As filed with the Securities and Exchange Commission on January 27, 1999
Registration No. 33-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Form S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
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:
David Barry Whitehead
Thomas A. Latta
WHITEHEAD, PORTER & GORDON LLP
220 Montgomery Street, Suite 1850
San Francisco, California 94104
Approximate date of commencement of proposed sale to the public: As
soon as practicable following effectiveness of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
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 [ ]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=================== =============== ================ ================ =================
Title of Amount Being Proposed Maximum Proposed Maximum Amount of
Securities Being Registered Offering Price Aggregate Registration Fee
Registered Per Unit Offering Price
=================== =============== ================= ================ =================
<S> <C> <C> <C> <C>
Units of Limited 120,000,000 $1.00 $120,000,000 $35,400
Partnership Interest
===================== =============== ================= =============== =================
</TABLE>
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
-----------------
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY FORM S-11
Item Number and Caption Location in Prospectus
<S> <C>
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 Prospectus Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of Summary Risk Factors
Earnings to Fixed Charges
4. Determination of Offering Price *
5. Dilution *
6. Selling Security Holders *
7. Plan of Distribution Plan of Distribution
8. Use of Proceeds Use of Proceeds
9. Selected Financial Data Selected Financial Data
10. Management's Discussion and Analysis of 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; Risk Factors; Business;
Management; Summary of Partnership Agreement, Rights of
Limited Partners and Description of Units
12. Policy with Respect to Certain Activities Business; Compensation of General Partner; Summary of
Partnership Agreement, Rights of Limited Partners and
Description of Units; Reports to Limited Partners
13. Investment Policies of Registrant Management's Discussion and Analysis
of Financial Condition and Results of Operations;
Business; How the Partnership Protects Its Rights as
a Lender; Summary of Partnership Agreement, Rights of
Limited Partners and Description of Units
14. Description of Real Estate Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business
15. Operating Data *
16. Tax Treatment of Registrant and Its Security Holders Risk Factors; Federal Income Tax Consequences
17. Market Price of and Dividends on the Registrant's *
Common Equity and Related Stockholder Matters
18. Description of Registrant's Securities Summary of Partnership Agreement, Rights of Limited
Partners 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 Partner
23. Certain Relationships and Related Transactions Conflicts of Interest; Management; Business
24. Selection, Management and Custody of Registrant's Compensation of the General Partner; Business
Investments
25. Policies with Respect to Certain Transactions Risk Factors; Conflicts of Interest; Business; Summary
of Partnership Agreement, Rights of Limited Partners
and Description of Units
26. Limitations of Liability Fiduciary Responsibility; Summary of Partnership
Agreement, Rights of Limited Partners and Description
of Units
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 Fiduciary Responsibility
Indemnification for Securities Act Liabilities
30. Quantitative and Qualitative Disclosures About *
Market Risk
* Not Applicable
</TABLE>
<PAGE>
Prospectus
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
120,000,000
Units of Limited Partnership Interests
The Partnership
- --------------------
The Partnership primarily invests in mortgage loans on real estate and
leasehold interests. The Partnership began in 1984 and has offered and sold its
Units at $1.00 each under four previous SEC registration statements, beginning
in 1988. There are 199,373,258 Units held by 2,668 limited partners, as of
December 31, 1998.
The Offering
- --------------------
Offering is 120,000,000 Units for $120,000,000.
Price is $1.00 per Unit.
Minimum Purchase is 2,000 Units.
Offering is on a best-efforts basis - no sales commissions.
Proceeds to the Limited Partnership are a maximum of $120,000,000,
less expenses of the offering estimated not to exceed $140,600, and
there is no minimum offering amount.
The Risk Factors
- --------------------
See "Risk Factors" at page 6 for a discussion of these and other
significant risk factors associated with a purchase of Units:
Your ability to sell or transfer Units is limited and no market
exists.
You must hold your Units for one year before the Partnership
may repurchase them.
Repurchases of Units by the Partnership are subject to other
limitations.
You must place total reliance for operating the Partnership on the
General Partner.
The General Partner is subject to conflicts of interest with limited
partners.
Investments in real estate mortgages carry risks; for example,defaults
can occur in payments by the borrowers.
The Partnership primarily concentrates its investments in Northern
California commercial real estate mortgages.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the Units or passed upon the adequacy or
accuracy of this Prospectus. Any representation to the contrary is a criminal
offense.
The date of this Prospectus is January __, 1999.
<PAGE>
TABLE OF CONTENTS
COVER PAGE
SUMMARY.............................................1
SUMMARY FINANCIAL INFORMATION.......................5
RISK FACTORS........................................6
INVESTOR SUITABILITY STANDARDS.....................15
NOTICE TO CALIFORNIA RESIDENTS.....................16
HOW TO SUBSCRIBE...................................16
USE OF PROCEEDS....................................16
CAPITALIZATION OF PARTNERSHIP......................17
CAPITAL CONTRIBUTION OF THE GENERAL PARTNER........18
COMPENSATION OF THE GENERAL PARTNER................18
Compensation and Reimbursement from
the Partnership...............................18
Compensation from Borrowers...................19
CONFLICTS OF INTEREST..............................20
FIDUCIARY RESPONSIBILITY...........................22
MANAGEMENT.........................................23
Management of the Partnership.................23
Research and Acquisition......................24
Partnership Management........................24
Mortgage Investments..........................25
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT...................25
SELECTED FINANCIAL DATA............................26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......27
BUSINESS...........................................35
Delinquencies.................................37
Real Estate Owned.............................39
Principal Investment Objectives...............39
Types of Mortgage Loans.......................40
First Mortgage Loans..........................40
Second and Wraparound Mortgage Loans..........41
Third Mortgage Loans..........................41
Construction Loans............................41
Leasehold Interest Loans......................41
Variable Rate Loans...........................41
Interest Rate Caps............................42
Assumability..................................42
Prepayment Penalties..........................42
Balloon Payment...............................42
Equity Interests and Participation
In Real Property..............................43
Debt Coverage Standard for Mortgage Loans.....43
Loan Limit Amount.............................43
Mortgage Loans to Affiliates..................43
Purchase of Loans from Affiliates.............43
Borrowing.....................................43
Repayment of Mortgages on Sales of Properties.43
No Trust or Investment Company Activities.....44
Miscellaneous Policies and Procedures.........44
Competition and General Economic Conditions...44
Available Information.........................44
HOW THE PARTNERSHIP PROTECTS ITS RIGHTS
AS A LENDER........................................45
Introduction..................................45
General.......................................45
Parties to a Deed of Trust....................45
Foreclosure...................................45
Provisions in Deeds of Trust..................46
California Usury Law Not Applicable to
Partnership Mortgage Loans....................47
FEDERAL INCOME TAX CONSEQUENCES....................48
SUMMARY OF PARTNERSHIP AGREEMENT, RIGHTS OF
LIMITED PARTNERS AND DESCRIPTION OF UNITS..........60
Nature of the Partnership.....................60
The Responsibilities of the General Partner...60
Limitations of the General Partner............61
Liabilities of Limited
Partners-Nonassessability.....................61
Term and Dissolution..........................61
General Partner's Interest Upon Removal,
Withdrawal or Termination.....................62
Meetings......................................62
Voting Rights.................................62
Status of Units...............................62
Distributions.................................62
Reinvestments.................................63
Assignment and Transfer of Units..............64
Repurchase of Units, Withdrawal from
Partnership...................................64
Special Power of Attorney.....................65
REPORTS TO LIMITED PARTNERS........................65
PLAN OF DISTRIBUTION...............................66
LEGAL MATTERS......................................66
EXPERTS............................................67
FINANCIAL STATEMENTS..............................F-1
EXHIBITS
A. Amended and Restated Limited Partnership
Agreement...................................A-1
B. Subscription Agreement and Power of
Attorney....................................B-1
<PAGE>
SUMMARY
This Summary highlights some of the information from this Prospectus.
The summary is not complete and does not contain all of the information that you
should consider before investing in the Units. You should read the entire
Prospectus carefully, including the section, "Risk Factors," beginning at page
6, and the Financial Statements and Notes, beginning at page F-1.
The Partnership
The name of the Partnership is Owens Mortgage
Investment Fund, a California Limited Partnership."
It was organized in 1984, as a California limited
partnership. The date specified for termination of
the Partnership in the Partnership Agreement is
December 31, 2034.
The General Partner
The sole General Partner of the Partnership is Owens
Financial Group, Inc., a California corporation,
incorporated in 1981. Its executive offices and the
executive offices of the Partnership are at 2221
Olympic Boulevard, P.O. Box 2308, Walnut Creek,
California 94595, telephone (925) 935-3840.
Compensation to General
The General Partner receives substantial compensation
and fees for services to and for Partner the benefit
of the Partnership, in connection with its making and
arranging mortgage loans and the management of the
Partnership and its business. These include the
following:
Management fees paid by the Partnership,
Loan servicing fees paid by the Partnership, and
Loan origination fees (points) paid by the
borrowers.
The following table shows the fees paid by the
Partnership to the General Partner during the periods
indicated:
<TABLE>
<CAPTION>
Nine Months Year ended Year ended Year ended
Ended 9/30/98 12/31/97 12/31/96 12/31/95
<S> <C> <C> <C> <C>
Management Fees * $2,493,560 $3,879,454 $866,985 $1,431,616
Management fees as a % of the average unpaid
balance of loans (1998 - annualized) * 1.39% 2.34% 0.56% 0.97%
Servicing fees $356,829 $420,742 $384,004 $371,000
Servicing fees as a % of the average unpaid
balance of loans (1998 - annualized) 0.25% 0.25% 0.25% 0.25%
</TABLE>
* The management fees paid to the General Partner are determined by the General
Partner within the limits set by the Partnership Agreement. An increase or
decrease in the management fees paid directly impacts the yield paid to the
partners.
Conflicts of Interest
The General Partner will experience conflicts of
interest with the Partnership and its limited
partners in connection with the management of the
Partnership, including the following:
The General Partner and its affiliates will
have to allocate their time between the
Partnership and other activities they are
involved in.
The fees of the General Partner are not set by
arms'-length negotiations.
The Units Each Unit is a limited partnership interest in the
Partnership.
Units are Restricted as
to Sale and Transfer
Some of the factors that may prevent you from
transferring your Units include:
No public market exists for our Units, and we
do not expect one ever to develop.
Securities laws restrictions;
The application of the investor suitability
standards to the proposed transferees of your
Units;
Restrictions regarding the potential of the
Partnership to become a "publicly traded
partnership" under the Tax Code (generally a
partnership whose interests are publicly traded
or frequently transferred); and
Restrictions regarding potential termination of
the Partnership for tax purposes.
The Offering
The Partnership is offering for sale an additional
120,000,000 Units of limited partnership interests at
a purchase price per Unit of $1.00. The minimum
initial purchase under the offering is 2,000 Units
for $2,000. As of December 31, 1998, there are
199,373,258 Units outstanding held by 2,668 limited
partners. The Partnership is authorized to have
500,000,000 Units outstanding at any time. Owens
Securities Corporation, a California corporation and
wholly-owned subsidiary of the General Partner, is
acting as the best-efforts underwriter of the
offering, without commissions or other compensation.
There is no minimum number of Units to be sold in
this offering. At any time when there are not
suitable loans for the Partnership to invest
Partnership funds, the General Partner may suspend
the offer and sale of Units to new investors, as
happened at times in 1991, 1992, 1994, 1995 and 1998.
Investor Suitability
Standards
You must meet certain standards as an investor in
Units. These are imposed by the California
Commissioner of Corporations and other state
securities law administrators and by the General
Partner, since there are risks associated with
investment in the Units, including a lack of
liquidity of the investment. In summary, the
standards are:
You must have a net worth (exclusive of home, home
furnishings and automobiles) of at least $30,000
($50,000 in the State of Washington), and a minimum
annual gross income of at least $30,000 ($50,000 in
the State of Washington); or
Alternatively, a minimum net worth of $75,000
($150,000 in the State of Washington).
Tax Considerations
The Partnership has been treated since its inception,
for federal tax purposes, as a partnership and not an
association taxable as a corporation. In the opinion
of tax counsel to the Partnership, this tax treatment
will continue. A person considering a purchase of the
Units should consult his or her own tax advisor for
advice on other personal tax consequences that might
be associated with investment in the Units. See
"Taxation Risks", beginning at page 13, and "Federal
Income Tax Consequences", beginning at page 48 of
this Prospectus.
Purchase of Units
To Purchase Units you must complete and sign the
Subscription Agreement and Power of Attorney, which
is Exhibit B at page B-1 of this Prospectus. Then
send or deliver it to Owens Securities Corporation,
2221 Olympic Boulevard, P.O. Box 2400, Walnut Creek,
CA 94595, together with your check for the purchase
price of your Units. If your Subscription Agreement
is accepted, you are then an owner of the Units and a
limited partner of the Partnership. If you are not
accepted, your purchase payment will be returned to
you promptly.
Use of Offering Proceeds
If the maximum amount of this offering is sold, the
Partnership will receive $120,000,000, less expenses
of the offering estimated at not to exceed $134,600.
The offering proceeds will be received as Units are
3 sold.
Investment Objectives Our objectives are:
to maximize distributable net income to you; and to
preserve, protect and return your capital
contribution.
The General Partner may change these investment
objectives at its full discretion, but may not change
the nature of the Partnership's business as a
mortgage investment fund.
Distributions All net income available for distribution is paid
monthly to the partners on the last day of the
calendar month following the month in which the net
income is earned. Net income available for
distribution means taxable profits and losses reduced
by amounts set aside for the restoration or creation
of reserves and increased by the reduction or
elimination of reserves.
Profits or cash revenues come primarily from interest
on mortgage loans.
Distribution
Reinvestment Plan
The Partnership has an automatic Distribution
Reinvestment Plan that allows you to invest your
monthly distribution in our Units. If you elect this
automatic reinvestment plan, your election may be
changed by sending a written form obtained from the
Partnership.
If you elect to participate in the Distribution
Reinvestment Plan, you will be allocated your share
of the Partnership's taxable income even though you
did not receive cash distributions. The General
Partner could terminate this Plan for various reasons
listed later in this Prospectus. See "Summary of
Partnership Agreement, Rights of Limited Partners and
Description of Units", beginning at page 60 of this
Prospectus.
Partnership Agreement
Your rights and obligations in the Partnership and
your relationship with the General Partner will be
governed by the Partnership Agreement. Some of the
significant features of the Partnership Agreement
include:
A majority of limited partners may vote to:
amend the Partnership Agreement, subject to certain
limitations;
change our business purpose; and
remove and replace the General Partner.
In the event of any such vote, you will be bound by
the majority vote even if you did not vote with the
majority.
Mergers and Consolidations. We may not merge or
consolidate with any other partnership or corporation
without approval by a majority of limited partners.
For a more detailed discussion concerning the terms of the Partnership
Agreement please refer to the "Summary of Partnership Agreement, Rights of
Limited Partners and Description of Units" section of this Prospectus on page
60. If any statements in this Prospectus differ from the Partnership Agreement,
you should rely on the Partnership Agreement. The Partnership Agreement is
attached as Exhibit A.
<PAGE>
SUMMARY FINANCIAL INFORMATION
We are providing the following summary financial information about us
for your benefit. This information is derived from our audited financial
statements for each of the years 1995, 1996 and 1997 and the unaudited financial
statements for the nine calendar months ended September 30, 1998 and September
30, 1997, respectively. These financial statements and notes are contained in
this Prospectus, beginning at page F-1. You should read this Summary in
conjunction with the full financial statements.
