots are expected to be purchased during fiscal year 1998.
The Company advances funds to Woodvalley to purchase the lots and for
the direct construction costs of developing the lots. The Company is
entitled to receive interest at a rate of prime plus 2% on the advances
to Woodvalley.
(7) Investment in Joint Venture, Continued
As WV-OMIF Partners, L.P. (a limited partnership between OMIF and
Woodvalley) is also developing 30 similar lots which are interspersed
among the 34 lots being developed by OFG and Woodvalley, WV-OMIF
Partners, L.P. is incurring the infrastructure costs which benefit all
64 lots, including the 34 lots being developed by the Company and
Woodvalley. To the extent that Woodvalley exercises its option to
purchase the lots, the Company and Woodvalley will reimburse WV-OMIF
Partners, L.P. their pro rata share of the infrastructure costs with
the funds received from the sale of the developed homes. As of December
31, 1997, the Company and Woodvalley had reimbursed $648,096 in
development costs to WV-OMIF Partners, L.P. The balance of development
costs due to WV-OMIF Partners, L.P. totals $102,579 as of December 31,
1997.
During 1997, the Company advanced $5,787,843 to Woodvalley which
includes $1,440,000 for the purchase of 28 lots and $4,347,843 for
direct construction costs. The Company and Woodvalley sold 17 homes in
1997 for proceeds of $9,026,485 and the net gain allocable to the
Company was $2,077,937 including interest of $309,015. In addition,
$7,287,604 was distributed to the Company in 1997.
Distributions of cash received from the sale of the homes are made in
the following priority: (1) to third parties, such as real property
taxes and assessments, lenders, contractors, etc.; (2) to OMIF for
reimbursement of the Company and Woodvalley's pro rata share of the
infrastructure costs, as each lot sells; (3) to reimburse the Company
in the amount of $90,000 per lot, as each lot sells; (4) to pay the
Company the interest on the cash advances in full, as each lot sells;
(5) to reimburse the Company for its out-of-pocket cash advances for
each lot, as each lot sells; and (6) the remainder to Woodvalley and
the Company at a rate of 30% to Woodvalley and 70% to the Company.
(8) Real Estate Held for Sale
Real estate held for sale at December 31, 1997 consists of the
following:
<TABLE>
<S> <C>
Industrial building, Oakland, California, net of valuation
allowance of $170,000 $ 667,158
Commercial building, Benicia, California, net of valuation
allowance of $160,000 323,489
Mini storage complex, Turlock, California 1,693,692
Industrial building, Pittsburg, California, net of valuation
allowance of $24,000 244,491
Motel property, Turlock, California, net of valuation allowance
of $61,000 510,298
Residential property, Sunnyvale, California 149,253
Residential property, Ione, California 72,323
-----------
$ 3,660,704
===========
</TABLE>
During 1997, the Company purchased three loans from OMIF in the total
amount of $613,400 for cash of $340,400 and a mortgage payable to OMIF
of $273,000. The Company then foreclosed on the loans and obtained
title to four properties providing security on the loans. One of the
properties was sold by the Company during 1997 for a gain of
approximately $42,000.
(9) Mortgages Payable
Mortgages payable are secured by properties acquired through loan
foreclosures and held for sale which have a net book value of
$2,928,830 as of December 31, 1997 (see note 8). Outstanding balances
at December 31, 1997 consist of the following:
<TABLE>
<S> <C>
Payable to OMIF, interest payable monthly at 8%, due on demand $ 1,450,000
Payable to OMIF, interest payable monthly at 8%, due on demand 492,549
Payable to affiliated investors, interest payable monthly at
10%, due on demand 415,000
Payable to OMIF, interest payable monthly at 8%, due on demand 273,000
------------
$ 2,630,549
============
</TABLE>
(10) Note Payable to Bank
The Company has a line of credit agreement with a bank which provides
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 $9,000,000, of which $6,022,375 was outstanding at
December 31, 1997. These borrowings are short-term in nature and are
repaid within a couple days once the related loans are sold to OMIF or
outside investors. The Company has the option to use up to $1,600,000
of the line of credit for general corporate purposes, including
short-term investments in certain real property assets which have been
pre-approved by the bank. At December 31, 1997, the Company had not
drawn funds under this option. Borrowings under this line of credit
bear interest at the bank's prime rate, which was 8.5% at December 31,
1997. The line of credit expires on May 31, 1998. Management expects to
renew the line of credit in the normal course of business.
(11) 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.
(12) Incentive Stock Options
Outstanding incentive stock options granted by the Company at an
exercise price of $44.96 per share totaled 4,000 as of December 31,
1997. Options exercised during the year ended December 31, 1997 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, 1998 through
2001. 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 1997 were issued in
exchange for notes receivable of $44,960. The aggregate outstanding
balance of notes receivable from shareholders of $312,221 as of
December 31, 1997 bears interest at 6% with a maturity date of March 1,
2008.
(13) 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.
(14) Loan Administration
As of December 31, 1997, the Company serviced 256 loans owned by
private and institutional investors, including OMIF. Such serviced
loans amounted to approximately $219,013,000 at December 31, 1997,
including approximately $174,715,000 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 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" means 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 subject 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, Larry Schultz, William C. Owens
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 16th day
of October, 1992.
GENERAL PARTNERS:
2221 Olympic Blvd. OWENS FINANCIAL GROUP, INC.
P. O. Box 2308 By: /s/ Larry R. Schultz
Walnut Creek, CA 94595
/s/ William C. Owens
/s/ Milton N. Owens
/s/ David Adler
/s/ Larry R. Schultz
/s/ David K. Machado
LIMITED PARTNERS: /s/ Larry R. Schultz
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, 2,000 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 ___________,
1998;
(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) ___________________________________
(include area code)
Business Telephone Number _____________________________________________________
(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 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
Owens Securities Corporation
- ---------------------------------------
Please PRINT Name and Title
- ---------------------------------------
Signature of Account Representative
- ---------------------------------------
Please PRINT Account Representative Name
<PAGE>
INDEX TO FINANCIAL STATEMENTS
OWENS MORTGAGE INVESTMENT FUND Page
Report of KPMG Peat Marwick LLP, Independent Auditors F-1
Balance Sheets-- December 31, 1997 and 1996 F-2
Statements of Income for the three-years ended
December 31, 1997, 1996 and 1995 F-3
Statements of Partner's Capital for the three-years ended
December 31, 1997, 1996 and 1995 F-4
Statements of Cash Flows for the three-years ended
December 31, 1997, 1996 and 1995 F-5
Notes to Financial Statements F-6
OWENS FINANCIAL GROUP, INC.
Report of KPMG Peat Marwick LLP, Independent Auditors F-19
Consolidated Balance Sheet-- December 31, 1997 F-20
Notes to Consolidated Balance Sheet F-21
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. 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:
<TABLE>
<S> <C>
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
</TABLE>
Item 32. Sales to Special Parties
Not Applicable
Item 33. Recent Sales of Unregistered Securities
Not Applicable
Item 34. Indemnification of Directors and Officers
Indemnification of the Partners, and any officer, director, employee,
agent, subsidiary or assign thereof, is provided for in Section IV.4 of
the Amended and Restated Limited Partnership Agreement which is
included in the Prospectus.
Item. 35. Treatment of Proceeds from Stock Being Registered
Not Applicable
Item 36. Financial Statements and Exhibits
(a) Financial Statements:
Owens Mortgage Investment Fund
Report of KPMG Peat Marwick LLP, Independent Auditors Balance
Sheets - December 31, 1997 and 1996
Statements of Income for the three years ended December 31,
1997, 1996 and 1995 Statements of Partners' Capital for the
three years ended December 31, 1997, 1996 and 1995 Statements
of Cash Flows for the three years ended December 31, 1997,
1996 and 1995 Notes to Financial Statements
Owens Financial Group, Inc,
Report of KPMG Peat Marwick LLP, Independent Auditors
Consolidated Balance Sheet -December 31, 1997
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, LLP with
Respect to Federal Income Tax Matters
23.1 Consent of A. Nick Shamiyeh
23.2 Consent of Wendel, Rosen, Black & Dean, LLP
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, 1997
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.
(5) 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. 4 to the Form
S-11 Registration Statement (No. 33-81896) and has duly caused this
Post-Effective Amendment No. 4 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Walnut Creek, State of California on
March 30, 1998.