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
------------------------------- -----------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans Secured by $176,446,203 $174,427,447 $174,714,607 $154,148,933 $151,350,591
Trust Deeds
Allowance for Loan $(3,500,000) $(3,500,000) $(3,500,000) $(3,500,000) $(3,250,000)
Losses
Total Assets $199,362,600 $189,705,135 $191,325,054 $177,376,018 $165,401,768
Liabilities $2,067,729 $686,512 $593,919 $535,914 $657,325
Partners' Capital $197,294,871 $189,018,623 $190,731,135 $176,840,104 $164,744,443
Total Revenues $16,106,614 $16,025,817 $21,325,850 $16,824,479 $16,415,301
Operating Expenses $3,058,303 $3,731,383 $5,905,603 $2,066,067 $2,923,926
Net Income $13,048,311 $12,294,434 $15,420,247 $14,758,412 $13,491,375
Net Income $12,919,120 $12,174,938 $15,266,045 $14,611,452 $13,355,791
Allocated to
Limited Partners
Percent of Net 6.6% 6.6% 8.2% 8.5% 8.3%
Income Allocated to
Limited Partners
per Limited
Partnership Unit
Distribution per 8.4% 8.7% 8.7% 8.7% 8.8%
Partnership Unit
(Yield)*
</TABLE>
- ----------
* Distribution per Partnership Unit (yield) is the average of the monthly yield
paid to the partners for the period indicated. The monthly yield is calculated
by dividing the total monthly distribution to the partners by the prior month's
ending partners' capital balance.
<PAGE>
67
RISK FACTORS
There are risks associated with investing in the Partnership, most of
which the General Partner does not control, such as trends in the economy,
general interest rates, income tax laws, governmental regulations, and the
availability of satisfactory investment opportunities. Also, you cannot properly
evaluate whether to invest in the Partnership without careful analysis of your
own investment objectives. Accordingly, it is important for you to discuss
investment in the Partnership with your own professional advisors.
Forward Looking Statements
Some of the information in this Prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
words such as "may," "will," "expect," "anticipate," "estimate," "continue" or
other similar words. These statements discuss future expectations, contain
projections of results of operations or of financial conditions or state other
forward-looking information. When considering such forward-looking statements
you should keep in mind the risk factors and other cautionary statements in this
Prospectus. Although management of the Partnership believes that the
expectations reflected in such forward-looking statements are based on
reasonable assumptions, there are certain factors, in addition to these risk
factors and cautioning statements, such as general economic conditions, local
real estate conditions, or weather and other natural occurrences that might
cause a difference between actual results and those forward-looking statements.
Risks of Real Estate Mortgage Loans
The Partnership invests in mortgage loans secured by real property and
mortgage loans on leasehold interests. Therefore, it is subject to the
risks usually associated with real estate financing, such as the
following:
Risks of Default by Borrowers
Since most of the assets of the Partnership are mortgage loans,
defaults by borrowers under those loans can have adverse consequences
to the Partnership's income. Examples of these are the following:
Properties foreclosed upon may not generate sufficient income from
operations to meet expenses and other debt service;
Operation of foreclosed properties may require the Partnership to
spend substantial funds for an extended period;
Subsequent income and capital appreciation from the foreclosed
properties to the Partnership may be less than competing investments;
The proceeds from sales of foreclosed properties may be less than the
Partnership's investment in the properties;
Construction mortgage loans are riskier than loans secured by
properties with an operating history. To reduce this risk, the
Partnership may:
Require prior commitments for permanent financing;
Require completion or performance bonds to ensure completion of
construction;
Hold back loan proceeds under a permanent loan until construction is
completed.
Loans secured by leasehold interests are riskier than loans secured by
real property because the loan is subordinate to the lease between the
property owner (lessor) and the borrower. However, the Partnership
normally obtains a consent from the lessor which among other things
enables it to cure any defaults under the lease.
Second, third and wraparound mortgage loans (those under which the
Partnership generally makes the payments to the holders of the prior
liens) are riskier than first mortgage loans because of:
Their subordinate position in the event of default;
There could be a requirement to cure liens of a senior loan holder
and, if not done, the Partnership would lose its entire interest in
the loan.
Risks of Large Loans
The Partnership's loans have an average face value of $887,000 as of
September 30, 1998. In situations where the Partnership has funds to
invest in loans and relatively smaller loans are not available, it may
be required to invest in loans of a higher amount than the present
average. This would decrease the diversification of Partnership loans
and increase the risk of losses through delinquencies.
Risk from the General Partner Not Purchasing Defaulted Receivables and
Loans
The General Partner has in the past relieved the Partnership of some of
the risks of defaults in loans by purchasing the Partnership's interest
receivables and/or principal on delinquent loans. This no longer
occurs, except in limited situations on loans originated prior to May
1993. This increases the risk to the Partnership of material losses in
income and assets, which could reduce distributions to limited
partners.
The Partnership maintains in its financial statements, as of September
30, 1998:
A $3,500,000 loan loss reserve; and
A $1,184,000 reserve for losses on real estate acquired through
foreclosure.
The General Partner believes these reserves are adequate as of
September 30, 1998.
Risks of Incorrect Original Collateral Assessment (Valuation)
Appraisals are obtained from certified third party appraisers on all
properties securing trust deeds prior to the origination of the loan.
However, there is a risk that the appraisals prepared by these third
parties are incorrect, which could result in defaults and/or losses
related to these loans.
Risks of Unexpected Declines in Values of Secured Properties
Loan to Value Ratios are Used
The Partnership generally makes its loans with the following maximum
loan to appraised value ratios:
First Mortgage Loans ---
80% of improved residential property,
50% of unimproved property,
75% of commercial property;
Second and Wraparound Loans ---
total indebtedness of 75%; and
Third Mortgage Loans --
total indebtedness of 70%.
Values of properties can decline below their appraised values during
the term of the associated Partnership loans. In addition, appraisals
are only opinions of the appraisers of property values at a certain
time. Material declines in values could result in Partnership loans
being undersecured with subsequent losses if such loans must be
foreclosed. The General Partner may vary from the above ratios in
evaluating loan requests in its sole discretion.
Risks Related to Short Term Loans
Most of the Partnership's loans mature within one to seven years. For
that reason, the General Partner does not regularly examine loans to
see if the original loan to appraised values are being maintained.
Instead, it reviews a loan if there is a delinquency or indication of
possible decline in the market value of the secured property. The
review then takes into consideration other relevant factors to the
adequacy of the Partnership's security such as:
Physical evaluation of the property and area where it is located;
Property occupancy and vacancy experience;
Tenant mix and quality; and
Financial stability of the borrower.
Risks Related to Change in Market Interest Rates
About 62% of the Partnership's loans as of September 30, 1998 are
fixed-interest rate loans. Market interest rates on investments
comparable to the Units could materially increase above the general
level of the Partnership's fixed-rate loans. Distributions by the
Partnership could then be less than the yield obtainable by the
limited partners from these other investments.
On Partnership loans with variable interest rates, a decrease in
market interest rates could lower the yields of these Partnership
loans. New mortgage loans of the Partnership might be made at lower
interest rates as well.
These risks increase as the length of maturity of a Partnership loan
increases and the amount of Partnership cash available for new loans
decreases.
Risks of Equity or Cash Flow Participation in Loans
The Partnership sometimes obtains participation in any appreciation
in value or the cash flow from a secured property. If a borrower
defaults and claims that this participation makes the loan comparable
to equity (like stock) in a joint venture, the Partnership might lose
its secured position as lender in the property. Other creditors of
the borrower might then wipe out or substantially reduce the
Partnership's investment. The Partnership could also be exposed to
the risks associated with being an owner of real property.
Controls on a borrower imposed by Partnership loans may also increase
the risk of claims of liability as lender against the Partnership for
wrongful acts of the borrower.
Risks of Uninsured Losses
Partnership loans require that borrowers carry adequate hazard
insurance for the benefit of the Partnership. Some events are however
either uninsurable or insurance coverage is economically not
practicable. Losses from earthquakes, floods or mudslides, for
example, which occur in California, may be uninsured and cause losses
to the Partnership on entire loans. No such loan loss has occurred to
date.
If a borrower allows insurance to lapse, an event of loss could occur
before the Partnership knows of the lapse and has time to obtain
insurance itself.
Insurance coverage may be inadequate to cover property losses, even
though the General Partner imposes insurance requirements on
borrowers that it believes are adequate.
Proceeds of this Offering are Not Committed to Specific Loans
The Partnership's assets are presently invested primarily in a
portfolio of mortgage loans. Depending upon the total amount of the
proceeds that are received from this offering, the Partnership will
invest in additional loans. The General Partner has sole authority and
control to choose loans for the Partnership, including their type and
amount. Limited partners will be informed concerning the Partnership's
loan portfolio in annual reports provided by the General Partner.
Risks of Real Estate Ownership After Foreclosures
When the Partnership acquires property by foreclosure or otherwise, it
has economic and liability risks as the owner, such as:
Earning less income on foreclosed properties than could be earned on
mortgage loans;
Keeping the property leased by tenants;
Controlling operating expenses;
Coping with general and local market conditions;
Complying with changes in laws and regulations pertaining to taxes,
use, zoning and environmental protection; and
Possible liability for injury to persons and property.
The Partnership will carry insurance over hazards and contingencies
that it can reasonably obtain as an owner.
Risks of Real Estate Development on Property Acquired by the
Partnership
When the Partnership has acquired property by foreclosure or otherwise
as a lender, it may develop the property, either singly or in
combination with other persons or entities. This could be done in the
form of a joint venture, limited liability company or partnership, with
the General Partner and/or unrelated third parties. This development
can create the following risks:
Reliance upon the skill and financial stability of third-party
developers and contractors;
Inability to obtain governmental permits;
Delays in construction of improvements;
Increased costs during development; and
Economic and other factors affecting sale or leasing of developed
property.
Risks Related to Concentration of Mortgages in Northern California
Northern California real estate secures more than half of the total
mortgage loans held by the Partnership as of September 30, 1998.
Northern California consists of Monterey, Kings, Fresno, Tulare and
Inyo counties and all counties north of those. This concentration may
increase the risk of delinquencies on our loans when Northern
California real estate or economic conditions are weaker than
elsewhere, for reasons such as:
economic recession in that area;
overbuilding of commercial properties; and
relocations of businesses outside the area, due to factors such as
costs, taxes and regulatory environment.
These factors also tend to make more commercial real estate available
on the market and reduce values, and suitable mortgages could be less
available to the Partnership. In addition, such factors could tend to
increase defaults on existing loans.
Recently, Northern California unemployment is at low levels, and
generally there is strong demand for commercial and residential
properties. This should result in more real estate financing and
mortgages suitable as Partnership investments. Economic conditions
change, however, and the concentration by the Partnership in Northern
California may expose it to greater risks than if it were more
diversified.
Hazardous or Toxic Substance Risks
Various federal, state and local laws can impose liability on owners,
operators, and sometimes lenders for the cost of removal or remediation
of certain hazardous or toxic substances on property. Such laws often
impose liability whether or not the person knew of, or was responsible
for, the presence of the substances.
When the Partnership forecloses on a mortgage loan, it becomes the
owner of the property. As owner, the Partnership could become liable
for remediating any hazardous or toxic contamination, which costs could
exceed the value of the property. Other costs or liabilities that could
result include the following:
damages to third parties or a subsequent purchaser of the property;
loss of revenues during remediation;
loss of tenants and rental revenues;
payment for clean up;
substantial reduction in value of the property;
inability to sell the property; or
default by a borrower if it must pay for remediation.
Any of these could create a material adverse affect on Partnership
assets and/or profitability.
Lack of Liquidity Risks
General
You may not be able to obtain cash for Units you own on a timely basis.
There are a number of restrictions on your ability to sell or transfer
your Units or to have them repurchased by the Partnership. These are
summarized in this Risk Factor. For further discussion, please refer to
page 60, under the caption "Summary of Partnership Agreement, Rights of
Limited Partners and Description of Units."
No Free Tradability of Units
The Units are restricted as to free tradability under the Federal
Income Tax Laws. In order to preserve the Partnership's status as a
limited partnership and prevent being taxable as a corporation, you
will not be free to sell or transfer your Units at will, and they are
likely not to be accepted by a lender as security for borrowing.
There is no market for the Units, public or private, and there is no
likelihood that one will ever develop.
You must be prepared to hold your Units as a long-term investment.
To comply with applicable tax laws, the General Partner may refuse on
advice of tax counsel to consent to a transfer or assignment of Units.
The General Partner must consent to any assignment that gives the
assignee the right to become a limited partner, and its consent to that
transaction may be withheld in its absolute discretion.
The California Commissioner of Corporations has also imposed a
restriction on sale or transfer because of the investor suitability
standards that apply to a purchaser of Units. Refer to the section
beginning at page 15, under the caption "Investor Suitability
Standards".
Repurchase of Units By the Partnership is Restricted
If you purchase Units pursuant to the offering made by this Prospectus,
you must own them for at least one year before you can request the
Partnership to repurchase any of those Units. This restriction does not
apply to Units purchased through the Partnership's Distribution
Reinvestment Plan. Some of the other restrictions on repurchase of
Units are the following:
You must give a written request to withdraw at least 60 days prior to
the withdrawal;
Payments only return all or the requested portion of your Capital
Account and are not affected by the value of the Partnership's
assets, except upon final liquidation of the Partnership;
Payments are made only to the extent the Partnership has available
cash;
There is no reserve fund for repurchases;
You may withdraw a maximum of $100,000 during any calendar quarter;
The total amount withdrawn by all limited partners during any
calendar year cannot exceed 10% of the aggregate capital accounts of
the limited partners.
Payments are only made by the Partnership on the last day of any
month.
If the Partnership does not sell sufficient Units in this offering or
if principal payments on existing loans decrease, your ability to have
your Units repurchased may be adversely affected, especially if the
total amount of requested withdrawals should increase substantially. To
help prevent lack of such liquidity, the Partnership will not refinance
or invest in new loans using payments of loan principal by borrowers or
new invested capital of limited partners, unless it has sufficient
funds to cover requested withdrawals.
Risks of Lack of Control By Limited Partners
Rights of Limited Partners Are Restricted
No limited partner can exercise control over the Partnership's affairs,
which is entirely in the hands of the General Partner. Voting of
limited partners is provided for in a limited number of specific
situations. A majority-in-interest of limited partners can take action
in those situations and bind the minority-in-interest of the limited
partners. These situations include votes to:
dissolve the Partnership,
change the nature of the Partnership's business,
remove and replace the General Partner,
amend the Partnership Agreement, or
approve a merger or sale of all of the assets of the Partnership.
Risk If Sole General Partner Withdraws or is Terminated
The Partnership presently has only one General Partner. If the General
Partner withdraws from the Partnership or is terminated as General
Partner by its dissolution or bankruptcy, the Partnership itself will
be dissolved unless:
The limited partners, acting by a majority-in-interest agree to
continue the Partnership and, within 6 months, admit one or more
successor General Partners.
Conflicts of Interest Risks
The General Partner and its affiliates are subject to various conflicts
of interest in managing the Partnership. The Partnership pays the
General Partner substantial fees that are not determined by
arms'-length negotiations.
Payment of Fees to General Partner
Investment evaluation fees to the General Partner are generally payable
up front from payments made by third party borrowers. The Partnership
pays a servicing fee monthly to the General Partner. The management
fees paid to the General Partner are determined by the General Partner
within the limits set by the Partnership Agreement. These are
obligations of the Partnership. Accordingly, the General Partner may
continue to receive these fees even if the Partnership is generating
insufficient income to make distributions to the limited partners. In
addition, if the maximum management fees were charged by the General
Partner in the future, yields paid to the partners could be reduced.
The limited partners must rely on the fiduciary duty of the General
Partner to deal fairly with the limited partners in those situations.
General Partner Not Full Time
The Partnership does not have its own officers, directors, or
employees. The General Partner supervises and controls the business
affairs of the Partnership, locates investment opportunities for the
Partnership and renders certain other services. The General Partner
devotes only such time to the Partnership's affairs as may be
reasonably necessary to conduct its business. The General Partner may
be a general partner of other partnerships and have other business
interests of significance.
Competition Risks
The mortgage lending business is highly competitive, and the
Partnership competes with numerous established entities, some of which
have more financial resources and experience in the mortgage lending
business than the General Partner. 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. Any general increase in the
availability of funds to mortgage lenders may increase competition for
loans and could reduce the yields they produce, including those of the
Partnership.
Taxation Risks
General
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. You
should discuss investment in the Partnership's Units with your own tax
advisor.
Risks of Taxation as a Corporation
Tax counsel to the Partnership has given its opinion that under
Treasury Regulations adopted in 1996, the Partnership will retain its
previous classification as a partnership for tax purposes. Tax counsel
has also given its opinion that the Partnership will not be classified
as a "publicly traded partnership", taxable as a corporation.
Of course, it is possible that this treatment might change because of
future changes in tax laws or regulations. The Partnership will not
apply for a ruling from the IRS that it agrees with tax counsel's
opinion.
If the Partnership were taxable as a corporation, it would be subject
to federal income tax on its taxable income at regular corporate tax
rates. The limited partners would then not be able to deduct their
share of the Partnership's deductions and credits. They would be taxed
on their share of the Partnership's income or the gain in excess of the
tax basis of their Units. Taxation as a corporation would result in a
reduction in yield and cash flow, if any, of the Units.
Other Risks Related to Taxation
In evaluating an investment in the Units, you should consider these
other tax consequences:
The possibility that the Partnership might be considered not to be
engaged in a trade or business - the result being that your share of
expenses would be deductible only to the extent all your other
"miscellaneous itemized deductions" exceed 2% of your adjusted gross
income.
The possibility that interest on any financing used to purchase Units
may not be deductible under the "investment interest" limitation of
the tax code.
The possibility that an audit of the Partnership's returns may result
in the disallowance of certain deductions, an increase in gross
income and an audit of limited partners' tax returns.
The possibility that any loan the Partnership makes with
participation in any appreciation of the secured property or its cash
flow would be re-characterized by the IRS as equity, requiring the
Partnership to recognize income, gain and other items from the
property.
The possibility that state or local income tax treatment might not be
the same as federal income tax treatment.
The possibility that all or a portion of Partnership income might be
deemed "unrelated trade or business income" subjecting tax-exempt
entities to tax who are investors in the Units.
Other Risks to Tax-Exempt Entities
Prospective investors which are qualified employee benefit plans and
individual retirement accounts should consider a number of factors that
might affect their investment in the Units, including whether an
investment in the Units:
would comply with the "prudent man" rule of ERISA;
would be consistent with the requirement that the assets of a
Qualified Plan be invested in a diversified manner; and
would be consistent with the liquidity needs of the investor.
<PAGE>
INVESTOR SUITABILITY STANDARDS
You must meet the investor suitability standards in this section to
purchase Units and to participate in the Partnership's Distribution Reinvestment
Plan. In addition, the Partnership and certain states have placed various
restrictions on the resale or transfer of Units.
The Subscription Agreement, which is Exhibit B to this Prospectus,
outlines the suitability standards and requests the disclosure from each
investor that it meets the minimum standards. The General Partner reviews and
screens all Subscription Agreements, and rejects Subscription Agreements from
investors not meeting the suitability standards. Owens Securities Corporation,
which will offer and sell Units for the Partnership, must diligently inquire of
all prospective investors to ascertain if the Units are suitable for the
investor and to promptly transmit all completed Subscription Agreements to the
General Partner.
Units represent a long-term investment with limited liquidity. You may
not be able to liquidate your investment in the event of an emergency or for any
other reason. Units will be sold to you only if you have, and you also represent
in the Subscription Agreement that you have, either:
a minimum net worth (exclusive of home, home furnishings and
automobiles) of $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);
a minimum net worth (exclusive of home, home furnishings and
automobiles) of $75,000 ($150,000 in the state of Washington)
irrespective of annual gross income; or
in the case of purchases by fiduciary accounts, a fiduciary that
meets one of the foregoing conditions.
If the investment is a gift to a minor, the custodian or the donor must
meet the above conditions.
In certain states, you may transfer Units only to persons who meet
similar suitability standards. You should carefully read the requirements in
connection with resales of Units in "Summary of Partnership Agreement, Rights of
Limited Partners and Description of Units--Assignment and Transfer of Units" at
page 64, and in the Subscription Agreement.
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" at page 48. 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 Partnerships and foundations, and charitable, religious,
scientific or educational organizations (assuming the provisions
of their governing instruments and the nature of their tax
exemptions permit such investment); and
persons seeking current taxable income.
It should be noted, however, that an investment in the Partnership will
not create an IRA for you and that, in order to create an IRA, you must 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 applicable regulations, the General Partner intends to manage
the Partnership to assure that an investment in the Partnership by a Qualified
Plan will not make the assets of the Partnership "plan assets." The regulations
are also applicable to an IRA. See "Federal Income Tax Consequences" at page 48.
The General Partner is not permitted to allow any Qualified Plan to
purchase Units if the General Partner has investment discretion with respect to
the assets of the Qualified Plan invested in the Partnership, or regularly gives
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.
You should obtain the advice of your attorney, tax advisor, and/or
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 therefore,
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 Commissioner of
Corporations is furnished to each California investor by the General Partner.
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 Corporation,
P.O. Box 2400, 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, a California Limited Partnership." Additional copies of the
Subscription Agreement may be obtained from Owens Securities Corporation.
USE OF PROCEEDS
The General Partner 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. 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 Partner. The
General Partner has complete discretion in investing the proceeds from the sale
of Units, subject to certain limitations set forth in the Partnership Agreement.
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 Partner, any adverse
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 sales proceeds of the maximum number of
Units being offered. 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, certificates of deposit or commercial paper.
<TABLE>
<CAPTION>
Maximum Offering
(120,000,000 Units
to be Sold)
--------------------------------------------------
Amount Percent of
Offering
<S> <C> <C>
Gross Offering Proceeds....................................... $ 120,000,000 100.00%
Less:
Public Offering Expenses (1).................................. 140,600 0.12%
-------------- ---------
Proceeds Available for Investment............................. $ 119,859,400 99.88%
Less:
Cash Reserves (2)............................................. 1,800,000 1.50%
---------------- -------
Cash Available for Investment in Mortgage Loans (3) $ 118,059,400 98.38%
- --------
<FN>
(1) Includes legal, accounting, printing and other expenses of this
offering, estimated not to exceed this amount.
(2) The Partnership has contingency reserves of at least 1-1/2% of the
aggregate capital accounts of the limited partners. 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 Partner will make a capital
contribution in the amount of 1/2 of 1% of the aggregate capital
accounts of the limited partners. This capital contribution is
available as an additional contingency reserve, making the total
reserves equal to 2% of the aggregate capital accounts of limited
partners.
(3) The General Partner has not set the amount of sales 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
General Partner. See "Business--Principal Investment Objectives" at
page 39. The Partnership intends to continue its current investment
policies. It is expected that the majority of the funds will be
invested in first mortgage loans on income-producing commercial
properties. The Partnership does not expect to use any of the proceeds
of this offering to acquire assets other than in the ordinary course of
its business.
</FN>
</TABLE>
CAPITALIZATION OF PARTNERSHIP
The capitalization of the Partnership as of September 30, 1998, 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 Partner,
is as follows:
Actual As Adjusted(1)
Units ($1.00 per Unit) 195,544,332 315,544,332
- -------------
(1) Amounts before payment of certain estimated public offering expenses
aggregating an estimated $140,600.
CAPITAL CONTRIBUTION OF THE GENERAL PARTNER
The General Partner is required to contribute to capital 1/2 of 1% of
the aggregate capital accounts of the limited partners and, as of September 30,
1998, has contributed $995,622. In addition, the General Partner is entitled to
a promotional interest of 1/2 of 1% of the aggregate capital accounts of the
limited partners. As of September 30, 1998, the General Partner had been
credited with $995,622 of promotional interests. If the maximum 120,000,000
Units is sold in the present offering, the General Partner will contribute an
additional $600,000 and will be credited with an additional $600,000 in
promotional interests. If less than the maximum number of Units is sold, those
amounts will be correspondingly less.
COMPENSATION OF THE GENERAL PARTNER
The General Partner receives various forms of compensation and
reimbursement of expenses from the Partnership and compensation from borrowers
under mortgage loans held by the Partnership.
Compensation and Reimbursement from the Partnership
Management Fees
The Partnership pays the General Partner a management fee monthly that
cannot exceed 2 3/4% annually of the average unpaid balance of the Partnership's
mortgage loans at the end of each of the 12 months in the calendar year. Since
this fee is paid monthly, it could exceed 2 3/4% in one or more months, but the
total fee in any one year is limited to a maximum of 2 3/4%, and any amount paid
above this must be repaid by the General Partner to the Partnership. The General
Partner is entitled to receive a management fee on all loans, including those
that are delinquent. The General Partner believes this is justified by the added
effort associated with such loans. The management fees may vary from month to
month and are at the discretion of the General Partner.
Until the Partnership Agreement was amended in December 1998 with the
approval of a majority-in-interest of the limited partners, the General
Partner's management fee was limited to 1 3/4% in any calendar year in which it
did not purchase any delinquent interest receivables or underlying delinquent
loans from the Partnership. The General Partner has generally ceased such
purchases and that former limitation no longer applies.
Servicing Fees
The General Partner has serviced all of the mortgage loans held by the
Partnership and expects to continue this policy. The Partnership Agreement
permits the General Partner to receive from the Partnership a monthly servicing
fee of 1/4 of 1% per annum of the unpaid balance of mortgage loans held by the
Partnership.
Promotional Interest
The General Partner receives a promotional interest of 1/2 of 1% of
the aggregate capital accounts of the limited partners, which is additional
compensation to the General Partner. In addition, the General Partner could
receive additional distributions of Partnership income from its promotional
interest. For example, if the Partnership generates an annual yield on capital
of the limited partners of 10%, the General Partner would receive additional
distributions on its promotional interest of approximately $150,000 per year if
$300,000,000 of Units were outstanding. If the Partnership were liquidated, the
General Partner could receive up to $1,500,000 in capital distributions without
having made equivalent cash contributions as a result of its promotional
interest. These capital distributions, however, will be made only after the
limited partners have received 100% of their capital contributions.
Reimbursement of Other Expenses
The General Partner is reimbursed by the Partnership for the actual
cost of goods and materials used for or by the Partnership and obtained from
unaffiliated entities and the actual cost of services of non-management and
non-supervisory 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 Partner
also receives compensation from borrowers under the mortgage loans placed by the
General Partner with the Partnership.
Investment Evaluation Fees
Investment evaluation fees, also called mortgage placement fees or
points, are paid to the General Partner from the borrowers under loans held by
the Partnership. These fees are compensation for the evaluation, origination,
extension and refinancing of loans for the borrowers. The amount of these fees
is determined by competitive conditions and may have a direct effect on the
interest rate borrowers are willing to pay the Partnership.
Late Payment Charges
All late payment charges paid by borrowers of delinquent mortgage
loans, including additional interest and late payment fees, are retained by the
General Partner.
Table of Compensation and Reimbursed Expenses
The following table summarizes the compensation and reimbursed expenses
paid to the General Partner or its affiliates for the nine months ended
September 30, 1998 and 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 Partner during these periods. The
fees were established by the General Partner and were not determined by
arms'-length negotiation.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ -----------------
Form of Compensation Actual Maximum Actual Maximum
Allowable Allowable
<S> <C> <C> <C> <C>
Management Fees*..................... $ 2,494,000 $ 3,531,000 $ 3,879,000 $ 4,614,000
Promotional Interest................. 38,000 38,000 71,000 71,000
------------- ------------- ------------- -------------
Subtotal............................. $ 2,532,000 $ 3,569,000 $ 3,950,000 $ 4,685,000
----------- ----------- ----------- -----------
Reimbursement of Other Expenses...... $ 94,000 $ 94,000 $ 57,000 $ 57,000
------------- ------------- ------------- -------------
Total $ 2,626,000 $ 3,663,000 $ 4,007,000 $ 4,742,000
=========== =========== =========== ===========
Investment Evaluation Fees........... $ 1,341,000 $ 1,341,000 $ 2,994,000 $ 2,994,000
Servicing Fees....................... 357,000 357,000 421,000 421,000
Late Payment Charges................. 292,000 292,000 409,000 409,000
------------- -------------- -------------- --------------
Total $ 1,990,000 $ 1,990,000 $ 3,824,000 $ 3,824,000
=========== =========== =========== ===========
- -------
<FN>
* The management fees paid to the General Partner are determined by the General
Partner within the limits set by the Partnership Agreement. An increase or
decrease in the management fees paid directly impacts the yield paid to the
partners.
</FN>
</TABLE>
Aggregate actual compensation paid by the Partnership and by borrowers
to the General Partner during the nine months ended September 30, 1998 and the
year ended December 31, 1997, exclusive of expense reimbursement, was $4,522,000
and $7,774,000, respectively, or 2.3% and 4.1%, respectively, of partners'
capital. If the maximum amounts had been paid to the General Partner during
these periods, the compensation, excluding reimbursements, would have been
$5,559,000 and $8,509,000, respectively, or 2.8% and 4.5%, respectively, of
partners' capital, which would have reduced net income allocated to limited
partners by approximately 7.9% and 4.8%, respectively.
The General Partner believes that the maximum allowable compensation
payable to the General Partner is commensurate with the services provided.
However, in order to maintain a competitive yield for the Partnership, the
General Partner in the past has chosen not to take the maximum allowable
compensation. If it chooses to take the maximum allowable, the amount of net
income available for distribution to limited partners would be reduced during
each such year.
CONFLICTS OF INTEREST
The Partnership and its limited partners are subject to various
conflicts of interest arising out of their relationship with the General
Partner. These conflicts include, but are not limited to, the following:
General Partner's Investment Evaluation Fees and Servicing Fees
For the evaluation, origination, extension and refinancing of
Partnership mortgage loans, the 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 General
Partner also receives from the Partnership a monthly servicing fee of 1/4 of 1%
per annum of the unpaid principal balance of mortgage loans. The mortgage
placement fees charged to the borrowers may directly effect the interest rate
that borrowers are willing to pay, as these fees are a cost of the loan made by
the Partnership. If mortgage placement fees charged to the borrower by the
General Partner are lower than those customarily charged for similar services,
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 the Partnership's loans.
General Partner's Management Fees
The General Partner's management fees are determined by the General
Partner, within the maximum amount permitted under the Partnership Agreement,
which is 2 3/4% per year of the average unpaid balance of the Partnership's
mortgage loans. The higher the percentage paid to the General Partner, the lower
the annual yield on capital of the limited partners. For the years 1995, 1996
and 1997 and the nine months ended September 30, 1998, the management fees were
0.97%, 0.56%, 2.34% and 1.39% of the average unpaid balance of mortgage loans,
respectively.
Compensation of the General Partner Not Negotiated
The compensation payable to the General Partner was not determined by
arms'-length negotiations.
Purchase of Delinquent Loans
In the past and in very limited instances, the General Partner has
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
interests of the General Partner in preserving its capital and those of the
Partnership are likely to conflict. The General Partner is under no obligation
to take such actions and intends to follow the policy in the foreseeable future
of not making such purchases. Until the Partnership Agreement was amended in
December 1998, upon the approval of a majority-in-interest of the limited
partners, the General Partner's management fee was limited to a maximum of 1 3/4
% in any year in which it did not take any such action. The amendment removed
this limitation.
When the General Partner has purchased a loan or a property from the
Partnership, it did so for an amount equal to or greater than the fair market
value of the subject loan or property. Should the General Partner subsequently
realize a profit from a property purchased from the Partnership, the Partnership
will not be entitled to any such profit, regardless of the loss, if any,
experienced by the Partnership.