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. 4 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/DAVID ADLER* General Partner of the Partnership and March 26, 1998
- ------------------------------
David Adler Director of the Corporate General Partner
/s/MILTON N. OWENS* General Partner of the Partnership and March 26, 1998
- -------------------------------
Milton N. Owens Director of the Corporate General Partner
/s/WILLIAM C. OWENS* General Partner of the Partnership and March 26, 1998
- -----------------------------
William C. Owens Director of the Corporate General Partner
/s/DAVID K. MACHADO* General Partner March 26, 1998
- ----------------------------
David K. Machado
OWENS FINANCIAL GROUP INC. Corporate General Partner March 26, 1998
By /s/ BRYAN H. DRAPER
- -------------------------------
Bryan H. Draper
Controller/Secretary
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE IV
OWENS MORTGAGE INVESTMENT FUND
MORTGAGE LOANS ON REAL ESTATE -- DECEMBER 31, 1997
Principal Amount
of Loans Subject
to Delinquent
Description Final Carrying Amount Principal or
Interest Rate Maturity date of Mortgages Interest
TYPE OF LOAN
<S> <C> <C> <C> <C>
Income Producing................ 6.875-14.50% Current to May, 2015 $165,201,582 $4,250,200
Single Family Residence......... 8.00-13.00% Current to Jun., 2001 2,088,606 184,000
Land 8.75-14.00% Current to Aug., 2002 7,424,419 802,200
------------ ----------
TOTAL $174,714,607 $5,236,400
============ ==========
AMOUNT OF LOAN
$0-250,000...................... 6.875-14.50% Current to Aug., 2005 $7,966,754 $ 267,862
$250,001-500,000................ 7.75-14.00% Current to Aug., 2010 15,112,207 1,194,973
$500,001-1,000,000.............. 7.50-14.00% Current to Apr., 2012 33,908,080 2,331,818
Over $1,000,000................. 7.50-12.75% Current to May, 2015 117,727,566 1,441,747
------------ ----------
TOTAL $174,714,607 $5,236,400
============ ==========
POSITION OF LOAN
First 6.875-14.50% Current to May, 2015 $161,275,350 $5,232,400
Second ......................... 10.00-13.50% Current to Dec., 2004 12,744,274 4,000
Third or all-inclusive
deeds of trust................. 10.00-11.00% Current to Apr., 2000 694,983 0
------------ ----------
TOTAL $174,714,607 $5,236,400
============ ==========
- ---------------
<FN>
NOTE 1: All loans are acquired from an affiliate of the Partnership, namely
Owens Financial Group, Inc., the Corporate General Partner.
</FN>
</TABLE>
<TABLE>
<S> <C>
NOTE 2: 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.........................................................................53,325,024
Foreclosures.....................................................................................2,501,308
Conversion to Unsecured Loan to Corporate General Partner................................... 902,357
Balance at end of period (12/31/95)...........................................................$151,350,591
Balance at beginning of period (1/1/96).............................................................$151,350,591
Additions during period
New mortgage loans..............................................................................51,365,781
Loan carried back on sale of real estate.................................................. 563,125
Subtotal.......................................................................................203,279,497
Deductions during period
Collection of principal.........................................................................46,976,563
Foreclosures.....................................................................................1,913,000
Conversion to Unsecured Loan to Corporate General Partner................................ 241,000
Balance at end of period (12/31/96)...........................................................$154,148,934
Balance at beginning of period (1/1/97).............................................................$154,148,934
Additions during period
New mortgage loans..............................................................................78,449,432
Loan carried back on sale of real estate................................................... 840,000
Subtotal.......................................................................................233,438,366
Deductions during period
Collection of principal.........................................................................55,444,410
Foreclosures............................................................................... 3,279,349
Balance at end of period (12/31/97)...........................................................$174,714,607
</TABLE>
During the years ended December 31, 1997, 1996 and 1995, the Partnership
refinanced loans totaling $6,562,000, $5,400,000 and $19,466,000, respectively,
thereby extending the maturity date.
During 1997, the Partnership sold five loans to the Corporate General Partner at
face values in the total amount of $1,213,000 comprised of cash of $940,000 and
an assumption of a loan in the amount of $273,000.