Other Mortgage Lending Activities
Although it has not done so, the General Partner may form additional
limited partnerships and other entities to engage in activities similar to and
with the same investment objectives as the Partnership. The General Partner may
be engaged in sponsoring other entities at approximately the same time as the
Partnership's securities are being offered or its investments are being made.
The General Partner also originates, sells and services 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
Partner concerning such activities and the Partnership. The General Partner 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 Partner for the operation of its business. The General Partner devotes
only such time to the business of the Partnership as, in its judgment, is
reasonably required. The General Partner has conflicts of interest in allocating
time, services, and functions between the Partnership and other present and
future entities which the General Partner has organized or may in the future
organize or with which it is or may be affiliated, as well as other business
ventures in which it is or may be involved. The General Partner is engaged, and
in the future may be engaged, for its own account, or for the accounts of
others, in other business ventures, and neither the Partnership nor any limited
partner is entitled to any interest in such other ventures.
No Separate Legal Representation
The same legal counsel currently represents the Partnership and the
General Partner. 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 Partner, and, if necessary,
separate counsel will be obtained for the Partnership and the General Partner.
Acquisition of Loans from General Partner
The General Partner arranges and makes all of the loans invested in by
the Partnership and sells those loans to the Partnership at or below face value.
The General Partner also arranges and makes mortgage loans for its own account
and for other investors. There may be a conflict of interest between the
Partnership and the General Partner or other investors for whom it selects
mortgage loans for investment. This could arise from the fact that the General
Partner may be choosing among various loans that it may have originated with
different interest rates or other terms and features, for placement either in
the Partnership's mortgage loan portfolio or with other investors or the General
Partner itself. Loans may sometimes be acquired by the Partnership at a discount
from face value. The limited partners must rely upon the General Partner to
honor its fiduciary duty to protect their interests in the making and choosing
of mortgage loans.
A committee of officers of the General Partner makes all decisions
regarding mortgage loans to be made or invested in by the Partnership. This
committee is currently comprised of William Owens, president of the General
Partner, and William Dutra and Andrew Navone, both vice-presidents of the
General Partner.
Investing in Loans with General Partner or Affiliates
The Partnership is prohibited by Section IX.4. of the Partnership
Agreement from making mortgage loans to the General Partner or its affiliates.
However, the Partnership may invest in mortgages acquired by the General Partner
or affiliates. The Partnership's portion of the total mortgage loan may be
smaller or greater than the portion of the loan made by the General Partner or
its affiliates but will generally be on terms substantially similar to the terms
of the Partnership's investment. Such an investment would be made after the
General Partner determines that the entire loan is not suitable for the
Partnership. However, investing with the General Partner or its affiliates could
result in a conflict of interest between the Partnership and the General Partner
or its affiliates in the event that the borrower defaults on the loan and both
the Partnership and the General Partner or its affiliates seek to protect their
own interest in the loan and in the underlying security. Limited partners of the
Partnership must rely on the fiduciary duty of the General Partner to protect
their interests.
Mortgage Loans to the General Partner
The Partnership will not generally invest in mortgage loans to the
General Partner, affiliates of the General Partner, or any limited partnership
or entity affiliated with or organized by the General Partner. However, the
Partnership may have an investment in a mortgage loan to the General Partner
when the General Partner or an affiliate purchases a defaulted mortgage loan
from the Partnership for an amount equal to or greater than fair market value
and subsequently forecloses on the related loan, becoming the obligor; or the
Partnership forecloses on a mortgage loan and then sells the related property to
the General Partner or an affiliate for an amount equal to or greater than its
fair market value, in exchange for a secured note payable to the Partnership in
the same amount.
Right of General Partner to Engage in Competitive Business
The General Partner will only devote such time to the Partnership as it
deems necessary to conduct the Partnership's business. Section IV.4. of the
Partnership Agreement provides that the General Partner and its 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. Neither
the Partnership nor any limited partners have any rights or claims from such
activities.
FIDUCIARY RESPONSIBILITY
The General Partner is accountable to the Partnership as a fiduciary,
and consequently must exercise good faith and integrity with respect to the
Partnership affairs, must not take advantage of the limited partners, must make
full disclosure in its dealings with the Partnership, and must account to the
Partnership for any benefit or profit derived by it from any transactions
connected with the Partnership without the consent of the limited partners. The
Partnership Agreement provides that the General Partner and its affiliates may
engage in activities similar to or identical with the business of the
Partnership. Presently, neither the General Partner nor any of its affiliates
acts for its own account or as general partner of a mortgage loan investment
business. However, the General Partner arranges and services trust deed
investments for other investors. When it acts in such capacity, it has a
fiduciary duty to each entity and is bound to treat each fairly and with equal
access to investment opportunities. The Partnership Agreement does not modify
any fiduciary standard imposed on the General Partner by California law.
Based upon the present state of the law, limited partners appear to
have the following legal rights and remedies as to the General Partner and the
Partnership:
they may bring individual actions on behalf of themselves or class
actions on behalf of themselves and other limited partners to
enforce their rights under the Partnership Agreement and California
partnership law, including breaches by the General Partner of its
fiduciary duty;
they may bring actions on behalf of the Partnership for claims it
might have, as "derivative" actions, if the General Partner refuses
to bring suit;
they may bring actions under federal or state securities laws,
either individually or as a class of limited partners, if the
General Partner has violated certain of such laws in connection
with the offer and sale, or repurchase of Units.
Exculpation
The General Partner may not be liable to the Partnership or limited
partners for errors in judgment or other acts or omissions not amounting to
willful misconduct or gross negligence, since the Partnership Agreement
exculpates the General Partner, except for willful misconduct and gross
negligence.
Indemnification
The Partnership Agreement indemnifies the General Partner by the
Partnership, not by the limited partners, for liabilities the General Partner
and its affiliates incur in dealing with third parties on behalf of the
Partnership. To the extent that the indemnification provisions purport to
include indemnification for liabilities arising under the Securities Act of
1933, in the opinion of the Securities and Exchange Commission, such
indemnification is contrary to public policy and unenforceable.
This is a rapidly developing and changing area of the law, and limited
partners who have questions concerning the duties of the General Partner should
consult with their own legal counsel.
MANAGEMENT
Management of the Partnership
The General Partner is Owens Financial Group, Inc., a California
corporation, 2221 Olympic Blvd., Walnut Creek, CA 94595. Its telephone number is
(925) 935-3840.
The 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. These duties include dealings with limited partners,
accounting, tax and legal matters, communications and filings with regulatory
agencies and all other needed management duties. The General Partner may also,
at its sole discretion and subject to change at any time,
purchase from the Partnership the interest receivable or principal
on delinquent mortgage loans held by the Partnership;
purchase from a senior lienholder the interest receivable or
principal on mortgage loans senior to mortgage loans held by the
Partnership;
use its own funds to cover any other costs associated with mortgage
loans held by the Partnership such as property taxes, insurance and
legal expenses; and
purchase from the Partnership real estate acquired through
foreclosure.
In order to assure that the limited partners will not have personal
liability as a General Partner, 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 General Partner has primary responsibility for the initial selection,
evaluation and negotiation of mortgage investments for the Partnership. The
General Partner provides all executive, supervisory and certain administrative
services for the Partnership's operations, including servicing the mortgage
loans held by the Partnership. The Partnership's books and records are
maintained by the General Partner, subject to audit by independent certified
public accountants.
The General Partner had a net worth of approximately $7,700,000 on
September 30, 1998. The following persons comprise the board of directors and
management employees of the General Partner actively involved in the
administration and investment activity of the Partnership.
Milton N. Owens - Mr. Owens, Chairman of the Board of Directors of
the General Partner, age 87, is a licensed real estate broker and
has been Chairman since October 1981. Mr. Owens is a lifetime
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. From 1936 to 1951, prior to his formation of Owens
Mortgage Company, Mr. Owens was employed with the mortgage loan
division of the Travelers Insurance Company. Mr. Owens is the
father of William C. Owens, also a member of the Board of Directors
and President of the General Partner.
William C. Owens - Mr. Owens, age 48, has been President of the
General Partner since April 1996 and is also a member of the Board
of Directors and the Loan Committee of the General Partner. From
1989 until April 1996, he served as a Senior Vice President of the
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 General Partner, Mr. Owens is
responsible for the overall activities and operations of the
General Partner, including corporate investment, operating policy
and planning. In addition, he is responsible for loan production,
including the underwriting and review of potential loan
investments. Mr. Owens is also the President of Owens Securities
Corporation, a subsidiary of the General Partner. Mr. Owens is a
licensed real estate broker and the son of Milton Owens, Chairman
of the Board of Directors of the General Partner.
Bryan H. Draper - Mr. Draper, age 41, has been Chief Financial
Officer and corporate secretary of the General Partner since
December 1987 and is also a member of the board of directors of the
General Partner. Mr. Draper is a Certified Public Accountant and is
responsible for all accounting, finance, and tax matters for the
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 - Mr. Dutra, age 36, is a Vice President and
member of the Board of Directors and the Loan Committee of the
General Partner and has been its employee since February 1986. In
charge of loan production, Mr. Dutra has responsibility for loan
committee review, loan underwriting and loan production.
Andrew J. Navone - Mr. Navone, age 42, is a Vice President and
member of the Board of Directors and the Loan Committee of the
General Partner and has been its employee since August 1985. Mr.
Navone has responsibilities for loan committee review, loan
underwriting and loan production.
Melina A. Platt - Ms. Platt, age 32, has been Controller of the
General Partner since May 1998. Ms. Platt is a Certified Public
Accountant and is responsible for all accounting, finance, and
regulatory agency filings of the Partnership. Ms. Platt was
previously a Senior Manager with KPMG Peat Marwick LLP.
Research and Acquisition
The General Partner considers prospective investments for the
Partnership. In that regard, the General Partner evaluates the credit 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" at page 35. For these services, the General Partner generally
receives mortgage placement fees (points) paid by borrowers when loans are
originally funded or when the Partnership extends or refinances mortgage loans.
These fees may reduce the yield obtained by the Partnership from its mortgage
loans.
Partnership Management
The General Partner is responsible for the Partnership's investment
portfolio. Its services include:
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 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 Partner believes 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
Partner--Management Fees," at page 18.
Mortgage Investments
The General Partner originates and services the Partnership's mortgage
investments. These mortgage investment services include:
review of investments;
recommendations with respect to changes in investments;
employment and supervision of employees who handle the
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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No person or entity owns beneficially more than 5% of the ownership
interests in the Partnership. The General Partner owns 2,361,555 units (1.2%) of
the Partnership as of September 30, 1998. The ownership (common stock) of the
General Partner is owned as follows: 43.96% by Milton N. Owens, 27.47% by
William C. Owens, 10.99% by Bryan H. Draper and 8.79% each by William E. Dutra
and Andrew J. Navone.
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
As of and for the As of and for the year ended
Nine months ended December 31
September 30
------------------------- ----------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Loans secured by trust
deeds................ $ 176,446,203 $ 174,427,447 $ 174,714,607 $ 154,148,933 $ 151,350,591 $ 145,050,213 $ 133,549,495
Less: Allowance for (3,500,000) (3,500,000) (3,500,000) (3,500,000) (3,250,000) (2,750,000) (2,750,000)
loan losses...........
Real estate held for 11,413,499 13,911,262 16,047,141 13,221,093 9,612,359 5,028,325 2,608,000
sale..................
Less: Allowance for (1,184,000) (600,000) (1,896,000) (600,000) (600,000) (400,000) --
losses on real estate.
Cash, cash equivalents
and other assets...... 16,186,898 5,466,426 5,959,306 14,105,992 8,288,818 5,697,459 5,202,246
---------- --------- --------- ---------- --------- --------- ---------
Total assets........... $ 199,362,600 $ 189,705,135 $ 191,325,054 $ 177,376,018 $ 165,401,768 $ 152,625,997 $ 138,609,741
============= ============= ============= ============= ============= ============= =============
Liabilities............. $ 2,067,729 $ 686,512 $ 593,919 $ 535,914 $ 657,325 $ 779,269 $ 1,026,578
Partners' capital
General partners...... 1,946,559 1,849,034 1,864,033 1,731,874 1,623,526 1,488,360 1,342,578
Limited partners...... 195,348,312 187,169,589 188,867,102 175,108,230 163,120,917 150,358,368 136,240,585
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total partners'
capital............... 197,294,871 189,018,623 190,731,135 176,840,104 164,744,443 151,846,728 137,583,163
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities/
Partners' capital. $ 199,362,600 $ 189,705,135 $ 191,325,054 $ 177,376,018 $ 165,401,768 $ 152,625,997 $ 138,609,741
============= ============= ============= ============= ============= ============= =============
Revenues................ $ 16,106,614 $ 16,025,817 $ 21,325,850 $ 16,824,479 $ 16,415,301 $ 15,503,534 $ 14,979,065
Operating expenses 72,984
Promotional interest.. 38,460 59,856 70,747 57,395 69,255 1,475,155 72,359
Management fee........ 2,493,560 3,121,387 3,879,454 866,985 1,431,616 338,000 2,234,968
Servicing fee......... 356,829 337,664 420,742 384,004 371,000 270,038 323,000
Net real estate 23,280 83,162 70,216 344,298 224,108 -- 75,844
operations............
Provision for losses
on loans............... -- -- -- 250,000 500,000 -- 2,750,000
Provision for losses --
on real estate held
for sale.............. -- -- 1,296,000 -- 200,000 400,000 --
Other................. 146,174 129,314 168,444 163,385 127,947 237,933 204,249
----------- ----------- ----------- ----------- ----------- ---------- ----------
Net Income $ 13,048,311 $ 12,294,434 $ 15,420,247 $ 14,758,412 $ 13,491,375 $ 12,709,424 $ 9,318,645
============ ============ ============ ============ ============ ============ ===========
Net income allocated to
general partners...... $ 129,191 $ 119,496 $ 154,202 $ 146,960 $ 135,584 $ 127,726 $ 90,218
======= ======= ======= ======= ======= ======= ======
Net income allocated to
limited partners...... $ 12,919,120 $ 12,174,938 $ 15,266,045 $ 14,611,452 $ 13,355,791 $ 12,581,698 $ 9,228,427
============ ============ ============ ============ ============ ============ ===========
Net income allocated to
limited partners per
limited partnership
unit................... $ .066 $ .066 $ .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.
<PAGE>
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
Nine Months Ended September 30, 1998 Compared to 1997
Net income increased by $754,000 or 6.1% for the nine months ended
September 30, 1998, as compared to the same period in 1997. This increase in net
income was primarily due to the decrease in management fees paid to the General
Partner pursuant to the Partnership Agreement from $3,121,000 in 1997 to
$2,494,000 in 1998 (a decrease of $627,000 or 20.1%).
Interest income on loans secured by trust deeds increased $1,016,000
(7.7%) for the nine months ended September 30, 1998, as compared to same period
in 1997. This increase was primarily a result of the growth in the loan
portfolio even though its weighted average yield decreased from 11.04% as of
September 30, 1997 to 10.82% as of September 30, 1998. Total revenues only
increased by $81,000 (.05%) due to a decrease in gain on sale of real estate of
$997,000 (44.3%). The decrease in gain on sale of real estate was a result of a
decrease in the gain on sales of homes from the development limited partnership
between the Partnership and Wood Valley Development, Inc. (see "Investment in
Development Limited Partnership," below). This decrease was a result of
increased construction costs, smaller profit margins, and one fewer home being
sold during the nine months ended September 30, 1998 compared to the same period
in 1997.
Results of Operations
1997 Compared to 1996
The net income increase of $662,000 (4.5%) for 1997 as compared to 1996, was due
to:
an increase in interest income of $1,816,000 from $16,425,000 to
$18,241,000;
a decrease in net real estate operations losses from $344,000 to
$70,000;
an increase in gain on sale of homes by the development limited
partnership from $171,000 to $2,355,000;
a decrease in nonperforming loans from $10,012,000 to $3,751,000;
and
a decrease in the provision for loan losses from $250,000 to $0.
The net income increase in 1997 as compared to 1996, was offset by:
an increase in management fees paid to general partner from
$867,000 to $3,879,000; and
an increase in the provision for losses on real estate acquired
through foreclosure from $0 to $1,296,000.
The weighted average yield on the Partnership's loan portfolio was
11.07%, 11.09% and 11.14% as of December 31, 1997, 1996 and 1995, respectively.
The increase in management fees, which represented .56% and 2.34% of
the average unpaid balance of mortgage loans for the years ended December 31,
1996, and 1997, respectively, was in the sole discretion of the General Partner
pursuant to the Partnership Agreement. An increase in revenues in 1997 allowed
the General Partner to increase the management fees in that year. This increase
in revenues was due primarily to the increase in gains on the sale of homes
owned by the development limited partnership.
1996 Compared to 1995
The net income increase of $1,267,000 (9.4%) for 1996 as compared to 1995 was
due to:
an increase in mortgage investments held by the Partnership from
$151,351,000 to $154,149,000;
a decrease in management fees paid to the General Partner from
$1,432,000 to $867,000; and
a decrease in the provisions for losses on loans and real estate
held for sale from $700,000 to $250,000.
The net income increase in 1996, as compared to 1995, was negatively affected
by:
an increase in net real estate operations losses from $224,000 to
$344,000; and
an increase in nonperforming loans from $8,309,000 to $10,012,000.
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 General Partner has not purchased the related Partnership
receivables for delinquent interest payments. All income was derived from
investments in mortgage loans, short-term interest-bearing accounts and
certificates of deposit, notes receivable from the General Partner, income from
real estate held for sale and real estate acquired through foreclosure, and gain
from the disposition of real estate.
Financial Condition
September 30, 1998 and December 31, 1997
Loan Portfolio
The number of Partnership mortgage investments decreased from 215 to
199 and the average loan balance increased from $813,000 to $887,000 between
December 31, 1997 and September 30, 1998. These average loan increases reflect
the Partnership's ability to invest in larger mortgage loans meeting the
Partnership's objectives.
Prior to May 1, 1993 the General Partner followed a policy of
purchasing all interest receivables of delinquent loans. However, on loans
originated by the General Partner on or after May 1, 1993, and effective
November 1, 1994, for certain other loans originated prior to May 1, 1993, the
General Partner adopted the policy not to purchase delinquent interest or
principal. As of September 30, 1998 and December 31, 1997, there were
approximately $11,548,000 and $3,751,000, respectively, in loans held by the
Partnership on which payments were more than 90 days delinquent and on which
such delinquent interest was not being purchased by the General Partner. The
General Partner purchased approximately $82,000 and $73,000 in delinquent
interest receivables of the Partnership during the nine months ended September
30, 1998 and 1997, respectively, that had not been collected from borrowers as
of September 30, 1998 or 1997.
Approximately $13,444,000 (7.6%) and $5,236,000 (3.0%) of the loans
invested in by the Partnership were more than 90 days delinquent in payment as
of September 30, 1998 and December 31, 1997, respectively. Of these amounts,
approximately $3,893,000 (2.2%) and $3,279,000 (1.9%) were in the process of
foreclosure. Loans more than 90 days delinquent increased by $8,208,000 (157%)
from December 31, 1997 to September 30, 1998, primarily due to two large loans
which became delinquent during 1998. Management believes that there is adequate
security in one of the loans with an outstanding principal balance of
approximately $3,760,000, and that an additional loan loss reserve for this loan
is not needed. The other loan with an outstanding principal balance of
approximately $4,247,000 may result in a loss of principal to the Partnership,
and, therefore, management has established a loan loss reserve for this loan in
the amount of $550,000. Although the total loan loss reserve of the Partnership
increased $550,000 for this specific loan, there were other adjustments in the
general and specific reserves which left the total reserve unchanged as of
September 30, 1998.
A loan loss reserve in the amount of $3,500,000 was maintained on the
books of the Partnership as of September 30, 1998 and December 31, 1997. The
General Partner believes that this loan loss reserve is adequate.
As of September 30, 1998 and December 31, 1997, approximately 54% and
67% of the Partnership's mortgage loans are secured by real property in Northern
California. The decrease in the percentage of loans secured by real property in
Northern California has primarily been due to the payoff of several of those
loans and the purchase of new loans secured by properties outside of Northern
California. As the real estate market in Southern California has gradually
improved, more loans secured by real estate in Southern California have been
invested in by the Partnership. In general, there has been increased competition
in the lending business in Northern California, particularly in the San
Francisco Bay Area, and the General Partner has increasingly sought loans in
areas outside of this region. For example, one loan in the amount of $10,600,000
was made during the nine months ended September 30, 1998 secured by real estate
in the states of Washington and Montana.
The Partnership's investment in loans secured by unimproved land rose
by 121% since December 31, 1997. Improvement in real estate market conditions
have made development and, thus, loans on unimproved land more attractive. All
of the Partnership's loans secured by unimproved land or land in the process of
being developed are first trust deeds. In addition, only one of these loans, in
the amount of $802,200, is more than 90 days delinquent in payment as of
September 30, 1998.
The following delinquent loans formerly held by the Partnership have
been acquired and foreclosed upon by the General Partner from January 1, 1994
through September 30, 1998:
Delinquent Year
Principal Interest Foreclosed
--------- -------- ----------
$ 58,000 $ 4,417 1994
1,184,223 252,810 1995
2,320,000 86,981 1996
613,400 50,625 1997
-- -- 1998
The General Partner has purchased from the Partnership all delinquent
interest receivable on those loans foreclosed on in 1994 and 1995, but did not
purchase the delinquent interest on the loans foreclosed on in 1996 and 1997. Of
these foreclosed loans, the Partnership held three mortgages due from the
General Partner totaling $765,332 as of September 30, 1998, on which the General
Partner was making payments which were current. In addition, the Partnership
held a mortgage in the amount of $1,150,000 secured by a property sold by the
Partnership to the General Partner during the nine months ended September 30,
1998, on which the payments were current. All loans due to the Partnership by
the General Partner were paid off in full in November 1998.
Real Estate Properties Held for Sale
The Partnership currently holds title to eleven properties that were
foreclosed on from January 1, 1993 through September 30, 1998 in the amount of
$10,229,499, net of allowance for losses of $1,184,000. Since 1993, the
Partnership's investment in real estate held for sale has increased due to the
General Partner's decision to stop acquiring from the Partnership property
subject to foreclosure on which the Partnership has a trust deed investment on
property acquired by the Partnership through foreclosure. During the nine months
ended September 30, 1998, the Partnership acquired through foreclosure a 22%
interest in a multi-unit residential building in Oakland, California; a
commercial building located in Sacramento, California; and a commercial building
located in Gresham, Oregon, on which it had trust deed investments of $53,185,
$30,000 and $425,000, respectively. In addition, in February 1998, the
Partnership sold a manufactured-home subdivision development property located in
Sonora, California, which the Partnership had acquired through foreclosure, to
the General Partner for $1,150,000, resulting in a loss to the Partnership of
approximately $2,000. An allowance for loss on this property in the amount of
$712,000 had been recorded in 1997; therefore, the loss for the nine months
ended September 30, 1998 was an additional $2,000.
Six of the Partnership's eleven properties do not currently generate
revenue. Although expenses from rental properties have increased from
approximately $323,000 to $499,000 (54%) for the nine months ended September 30,
1997 and 1998, respectively, revenues associated with these properties have also
increased from $240,000 to $476,000 (98%), thus generating a small net loss from
real estate held for sale of $23,000 during the nine months ended September 30,
1998. The increase in expenses is primarily due to the increased number of real
estate properties owned. The increase in rental revenues is due to the increased
number of properties held which are generating income as of September 30, 1998
as compared to September 30, 1997.
Investment in Development Limited Partnership
In 1993, the Partnership foreclosed on a $600,000 loan and obtained 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 of 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, WV-OMIF Partners, with an unrelated builder/developer, Wood Valley
Development, Inc. (Woodvalley), for the purpose of constructing single-family
residences on the lots. In 1996,the Partnership contributed the lots to WV-OMIF
Partners for a limited partner interest. The $671,000 in costs incurred in 1995
became an obligation of WV-OMIF Partners in 1996 when the lots were contributed.
WV-OMIF Partners built single-family residences of between
approximately 2,200 and 2,800 square feet on the lots. The Partnership advanced
funds to WV-OMIF Partners to construct the homes. The Partnership is entitled to
receive interest at prime plus 2% on these advances.
During the nine months ended September 30, 1998 and 1997, thirteen and
fourteen houses, respectively, were sold resulting in a gain on sale of real
estate to the Partnership of $1,227,070 and $2,249,142, respectively. During the
year ended December 31, 1997, 15 houses were sold resulting in a gain of
$2,355,000. The Partnership's net investment in WV-OMIF Partners totaled
$345,458 as of September 30, 1998 and $3,812,122 and $4,877,798, as of December
31, 1997, and 1996, respectively.
As of September 30, 1998, a total of 29 houses had been completed and
sold and escrow closed on the remaining house in October 1998.
The General Partner and Woodvalley exercised their option to purchase
34 similar lots that are interspersed among the 30 lots developed by WV-OMIF
Partners. WV-OMIF Partners incurred certain infrastructure costs that benefit
all 64 lots, including the 34 lots being developed by the General Partner and
Woodvalley. As of September 30, 1998, the General Partner and Woodvalley had
developed and sold 28 of their 34 lots. As of September 30, 1998, the General
Partner and Woodvalley had reimbursed all shared development costs in the total
amount of $750,675 to WV-OMIF Partners.
As WV-OMIF Partners sold the remaining house during 1998, there will be
no additional income from this partnership or from developments of this type in
the foreseeable future.
WV-OMIF Partners has provided a one-year limited warranty to homeowners
to cover minor fix-ups on the houses. The future costs to cover these warranties
are expected to be insignificant. WV-OMIF Partners has also purchased insurance
to cover, among other incidents, potential construction defects.
Investment in Corporate Joint Venture
In 1995, the Partnership foreclosed on a $571,853 loan and obtained
title to a commercial lot in Los Gatos, California that secured the loan. In
1997, the Partnership contributed the lot to a limited liability company (the
Company) formed with an unaffiliated developer to develop and sell a commercial
office building on the lot. The Partnership is providing construction financing
to the Company at prime plus two percent.
During the nine months ended September 30, 1998, and the year ended
December 31, 1997, the Partnership advanced an additional $79,566 and $56,889,
respectively, to the corporate joint venture for development. The total
investment in the corporate joint venture was $718,929 and $639,363 as of
September 30, 1998 and December 31, 1997, respectively.
The Company received all development approvals in the third quarter of
1998 and expects to begin construction in March of 1999.
Interest Receivable, Accounts Payable and Accrued Liabilities
Interest receivable increased from approximately $1,774,000 as of
December 31, 1997 to $2,724,000 as of September 30, 1998 ($950,000 or 53.6%),
due primarily to interest income accrued on one large loan and also due to the
growth in the loan portfolio in general. The interest on the large loan was paid
in October 1998 at the maturity date of the loan. Accounts payable and accrued
liabilities increased from approximately $50,000 as of December 31, 1997 to
$1,548,000 as of September 30, 1998 ($1,498,000 or 2996%) due primarily to
accrued management fees for the months of August and September.
Cash and Cash Equivalents, Certificates of Deposit and Commercial Paper
Cash and cash equivalents, certificates of deposit and commercial paper
have increased from approximately $4,073,000 as of December 31, 1997 to
$12,931,000 as of September 30, 1998, respectively ($8,858,000 or 217%). This
increase is primarily attributable to distributions received from the
development limited partnership during the nine months ended September 30, 1998
without the investment in new loans of the same amount during the period and
from continuing limited partner contributions (including rollover of limited
partner income) during the period.
Financial Condition
December 31, 1997, 1996 and 1995
Loan Portfolio
At the end of 1995 and 1996 the number of Partnership mortgage
investments was 254 and 238, respectively, and decreased to 215 by the end of
1997. The average loan balance was $636,000 and $640,000 at the end of 1995 and
1996 respectively, and increased to $813,000 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 in
Northern California totaled approximately 67% ($117,352,000) of the loan
portfolio.
As of December 31, 1997, 1996 and 1995, approximately 94.6%, 94.7% and
94.2%, respectively, of the loan portfolio was invested in loans on
income-producing properties, 4.2%, 2.7% and 4.3%, respectively, in land loans
and 1.2%, 2.6% and 1.5%, respectively, in residential loans. Also, as of these
dates, approximately 92.3%, 90.5% and 89.9%, respectively, of the loan portfolio
was invested in first deeds of trust, 7.3%, 9.1% and 9.7%, respectively, in
second deeds of trust and 0.4%, 0.4% and 0.4%, respectively, in third and
all-inclusive deeds of trust.
As of December 31, 1997, there were delinquent loans aggregating
$5,236,000. Under its post-1993 policy, the General Partner did not purchase the
receivables on delinquent loans totaling $3,751,000. As of December 31, 1997, on
loans that pre-dated 1993, the General Partner had purchased from the
Partnership delinquent interest receivables on loans totaling $1,485,000.
As of December 31, 1997 and 1996, there were uncollected amounts of
$219,000 and $541,000, respectively, that represented purchases by the General
Partner of delinquent interest receivables and other advances by the General
Partner on loans made before 1993.
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 reserve of the Partnership is performed by the 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 and $3,250,000 as of December 31,
1995.
Real Estate Properties Held for Sale
As of December 31, 1997, the Partnership owned nine separate properties
that, prior to foreclosure by the Partnership, secured loans aggregating
$8,354,000. As of December 31, 1996 and 1995, the Partnership owned ten and
eleven properties, respectively. Prior to foreclosure, these properties secured
Partnership loans aggregating $6,877,000 and $6,115,000 in 1996 and 1995,
respectively. During the years ended December 31, 1997, 1996 and 1995, the
Partnership acquired certain properties through foreclosure on which it had
trust deed investments totaling $3,279,000, $1,913,000 and $2,501,000,
respectively.
Cash and Cash Equivalents
Cash and cash equivalents of the Partnership increased from
approximately $5,056,000 as of December 31, 1995 to $11,387,000 as of December
31, 1996 and decreased to approximately $3,073,000 as of December 31, 1997. The
increase as of December 31, 1996 was due primarily to mortgage loan payoffs
received near the 1996 year end which were not reinvested in new mortgage loans
until the beginning of 1997. These fluctuations are normal for the Partnership.
Asset Quality
Some losses are normal when lending money and the amounts of losses
vary as the loan portfolio is affected by changing economic conditions and
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.
The conclusion that a Partnership loan may become uncollectible, in
whole or in part, is a matter of judgment. Although lenders such as banks and
savings and loans are subject to regulations that require them to perform
ongoing analyses of portfolio, loan to value ratios, reserves, etc., and to
obtain current information regarding its borrowers and the securing properties,
the Partnership is not subject to these regulations and has not adopted these
practices. Rather, management of the General Partner, in connection with the
quarterly closing of the accounting records of the Partnership and the
preparation of the financial statements, evaluates the Partnership's mortgage
loan portfolio. Based upon this evaluation, a determination is made as to
whether the allowance for loan losses is adequate to cover potential losses of
the Partnership. As of September 30, 1998, management believes that the
allowance for loan losses of $3,500,000 is adequate. As of then, loans secured
by trust deeds include $13,444,000 in loans delinquent over 90 days, of which
$3,893,000 was invested in loans that were in the process of foreclosure. Due to
the loan-to-value criteria established by the General Partner, in its opinion,
the mortgage loans held by the Partnership appear in general to be adequately
secured.