- --------------
NOTE 3: Included in the above loans are the following loans which exceed 3% of
the total loans as of December 31, 1997. There are no other loans which exceed
3% of the total loans as of December 31, 1997:
<TABLE>
<CAPTION>
Principal
Amount of
Loans Subject
Final Face Carrying to Delinquent
Interest Maturity Periodic Payment Prior Amount of Amount of Principal or
Description Rate Date Terms Liens Mortgages Mortgages Interest
----------- -------- -------- ----------------- ----- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial Retail Center, 10.0% 7/27/04 Interest only, None $5,344,002 $5,344,002 $0
So. Lake Tahoe, CA..... balance due at
maturity
Condominium Development 12.75% 6/1/99 Fixed amount of None $5,340,739 $5,340,739 $0
Incline Village, NV.... interest accrued
until August,
1998, then
interest only,
balance due at
maturity
Office Building 10.75% 4/10/2000 Interest only, None $6,636,587 $6,636,587 $0
San Francisco, CA balance due at
maturity
Office Building 10.50% 8/26/2000 Interest only, None $7,637,892 $7,637,892 $0
San Francisco, CA balance due at
maturity
</TABLE>
- ---------------
NOTE 4: All amounts reported in this Schedule IV represent the aggregate cost
for Federal income tax purposes.
NOTE 5: There are no write-downs or reserves on any of the individual loans
listed under Note 3 above.
<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, LLP with
Respect to Federal Income Tax Matters ..................
23.1 Consent of A. Nick Shamiyeh ............................
23.2 Consent of Wendel, Rosen, Black & Dean, LLP ............
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 DavidAdler, 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
Law Offices of
A. NICK SHAMIYEH
2221 Olympic Boulevard, Suite 100 San Francisco Branch Office
Walnut Creek, California 94595-0308 703 Market Street,
20th Floor San Francisco, CA
Telephone: (510) 935-9401 Telephone: (415) 777-0700
94103
Facsimile: (510) 935-9407
March 26, 1998
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. 4 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
March 26, 1998
Owens Mortgage Investment Fund,
a California Limited Partnership
2221 Olympic Boulevard
Walnut Creek, CA 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. 4 (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:
The following instruments:
The Amendment;
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
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.
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.
The representations of the General Partners that:
The Partnership is organized and will be operated in compliance with
the Partnership Agreement and the applicable state statutes governing limited
partnerships;
The Partnership was formed principally to make first, second, third,
wraparound and construction mortgage loans, and mortgage loans on leasehold
interests.
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;
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;
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
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.
I. 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:
The Partnership will be classified as a partnership rather than as an
association taxable as a corporation for federal income tax purposes.
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 the preparation of certain portions of the Amendment and expects to
continue to represent the General Partners in other matters; (ii) as of December
31, 1997, certain members of the firm owned or controlled an aggregate of
976,624 Units, none of which were received in connection with the preparation of
any offering of Units; and (iii) certain 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, 1997, is $941,000.
Very truly yours,
WENDEL, ROSEN, BLACK & DEAN, LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF A. NICK SHAMIYEH
With regard to the Post-Effective Amendment No. 4 to the Form S-11 Registration
Statement (No. 33-81896) to be filed with the Securities and Exchange Commission
on or about March 27, 1998, 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
Walnut Creek, California
March 26, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF WENDEL, ROSEN, BLACK & DEAN, LLP
With respect to the Post-Effective Amendment No. 4 to the Form S-11 Registration
Statement (No. 33-81896) to be filed with the Securities and Exchange Commission
on or about March 26, 1998, 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, LLP
Oakland, California
March 26, 1998
<PAGE>
EXHIBIT 23.3
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
March 26, 1998
<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 27,109,309
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 Post-Effective Amendment No. 4 to the
S-11 Registration Statement 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 30th day of March, 1998. 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
<PAGE>
$27,109,309
$250,000,000 Authorized Including Prior Subscriptions
LIMITED PARTNERSHIP UNITS
$1.00 per Unit
2,000 Units Minimum Investment ($2,000)
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
--------------------
PROSPECTUS
-------------------
_____________, 1998
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<PERIOD-START> JAN-01-1997
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