The General Partner's judgment of the adequacy of loan loss reserves
includes consideration of:
economic conditions;
borrower's financial condition;
evaluation of industry trends;
review and evaluation of loans identified as having loss
potential; and
quarterly review by Board of Directors.
Liquidity and Capital Resources
Purchases of Units and loan payoffs provide the 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, because then the Partnership's investment yield could be lower than
other debt-related investments. In that event, purchases of additional Units
could decline, which, in turn, would reduce the liquidity of the Partnership and
its ability to make additional mortgage investments. In contrast, a significant
increase in the dollar amount of loan payoffs and/or additional limited partner
investments without the origination of new loans of the same amount would
increase the liquidity of the Partnership. This increase in liquidity could
result in a decrease in the yield paid to limited partners as the Partnership
would be required to invest the additional funds in lower yielding, short term
investments. The Partnership has not and does not intend to borrow money for
investment purposes. See "Business--Borrowing" at page 43.
There has been little variation in the percentage of capital
withdrawals to total capital invested by the limited partners in recent years,
excluding regular distributions of net income to limited partners, and no
substantial change is expected. Withdrawal percentages have been 7.37%, 6.11%,
7.85% and 6.63% for the years ended December 31, 1994, 1995, 1996 and 1997 and
7.48% (annualized) for the nine months ended September 30, 1998. These
percentages are the annual average of the limited partners capital withdrawals
in each calendar quarter divided by the total limited partner capital as of the
end of each quarter. (See "Summary of Partnership Agreement, Rights of Limited
Partners and Description of Units--Repurchase of Units, Withdrawal from
Partnership" at page 64, for a description of the limitations on withdrawal of
capital by a limited partner).
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 61 to 91 days after written notices are delivered
to the General Partner, subject to the following limitations, among others:
No withdrawal of Units can be requested or made until at least one
year from the date of purchase of those Units, on or after the
date of this Prospectus, other than Units received under the
Partnership's Reinvested Distribution Plan.
Any such payments are required to be made only from net proceeds
and capital contributions (as defined) during said 91-day period.
A maximum of $100,000 per partner may be withdrawn during any
calendar quarter.
The General Partner is not required to establish a reserve fund
for the purpose of funding such payments.
No more than 10% of the outstanding limited partnership interest
may be withdrawn during any calendar year except upon dissolution
of the Partnership.
Contingency Reserves
The Partnership maintains cash, cash equivalents and marketable
securities as contingency reserves in an aggregate amount of 2% of the limited
partners' capital accounts to cover expenses in excess of revenues or other
unforeseen obligations of the Partnership. Although the General Partner believes
that contingency reserves are adequate, it could become necessary for the
Partnership to sell or otherwise liquidate certain of its investments to cover
such contingencies on terms which might not be favorable to the Partnership.
Current Economic Conditions
Although the current economic climate in Northern California and the
Western United States is generally strong, many areas outside of the San
Francisco Bay Area and throughout the Western United States 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 General
Partner of the manufactured-home development in Sonora, California, acquired
through foreclosure, the Partnership has not sustained any material losses to
date. This has been due primarily to the General Partner's pre-May 1, 1993
practice of purchasing delinquent interest and loans from the Partnership prior
to foreclosure. The General Partner has ceased such practices, except as to
loans that pre-exist the change in policy and other very limited exceptions. The
General Partner expects that it will not purchase delinquent interest or
principal on delinquent loans in the future, and therefore, the Partnership
could sustain losses with respect to loans secured by properties located in
areas of declining real estate values. This could result in a reduction of the
net income of the Partnership for a year in which those losses occur. There is
no way of making a reliable estimate at the present of these potential losses.
Despite the Partnership's ability to purchase mortgage loans with
relatively strong yields during 1997 and 1998, there is increased competition
from a variety of lenders that has had the effect of reducing mortgage yields
over the past twelve months and could have the effect of reducing mortgage
yields further in the future. 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, if there is less demand by borrowers
for loans and, thus, fewer loans for the Partnership to invest in, it will
invest its excess cash in shorter-term alternative investments yielding
considerably less than the current investment portfolio.
Year 2000 Readiness
Many computer systems may experience difficulty processing dates beyond
the year 1999; as a consequence, some computer hardware and software at most
companies will need to be modified or replaced prior to the year 2000 in order
to remain functional. The General Partner depends on the use of computers and
related systems to provide timely, accurate information essential to the
management and operation of the Partnership. These systems include both
information technology (IT) and non-information technology (non-IT) systems. For
IT and non-IT systems developed by independent third parties
(externally-developed), the vendors and suppliers have represented that these
systems are Year 2000 compliant; however, internal testing of these systems has
not been completed. The computer programs used to account for mortgage loan
investments, investments in Units and other items are internally-developed IT
systems. These IT systems have been reviewed by independent consultants to
determine whether these programs are able to recognize the year 2000. The
consultants are in the process of modifying all internally-developed IT systems
to make them Year 2000 compliant. Their remediation efforts and testing are
expected to be completed in early 1999.
Although not anticipated by the General Partner, a failure to
adequately address the Year 2000 issue could result in the misstatement of
reported information, the inability to accurately track mortgage investments and
payments due or other operational problems. If IT systems are not operational in
the Year 2000, the General Partner has determined that they can operate manually
for several months while correcting the system problems before experiencing
material adverse effects on the Partnership's and the General Partner's business
and results of operations. However, shifting portions of daily operations to
manual processes may result in time delays and increased processing costs.
Additionally, the Partnership and General Partner may not be able to provide
borrowers and investors with timely and pertinent information, which may
negatively affect customer relations and lead to the potential loss of new loans
and limited partner investments.
The General Partner is in the process of assessing Year 2000 issues
with third parties, comprised primarily of certain financial institutions and
other vendors, with whom the Partnership has a material business relationship
(Third Parties). Currently, the Partnership believes that if a significant
portion of these financial institutions is non-compliant for a substantial
length of time, the Partnership's operations and financial condition would be
materially adversely affected. Non-compliance by other Third Parties is not
expected to have a material effect on the Partnership's results of operations
and financial condition. The General Partner is in the process of sending
letters to these and other Third Parties requesting representations of their
Year 2000 readiness.
The total costs to remedy Year 2000 issues will be paid by the General
Partner. None of such costs will be reimbursed by the Partnership.
The worst case scenario from the impact of Year 2000 cannot presently
be predicted.
Forward Looking Statements and Other Year 2000 Risk Factors
The foregoing analysis of Year 2000 issues includes forward-looking
statements and predictions about possible or future events, results of
operations and financial condition. As such, this analysis may prove to be
inaccurate because of the assumptions made by the General Partner or the actual
development of future events. No assurance can be given that any of these
forward-looking statements and predictions will ultimately prove to be correct
or even substantially correct.
Various other risks and uncertainties could also affect the Year 2000
analysis causing the effect on the Partnership to be more severe than discussed
above. The General Partner's Year 2000 compliance testing cannot guarantee that
all computer systems will function without error beyond the Year 2000. Risks
also exist with respect to Year 2000 compliance by Third Parties, such as the
risk that an external party, who may have no relationship to the Partnership or
the General Partner, but who also has a significant relationship with one or
more Third Parties, may have a system failure that adversely affects the
Partnership's ability to conduct business. While the General Partner is
attempting to identify such external parties, no assurance can be given that it
will be able to do so. Furthermore, Third Parties with direct relationships with
the Partnership, whose systems have been identified as likely to be Year 2000
compliant, may suffer a breakdown due to unforeseen circumstances. It is also
possible that the information collected by the General Partner for these Third
Parties regarding their compliance with Year 2000 issues may be incorrect.
Finally, it should be noted that the foregoing discussion of Year 2000 issues
assumes that to the extent the General Partner's systems fail, whether because
of unforeseen complications or because of Third Parties' failure, switching to
manual operations will allow the Partnership to continue to conduct its
business. While the General Partner believes this assumption to be reasonable,
if it is incorrect, the Partnership's results of operations would likely be
adversely affected.
BUSINESS
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 Partnership II to Owens Mortgage Investment Fund, a
California Limited Partnership. The address of the Partnership is P.O. Box 2400,
2221 Olympic Blvd., Walnut Creek, CA 94595. Its telephone number is (925)
935-3840.
The General Partner makes and arranges or purchases all of the loans
invested in by the Partnership. In connection with the investment in loans, the
Partnership in limited instances may acquire 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, improved,
income-producing and non-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.
<PAGE>
The following table shows the growth in total Partnership capital,
mortgage investments and net income as of and for the nine months ended
September 30, 1998 and as of and for the years ended December 31, 1997, 1996,
1995, 1994 and 1993.
<TABLE>
<CAPTION>
Total Partners' Mortgage Net
Capital Investments Income
<S> <C> <C> <C>
1998 (nine months).............. $ 197,294,871 $ 176,446,203 $ 13,048,311
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
</TABLE>
As of September 30, 1998, the Partnership held investments in 198
mortgage loans, secured by liens on title and leasehold interests in real
property, and one loan secured by a collateral assignment of a limited liability
company that owns and is developing commercial real property in Arizona. 54% of
the mortgage loans are located in Northern California. The remaining 46% are
located in Southern California, Oregon, Washington, Montana, Nevada, Arizona,
and Hawaii. The following table sets forth the types and maturities of mortgage
investments held by the Partnership as of September 30, 1998:
<TABLE>
<CAPTION>
TYPES AND MATURITIES OF MORTGAGE INVESTMENTS
(As of September 30, 1998)
Number of Loans Amount Percent
<S> <C> <C> <C>
1st Mortgages.................................... 160 $ 159,185,333 90.22%
2nd Mortgages.................................... 37 16,699,954 9.46%
3rd Mortgages or wraparound deeds of trust....... 2 560,916 .32%
----- ----------------- -----------
199 $ 176,446,203 100.00%
=== ============= =======
Maturing on or before September 30, 1999 (1)..... 88 $ 58,534,318 33.17%
Maturing on or between October 1, 1999 and September 74 89,877,841 50.94%
30, 2002.......................................
Maturing on or between October 1, 2002 and September 37 28,034,044 15.89%
----- --------------- ---------
2, 2018
199 $ 176,446,203 100.00%
=== ============= =======
Income Producing Properties...................... 169 $ 157,902,115 89.49%
Single Family Residences......................... 12 2,159,101 1.22%
Unimproved land.................................. 18 16,384,987 9.29%
----- -------------- --------
199 $ 176,446,203 100.00%
=== ============= =======
- --------
<FN>
(1) $21,622,000 was past maturity as of September 30, 1998.
</FN>
</TABLE>
The average loan balance of the mortgage loan portfolio of $887,000 as
of September 30, 1998 is considered by the General Partner to be a reasonable
diversification of investments concentrated in mortgages secured by commercial
properties. Of such investments, 38% earn a variable rate of interest and 62%
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. When the General Partner experiences
increased competition for quality loans, as has been the case during 1998, it
continues to use relatively low loan-to-value ratios as a major criteria in
making loans to minimize the risk of being undersecured. See "Risk
Factors--Risks of Real Estate Mortgage Loans--Risks of Unexpected Declines in
Values of Secured Properties" at page 7.
As of September 30, 1998, the Partnership was invested in construction
loans of approximately $9,860,000 and in loans partially secured by a leasehold
interest of $12,699,000.
The Partnership has other assets in addition to its mortgage
investments, comprised principally of the following:
$12,931,000 in cash, cash equivalents and marketable securities
which is held for investment, required to transact the business of
the Partnership, or in conjunction with contingency reserve
requirements;
$10,229,000 in real estate acquired through foreclosure (including
$345,000 in the development limited partnership formed to develop
the property located in Carmel Valley, California and $719,000 in
the corporate joint venture formed to develop the property located
in Los Gatos, California); and
$2,724,000 in interest receivable.
Delinquencies
The General Partner does not regularly examine the existing loan
portfolio to see if acceptable loan-to-value ratios are being maintained because
the majority of loans mature in a period of only 1-7 years. The General Partner
will perform an internal review on a property securing a loan in the following
circumstances:
payments on the loan securing the property become delinquent;
the loan is past maturity;
it learns of physical changes to the property securing the loan or
to the area in which the property is located; or
it learns of changes to the economic condition of the borrower or
of leasing activity of the property securing the loan.
A review includes a physical evaluation of the property and the area in
which the property is located, the financial stability of the borrower, and the
property's tenant mix. The General Partner may then work with the borrower to
bring the loan current.
As of September 30, 1998, the Partnership's portfolio included
$13,444,000 (compared with $5,236,000 as of December 31, 1997) of loans
delinquent more than 90 days, representing 7.6% of the Partnership's investment
in mortgage loans. Loans delinquent for at least 90 days have historically
represented between 5% to 10% of the total loans outstanding at any given time.
The balance of delinquent loans at September 30, 1998 includes $3,893,000
(compared with $3,279,000 as of December 31, 1997) in the process of foreclosure
and $4,000 (compared with $184,000 as of December 31, 1997) involving loans to
borrowers who are in bankruptcy. The General Partner believes that these loans
may result in a loss of principal and interest. However, the General Partner
believes that the $3,500,000 allowance for losses on loans which is maintained
in the financial statements of the Partnership as of September 30, 1998 is
sufficient to cover any potential losses of principal. With the exception of the
sale of the Sonora property to the General Partner in 1998, at a loss of
$712,000, the Partnership has not suffered material losses on defaults or
foreclosures.
Of the $5,236,000 that was delinquent as of December 31, 1997,
$3,098,000 remained delinquent as of September 30, 1998, $1,172,000 was paid
off, $331,000 became current, $455,000 became real estate acquired through
foreclosure of the Partnership and $180,000 became real estate owned by an
affiliate of the General Partner.
Although not required to do so, the General Partner has at times in the
past purchased certain loans from the Partnership at the time of foreclosure for
the unpaid principal amount in order to prevent the Partnership from suffering a
loss upon foreclosure. This generally occurred where there was more than one
investor in the loan for which the property provided security and because the
General Partner wanted to avoid administrative problems associated with multiple
ownership of real property. For the most part, the General Partner will no
longer purchase defaulted loans from the Partnership and will act to cause the
Partnership to foreclose and obtain title to the real property securing the loan
when necessary to enforce the Partnership's rights to the security. Losses from
delinquencies may increase as a result.
Despite this general policy change, where payments on delinquent loans
are not made currently by the borrowers, the 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 $1,896,000 as of September 30, 1998. The amount of purchases made and
not reimbursed by borrowers during the nine months ended September 30, 1998 and
the year ended December 31, 1997 was $82,000 and $87,000, respectively. 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 General
Partner or as loans made by the General Partner. The Partnership has no
obligation to repay such amounts to the General Partner.
Following is a table representing the Partnership's delinquency
experience (over 90 days) as of December 31, 1995, 1996, 1997 and September 30,
1998:
<TABLE>
<CAPTION>
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Delinquent Loans....................... $ 12,037,000 $ 11,348,000 $ 5,236,000 $ 13,444,000
Nonperforming Delinquent Loans......... $ 8,309,000 $ 10,012,000 $ 3,751,000 $ 11,548,000
Total Mortgage Investment.............. $ 151,351,000 $ 154,149,000 $ 174,715,000 $ 176,446,000
Percent of Delinquent Loans to Total Loans 7.95% 7.36% 3.00% 7.62%
Percent of Nonperforming Delinquent Loans 5.49% 6.50% 2.15% 6.54%
to Total Loans.......................
</TABLE>
The following delinquent loans formerly held by the Partnership have
been acquired and foreclosed upon by the General Partner from January 1, 1994
through September 30, 1998:
Delinquent Year
Principal Interest Foreclosed
$ 58,000 $ 4,417 1994
1,184,223 252,810 1995
2,320,000 86,981 1996
613,400 50,625 1997
-- -- 1998
As of September 30, 1998, the General Partner continued to own real
property that provides security on $2,095,332 of loans payable to the
Partnership by the General Partner, who was required to make payments on such
loans in accordance with the terms thereof. However, all of these loans were
repaid by the General Partner in November 1998.
Should the General Partner realize any further gain or loss on the
disposition or operation of a property acquired by the General Partner through
foreclosure of a Partnership loan, the 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.
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,
the mortgage interest income of the Partnership would be reduced by
approximately 10%. If a mortgage loan held by the Partnership is foreclosed on,
the Partnership will acquire ownership of real property and the inherent
benefits and detriments of such ownership that are described under "Risk
Factors--Risks of Real Estate Mortgage Loans--Risks of Real Estate Ownership
after Foreclosures," at page 9.
Real Estate Owned
Between 1993 and 1998, the Partnership has foreclosed on certain
delinquent mortgage loans and has acquired title to the properties securing the
loans. As of September 30, 1998, the Partnership held title to eleven properties
that were acquired through foreclosure. All of the properties are either
currently being marketed for sale or will be marketed for sale in the
foreseeable future. None of the properties individually has a book value greater
than 2% of total Partnership assets as of September 30, 1998.
The Partnership's title to all eleven properties is held as fee
simple.
There are no mortgages or encumbrances on any of the Partnership's
real estate properties.
Of the eleven properties held, five of the properties are either
partially or fully leased to various tenants. Only minor
renovations and repairs to the properties are currently being made
or planned.
Management of the General Partner believes that all properties
owned by the Partnership are adequately covered by insurance.
The Partnership maintains an allowance for losses on real estate
held for sale in its financial statements of $1,184,000 as of
September 30, 1998.
Real estate acquired through foreclosure is typically held for a number
of years before ultimate disposition. During the time that the real estate is
held, the Partnership usually earns less income on these properties than could
be earned on mortgage loans.
Principal Investment Objectives
The Partnership invests primarily in mortgage loans on commercial,
industrial and residential income-producing real property and land. The General
Partner negotiates the terms of and makes or purchases all loans, which are then
acquired by the Partnership, on a loan-by-loan basis.
The Partnership's two principal investment objectives are to preserve
the capital of the Partnership and provide monthly cash distributions to the
limited partners. It is not an objective of the Partnership to provide
tax-sheltered income. Under the Partnership Agreement, the General Partner would
be permitted to modify these investment objectives without the vote of limited
partners but has no authority to do anything that would make it impossible to
carry on the ordinary business as a mortgage investment limited partnership.
The General Partner locates and identifies virtually all mortgages the
Partnership invests in and makes all investment decisions on behalf of the
Partnership in its sole discretion. The limited partners are not entitled to act
on any proposed investment. In evaluating prospective investments, the General
Partner considers such factors as the following:
the ratio of the amount of the investment to the value of the
property by which it is secured;
the 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;
the property's 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 General Partner believes are relevant.
Substantially all investment loans of the Partnership are originated by
the General Partner, which is licensed by the State of California as a real
estate broker and California Finance Lender. During the course of its business,
the General Partner is continuously evaluating prospective investments. The
General Partner originates loans from mortgage brokers, previous borrowers, and
by personal solicitations of new borrowers. The Partnership may purchase
existing loans that were originated by other lenders. Such a loan might be
obtained by the General Partner from a third party and sold to the Partnership
at an amount equal to or less than its face value. The General Partner evaluates
all potential mortgage loan investments to determine if the security for the
loan and the loan-to-value ratio meets the standards established for the
Partnership, and if the loan can meet the Partnership's investment criteria and
objectives. An appraisal will be ordered on the property securing the loan, and
an officer, director, agent or employee of the General Partner will inspect the
property during the loan approval process.
The Partnership requires that each borrower obtain a title insurance
policy as to the priority of the mortgage and the condition of title. The
Partnership obtains an independent, on-site appraisal from a qualified appraiser
for each property in which it invests. Appraisals will ordinarily take into
account factors such as property location, age, condition, estimated building
cost, community and site data, valuation of land, valuation by cost, valuation
by income, economic market analysis, and correlation of the foregoing valuation
methods. The General Partner additionally relies on its own independent analysis
in determining whether or not to arrange a particular mortgage loan for the
Partnership.
Types of Mortgage Loans
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 Partner does 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 1-7 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 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 75% 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 75% of the appraised value of the mortgaged property.
Construction Loans
Construction loans are loans made for both original development and
renovation of property. Construction loans invested in by the Partnership are
generally secured by first deeds of trust on real property for terms of six
months to two years. In addition, if the mortgaged property is being developed,
the amount of such loans generally will not exceed 75% of the post-development
appraised value.
The Partnership will not usually disburse funds on a construction loan
until work in the previous phase of the project has been completed, and an
independent inspector has verified certain aspects of the construction and its
costs. In addition, the Partnership requires the submission of signed labor and
material lien releases by the borrower in connection with each completed phase
of the project prior to making any periodic disbursements of loan proceeds.
Leasehold Interest Loans
Loans on leasehold interests are secured by an assignment of the
borrower's leasehold interest in the particular real property. Such loans are
generally for terms of from six months to 15 years. Leasehold interest loans
generally do not exceed 75% of the value of the leasehold interest and require
personal guarantees of the borrowers. The leasehold interest loans are either
amortized over a period that is shorter than the lease term or have a maturity
date prior to the date the lease terminates. These loans all permit the General
Partner to cure any default under the lease.
Variable Rate Loans
Approximately 38% ($67,370,000) of the Partnership's loans as of
September 30, 1998 bear interest at a variable rate. Variable rate loans
originated by the General Partner may use as indices the one and five year
Treasury Constant Maturity Index, the Prime Rate Index and the Monthly Weighted
Average Cost of Funds Index for Eleventh District Savings Institutions (Federal
Home Loan Bank Board).
The General Partner may negotiate spreads over these indices of from
2.5% to 5.5%, depending upon market conditions at the time the loan is made.
<PAGE>
The following is a summary of the various indices described above as of
September 30, 1998 and December 31, 1997:
September 30, December 31,
1998 1997
One-year Treasury Constant Maturity Index 4.41% 5.51%
Five-year Treasury Constant Maturity Index 4.24% 5.71%
Prime Rate Index 8.50% 8.50%
Monthly Weighted Average Cost of Funds for
Eleventh District Savings Institutions 4.90% 4.96%
It is possible that the interest rate index used in a variable rate
loan will rise (or fall) more slowly than the interest rate of other loan
investments available to the Partnership. The General Partner attempts to
minimize such interest rate 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 General Partner contain provisions under
which the interest rate cannot fall below the starting rate.
Interest Rate Caps
All variable rate loans acquired by the Partnership have interest rate
caps. The interest rate cap is generally a ceiling that is 2-4% above the
starting rate with a floor rate 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 Partner. The Partnership does
not typically make or invest in other assumable loans. To minimize risk to the
Partnership, 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 prepayment penalties.
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 September 30, 1998, $67,050,000 (approximately 38%) of
the mortgage loans held in the Partnership's portfolio were variable rate loans
which by their terms generally 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 minimizes the 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 mortgage
loan principal 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,
these 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.
Debt Coverage Standard for Mortgage Loans
Loans on commercial property require the net annual estimated cash flow
to equal or exceed the annual payments required on the mortgage loan.
Loan Limit Amount
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 made to the General
Partner, affiliates of the General Partner, or any limited partnership or entity
affiliated with or organized by the General Partner. However, the Partnership
may acquire investment in a mortgage loan payable by the General Partner when
the General Partner has assumed by foreclosure the obligations of the borrower
under that loan. As of September 30, 1998, the Partnership had secured loans
under which the General Partner and an affiliate were obligated in the total
amount of $2,095,332. However, all of these loans but one in the amount of
$180,000 were paid off in full in November 1998.
Purchase of Loans from Affiliates
Although it has never done so, the Partnership may purchase loans from
the General Partner or its affiliates that were originated by the General
Partner and first held for its own portfolio, as long as the loan is not in
default and otherwise satisfies all of the Partnership's lending criteria. In
addition, if the loan did not originate within the 90 days prior to its purchase
by the Partnership from the General Partner, the General Partner must retain a
minimum of a 10% interest in the loan. This requirement also applies to any loan
originated by an affiliate of the General Partner.
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 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 done so, the
Partnership may incur indebtedness in order to operate or develop a property
that the Partnership acquires under a defaulted loan.
Repayment of Mortgages On Sales of Properties
The Partnership invests in mortgage loans and does not acquire real
estate or engage in real estate operations or development (other than when the
Partnership forecloses on a loan or takes over management of such foreclosed
property). The Partnership also 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 a mortgage loan upon
the sale of the mortgaged property rather than allow the buyer to assume the
existing loan. This may be done if the General Partner determines that 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, the
credit-worthiness of the buyer and the objectives of the Partnership. The net
proceeds to the Partnership from any sale or repayment are invested in new
mortgage loans, held as cash or distributed to the partners at such times and in
such intervals as the General Partner in its sole discretion determines.
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 that are imposed on real estate
investment trusts. The Partnership conducts its business so that it is not an
"investment company" within the meaning of 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:
issue securities senior to the Units or issue any Units or other
securities for other than cash;
invest in the securities of other issuers for the purpose of
exercising control, except in connection with the exercise of its
rights as a secured lender;
underwrite securities of other issuers; or
offer securities in exchange for property.
Competition and General Economic Conditions
The Partnership's major competitors in providing mortgage loans 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 General Partner generates all of its
loans. The General Partner has been in the business of making or investing in
mortgage loans in Northern California since 1951 and has developed a quality
reputation and recognition within the field.
For the past few years, the major institutional lenders have not been
as active in the commercial mortgage market as in past years. 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 have generally decreased
over the past several months and may decrease further in the near future,
reducing the net income of the Partnership and the yield earned by the limited
partners.
Available Information
This Prospectus does not contain all information set forth in the
Registration Statement on Form S-11 (No. 33-__________) 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.
HOW THE PARTNERSHIP PROTECTS ITS RIGHTS AS A LENDER
Introduction
The following discussion is limited to the laws of the State of
California, where most of the real estate that secures the loans invested in by
the Partnership is located. The laws of other states where the Partnership has
or may have mortgage investments may be significantly different. The Partnership
generally obtains the advice of legal counsel in those states, in connection
with new loans in those states.
General
Most of the Partnership's loans are secured by a deed of trust, the
most commonly used way of securing the lender's interest in a real property
secured loan. In this Prospectus, references to "mortgages" or "mortgage loans"
include "deeds of trust" or "deeds of trust loans."
Parties to a Deed of Trust
The deed of trust has these parties:
The borrower- trustor (like a mortgagor);
The trustee; and
The lender- creditor (like a mortgagee).
The borrower conveys the property, until the debt is paid, in trust to
the trustee for the benefit of the lender (the "beneficiary"), to secure the
payment of the borrower's obligations.
The power of the trustee is governed by the loan documents and the
state law. The trustee under the Partnership's loans will normally be Investors
Yield, Inc., a wholly owned subsidiary of the General Partner, which is a
California corporation qualified to act as a trustee. The trustee may be changed
by the Partnership and a different qualified trustee appointed.
Foreclosure
Nonjudicial Foreclosure
When a Partnership loan is in default and the General Partner's
judgment is that the best way of protecting the Partnership's interest in the
loan is to foreclose, it will act to do so. The most commonly used foreclosure
procedure is the following:
The General Partner notifies the trustee;
The trustee records a notice of default, sends it to the
borrowers, and publishes it publicly;
If there is a lien on the property that is junior to the
Partnership's, the junior lienhholder or its borrower has time to
cure the default and reinstate the loan;
The trustee may sell the secured property by public auction after
the required notice has been provided to the borrower, unless it
pays the loan obligations;
The beneficiary under the deed of trust, in this case the
Partnership, may make a non-cash bid equal to the total amount
secured by the deed of trust, including fees and expenses; any
other bidder may be required by the trustee to show evidence of
ability to pay its bid amount in cash;
After the sale, the trustee will execute and deliver a trustee's
deed to the Partnership if it is the purchaser; title under this
deed is subject to all prior liens and claims, including real
estate taxes.
If the Partnership's deed of trust was not superior to all other
liens on the property, foreclosure by the Partnership leaves it
subject to those prior liens.
Proceeds to Partnership from Trustee Sale
When the Partnership uses non-judicial foreclosure, the trustee first
applies the amount of the Partnership's purchase bid to the fees and costs of
the sale, and then to the unpaid indebtedness. Amounts in excess of that, if
any, are paid first to holders of any junior liens and then to the borrower.
Following the trustee's sale, the borrower's right to redeem the property is cut
off, and the Partnership normally has no further right, under California law, of
collection for any amount remaining unpaid under the loan, unless there was
other security obtained from the borrower, such as property other than the real
estate.
Judicial Procedure
If the Partnership's object is to seek a judgment in court against the
borrower for the deficiency between the value of the secured real property and
the amount due under the loan, it may seek judicial foreclosure of its deed of
trust. This is a more prolonged procedure, usually, subject to most of the
delays and expenses of other lawsuits, sometimes requiring years to complete.
Recovery of such a deficiency judgment is also barred by California law in
certain situations where the loan was made to purchase the real estate, and is
subject to other statutory limitations. Following a judicial foreclosure sale,
the borrower or its successor has either one year or three months, depending
upon the type of purchase made at the sale, to redeem the property and remains
in possession during this period. Consequently, judicial foreclosure is rarely
used by the Partnership.
Other Statutory Provisions Affecting Foreclosure
Other statutes, such as bankruptcy laws and laws giving certain
priorities to federal tax liens, may have the effect of delaying the
Partnership's foreclosure under a deed of trust and reducing the amount realized
from a trustee's sale, due to such delay, such as a decline in the borrower's
financial condition or ability to maintain the secured property pending recovery
of it by the Partnership.
Provisions in Deeds of Trust
Insurance and Condemnation Proceeds
The form of deed of trust used by the Partnership gives it the right to
receive all proceeds from hazard insurance and any award made in a condemnation
proceeding and use those funds to apply to the indebtedness under the loan.
Future Advances Clause
If the Partnership advances additional funds to a borrower, these will
be covered by the deed of trust. Under California law, the Partnership's
priority with respect to those advances depends on whether an advance was
obligatory or optional. If obligatory, the Partnership's priority will remain as
to the advance. If optional, the advance will be subordinate to any other lien
imposed with the knowledge of the Partnership after it made its original loan.
Borrower's Must Pay Taxes and Prior Liens, Maintain Property
If the borrower under a Partnership deed of trust does not pay when due
all taxes and assessments and prior liens on the secured property and maintain
the property with adequate hazard insurance, the Partnership can step in and do
these things itself. If it does, its expenditures become additions to the
indebtedness of the borrower under the deed of trust.
"Due-on-Sale" Clauses
The Partnership's standard form of deed of trust, like that of most
institutional lenders, may contain a due-on-sale clause, permitting the
Partnership to accelerate payment of the loan if the borrower sells or transfers
the secured property.
Under a 1982 federal statute and a U.S. Supreme Court case, the
Partnership should be permitted to enforce a due-on-sale clause, with certain
exceptions pertaining to specific residential property. None of the
Partnership's investment loans are secured by that type of residential property
and its due-on-sale clauses should therefore be enforceable.
"Due-on-Encumbrance" Clauses
If a "due-on-encumbrance" clause is in a Partnership's deed of trust,
it permits the Partnership to accelerate the maturity of the loan if the
borrower encumbers the property with an additional lien, or it may prohibit such
a lien altogether. The due-on-encumbrance clause would probably be enforceable,
like its due-on-sale clause, because the Partnership's loans are not secured by
the type of residential property that would make the loans unenforceable.
Prepayment Charges
The Partnership's deed of trust may provide that a borrower must pay
specified additional amounts if it makes early payments on or full repayment of
the loan. A similar provision would preclude the borrower from repayment for a
specified period of time, usually several years. These provisions should be
enforceable by the Partnership, so long as any reasonable charges are imposed.
The Partnership's deeds of trust usually do not contain this type of provision.
The General Partner has the total discretion to waive prepayment
charges imposed by any Partnership's deed of trust.
Late Charges and Additional Interest on Delinquent Payments
The Partnership's loans generally include a provision which requires
the borrower to pay a late payment charge, if payments are not received within
the specified period, and additional interest on delinquent payments. These
provisions should be enforceable if the amount of the charge is reasonable. All
late charges and additional interest on delinquent payments is retained by the
General Partner, and may be considered compensation for its services to the
Partnership.
California Usury Law Not Applicable to Partnership Mortgage Loans
The General Partner is licensed as a real estate broker by the
California Department of Real Estate and as a California Finance Lender by the
Corporations Commissioner. Mortgage loans made or arranged by a licensed real
estate broker are exempt from the California usury law provisions that restrict
the maximum rate of interest on California loans. All mortgage loans of the
Partnership are made or arranged by the General Partner for the Partnership.
When the Partnership invests in a loan in a state other than
California, it consults with legal counsel in that state for advice as to the
usury laws there. The Partnership will always seek to invest in loans that will
not cause usury law violations in any state. It is possible, however, that
violation could have inadvertently occurred, or may occur in the future,
although the General Partner knows of no such loans. Severe penalties, including
loss of interest and treble damages, may be imposed for violations of usury
laws.
FEDERAL INCOME TAX CONSEQUENCES
The following summarizes the anticipated federal income tax aspects of
an investment in the Partnership. It is impractical to discuss all tax
consequences of federal, state, and local law of an investment. This summary is
based on the Internal Revenue Code of 1986, as amended ("Code"), existing laws,
judicial decisions and administrative regulations, rulings and practice, any of
which could change, and such changes could be retroactive.
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.
Some of the deductions claimed or positions taken by the Partnership
may 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, the disallowance of certain deductions or credits claimed by the
Partnership or an audit of the income tax returns of a limited partner.
Any audit adjustments made by the IRS could adversely affect the
limited partners, and even if no such adjustments were ultimately sustained, the
limited partners would, directly or indirectly, bear the expense of contesting
such adjustments.
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.
Neither the Partnership's independent accountant or tax counsel will
prepare or review the Partnership's income tax information returns, which will
be prepared by the General Partner. Tax matters involving the Partnership will
be handled by the General Partner, 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 that:
the Partnership will be classified as a partnership rather than as
an association taxable as a corporation for federal income tax
purposes;
the Partnership will not be classified as a "publicly traded
partnership" for federal income tax purposes; and
the discussion set forth below is an accurate summary of certain
material federal income tax aspects of an investment by a limited
partner in the Partnership.
The following discusses the material tax issues associated with an
investment in the Partnership.
This discussion considers 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. It is not known whether a
court would sustain any Partnership position, if contested, or whether there
might be legislative or administrative changes or court decisions that would
modify this discussion. 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.
Each person 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 section 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.
Classification as a Partnership
Under Regulations issued in December 1996 (the "Check-the-Box"
Regulations), a 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 is a domestic partnership and was classified as a partnership
for tax purposes prior to January 1, 1997. The General Partner will not cause
the Partnership to make an election to be classified as an association taxable
as a corporation. Based on the foregoing and subject to the discussion set forth
below regarding the tax treatment of publicly traded partnerships, it is the
opinion of tax counsel that that the Partnership will retain its classification
as a partnership for federal income tax purposes.
The Partnership Will Not Be Classified As A Publicly Traded Partnership
Section 7704 of the Code treats "publicly traded partnerships" as
corporations for federal income tax purposes. Section 7704(b) of the Code
defines the term "publicly traded partnership" as any partnership the interest
of which are readily traded on an established securities market; or readily
tradable on a secondary market or the substantial equivalent thereof.
IRS Notice 88-75 sets forth comprehensive guidance concerning the
application of Section 7704 prior to the adoption of final Regulations under
Section 7704. It primarily addresses the issue of when partnership interests
will be considered to be readily tradable on a secondary market or the
substantial equivalent thereof under Section 7704(b).
In 1995, the IRS issued Final Regulations under Section 7704 (the
"Final PTP Regulations"). The Final PTP Regulations generally retain the
conceptual framework of Notice 88-75, but contain a number of modifications, and
are generally effective for taxable years beginning after December 31, 1995.
However, the Final PTP Regulations contain a transitional rule which provides
that for partnerships, like the Partnership, that were actively engaged in an
activity before December 4, 1995, the Final PTP Regulations will not be
effective until taxable years beginning after December 31, 2005, unless the
partnership adds a substantial new line of business after December 4, 1995.
During this transitional period, such partnerships may continue to rely on
Notice 88-75.
The Final PTP Regulations provide that an established securities market
includes:
a national securities exchange registered under the Securities
Exchange Act of 1934;
a national securities exchange exempt from registration because of
the limited volume of transactions;
a foreign securities exchange;
a regional or local exchange; and
an interdealer quotation system that regularly disseminates firm
buy or sell quotations by identified brokers or dealers by
electronic means or otherwise (i.e., an over-the-counter market).
As indicated above, the primary focus of Notice 88-75 is on determining
when partnership interests will be treated as "readily tradable on a secondary
market or the substantial equivalent thereof." The Notice and the Final PTP
Regulations provide a number of safe harbors relative to this determination. The
safe harbors in the Final Regulations generally track those in Notice 88-75.
Included as safe harbors in Notice 88-75 and the Final PTP Regulations are those
designated as "Lack of Actual Trading" (the "Lack of Actual Trading Safe
Harbors").
The Lack of Actual Trading Safe Harbors contained in Notice 88-75
provide that interests in a partnership will not be considered readily tradable
on a secondary market or the substantial equivalent thereof if the sum of the
percentage interests in partnership capital or profits that are sold or
otherwise disposed of during the taxable year does not exceed a specified
percentage (either 5% or 2%) of the total interests in partnership capital or
profits.
The determination of whether the specified percentage is 5% (the "Five
Percent Safe Harbor") or 2% (the "Two Percent Safe Harbor") depends on which of
certain designated transfers are disregarded for purposes of determining whether
the percentage limitation has been satisfied. This is discussed in greater
detail below. The Final Regulations contain a Lack of Actual Trading Safe Harbor
which essentially conforms to the Two Percent Safe Harbor in Notice 88-75.
Certain transfers are disregarded for purposes of determining whether
these safe harbors are satisfied. These include transfers at death, transfers in
which the basis is determined under Section 732 of the Code and interests issued
by the partnership for cash, property or services. In addition, for purposes of
the Two Percent Safe Harbor interests in the partnership which are redeemed
pursuant to the "Redemption and Repurchase Safe Harbor" discussed below are also
disregarded.
Notice 88-75 and the Final Regulations each contain a safe harbor for
redemption and repurchase agreements (the "Redemption and Repurchase Safe
Harbor"). These safe harbors are substantially identical and provide that the
transfer of an interest in a partnership pursuant to a "redemption or repurchase
agreement" is disregarded for purposes of determining whether interests in the
partnership are readily tradable on a secondary market or the substantial
equivalent thereof certain requirements are met. A redemption or repurchase
agreement means a plan of redemption or repurchase maintained by a partnership
whereby the partners may tender their partnership interests for purchase by the
partnership, another partner or certain persons related to another partner.
The requirements which must be met in order to disregard transfers made
pursuant to a redemption or repurchase agreement and which are provided for in
the Partnership Agreement are:
the redemption agreement requires that the redemption cannot occur
until at least 60 calendar days after the partner notifies the
partnership in writing of the partner's intention to exercise the
redemption right;
the redemption agreement requires that the redemption price not be
established until at least 60 days after receipt of such
notification by the partnership (or the price is established not
more than 4 times during the partnership's taxable year); and
the sum of the percentage interests in partnership capital and
profits represented by partnership interests that are transferred
(other than in transfers otherwise disregarded, as described
above) during the taxable year of the partnership, does not exceed
10% of the total interests in partnership capital or profits.
The Partnership Agreement provides that a limited partner may not
transfer his interest in the Partnership, if in the opinion of tax counsel for
the Partnership it would jeopardize the status of the Partnership as a
partnership for federal income tax purposes. To prevent that:
the Partnership will not permit trading of Units on an established
securities market within the meaning of Section 7704(b);
the General Partner will prohibit any transfer of Units to exceed
the limitations under the applicable safe harbor provision; and
the General Partner will not permit any withdrawal of Units except
in compliance with the provisions of the Partnership Agreement.
Based upon the provisions of the Partnership Agreement and the
representations of the General Partner, tax counsel's opinion is that:
interests in the Partnership will not be traded on an established
securities market within the meaning of Section 7704 of the Code;
the operation of the Partnership with regard to the withdrawal by
limited partners will qualify for the Redemption and Repurchase
Safe Harbor;
the operation of the Partnership with regard to the transfer of
Units by limited partners will qualify for either the Two Percent
Safe Harbor or the Five Percent Safe Harbor, whichever, is
applicable for a given year;
interests in the Partnership will not be considered as readily
tradable on a secondary market or the substantial equivalent
thereof; and
the Partnership will not be classified as a publicly traded
partnership for purposes of Section 7704 of the Code.
A partnership which is a publicly traded partnership under Section 7704
of the Code is not a corporation for federal income tax purposes, if 90% or more
of its gross income is "qualifying income." "Qualifying income" for this purpose
includes interest, dividends, real property rents, and gains from the sale of
real property, but excludes interest derived in the conduct of a financial
business.
If a publicly traded partnership is not taxed as a corporation because
it meets the qualifying income test, the passive loss rules discussed below are
applied separately to the partnership, and a tax-exempt partner's share of the
partnership's gross income is treated as income from an unrelated trade or
business for purposes of the unrelated trade or business taxable income rules
discussed below.
It is not clear whether the Partnership would satisfy this "qualifying
income" test. (This would be relevant only if it were determined that the
Partnership should be classified as a publicly traded partnership.) The General
Partner expects that more than 90% of the Partnership's income will be of the
passive-type included in the definition of "qualifying income." However, it is
not clear whether the Partnership is engaged in the conduct of a financial
business. If the Partnership were classified as a publicly traded partnership
and considered to be engaged in a financial business, the Partnership would be
treated as a corporation for federal income tax purposes.
General Principles of Partnership Taxation
A partnership generally is not subject to any federal income taxes. The
Partnership will file partnership information returns reporting its operations
on the accrual basis for each calendar year.
Determination of Basis in Units
In general, a limited partner is not taxed on partnership distributions
unless such distributions exceed the limited partner's adjusted basis in his
Units. A limited partner's adjusted basis in his Units is the amount originally
paid increased by:
his proportionate share of Partnership indebtedness with respect
to which no partner is personally liable,
his proportionate share of the Partnership's taxable income, and
any additional contributions to the Partnership's capital by such
limited partner, and decreased by:
his proportionate share of losses of the Partnership,
the amount of cash, and fair value of noncash, distributions to
such limited partner, and
any decreases in his share of any nonrecourse liabilities of the
Partnership.
Any increase in nonrecourse liabilities is a cash contribution and a decrease in
nonrecourse liabilities is a cash distribution, even though the limited partner
does not actually contribute or receive cash. Distributions in excess of such
basis generally will be gain from the sale or exchange of a limited partner's
interest in the Partnership.
Allocations of Profits and Losses
The Partnership will allocate to the partners profits and losses and
cash distributions in the manner described in Article VIII of the Partnership
Agreement. These allocations will be accepted by the IRS as long as they have
"substantial economic effect" under their Regulations by satisfying one of these
tests:
it has "substantial economic effect" (the "substantial economic
effect test");
it is in accordance with the partners' interest in the Partnership
(the "partners' interest in the partnership test"); or
it is "deemed" to be in accordance with the partners' interest in
the Partnership.
The substantial economic effect test is a substantially objective test
which effectively creates a safe harbor for compliance with the requirements of
Section 704(b). However, in order to comply strictly with the requirements of
that test, it would be necessary to include in the Partnership Agreement a
lengthy, intricate and complex set of provisions which may have little practical
significance based on our operations.
It is not anticipated that the operation of the Partnership and the
allocation provisions of the Partnership Agreement will ever produce a situation
in which a partner will be allocated losses in excess of the economic losses
actually borne by such partner. For these reasons, the General Partner has
decided not to include these complex provisions in the Partnership Agreement and
to rely instead on the partners' interest in the partnership test as the basis
for justifying the allocations under the Partnership Agreement.
The allocation of profits, losses and cash distributions under the
Partnership Agreement will be substantially proportionate to the capital
accounts of the partners. For this reason, the IRS should treat the allocations
as being substantially in accordance with the partners' interests in the
Partnership.
Limitations on the Deduction of Losses
The Partnership does not expect that it will incur net losses for
income tax purposes in any taxable year. However, if the Partnership were to
incur losses in any year, the ability of a limited partner to deduct such losses
would be subject to the potential application of the limitations discussed
below.
The Basis Limitation
Section 704(d) of the Code provides that a limited partner's share of
Partnership losses will be allowed as a deduction only to the extent of his
adjusted basis in his Units at the end of the year in which the losses occur.
Losses disallowed under Section 704(d) may be carried forward indefinitely until
adequate basis is available to permit their deduction.
The At Risk Limitation
Section 465 of the Code provides that the Partnership may not deduct
losses incurred in its lending activities, in an amount exceeding the aggregate
amount it is "at risk" at the close of its taxable year. This limits 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 the purchase price of your Units
to the extent you used the proceeds of a nonrecourse borrowing to purchase the
Units.
The Passive Loss Rules
Section 469 of the Code limits the deductibility of losses from
"passive activities" for individuals, estates, trusts and certain closely-held
corporations to offset passive income and not to offset "non-passive" income.
Unused credits attributable to passive activities may be carried forward and
treated as deductions and credits from passive activities in the next year.
Unused 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.
The Regulations under Section 469 provide that in certain situations,
passive net income (but not passive net loss) is treated as nonpassive. One of
the items in this Regulation is net income from an "equity-financed lending
activity." An equity-financed lending activity is defined as an activity that
involves a trade or business of lending money, if the average outstanding
balance of liabilities incurred in the activity for the taxable year does not
exceed 80% of the average outstanding balance of the interest-bearing assets
held in the activity for such year.
The General Partner expects that at no time will the average
outstanding balance of Partnership liabilities exceed 80% of the average
outstanding balance of the Partnership's mortgage loans. If the Partnership is
deemed for tax purposes to be engaged in the trade or business of lending money,
it is an equity-financed lending activity. The Partnership's income will
therefore generally be recharacterized as nonpassive income, even though the net
losses of the Partnership or loss on the sale of a Unit by a limited partner
will be treated as passive activity losses.
If the Partnership is not deemed to be engaged in a trade or business
of lending money, then its income and loss will be considered portfolio income
and loss and a limited partner may not offset any other of his passive losses
against his share of the income of the Partnership.
Section 67(a) of the Code makes most miscellaneous itemized deductions
deductible by an individual taxpayer only to the extent that they exceed 2% of
the taxpayer's adjusted gross income and limits are set 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 subject to this
2% limitation, only if the Partnership is not considered to be in the trade or
business of lending money.
Computation of Gain or Loss on Sale or Repurchase of Units
Gain or loss on the sale by a limited partner of his Units (including a
repurchase by the Partnership) will be the difference between the amount
realized, including his share of Partnership nonrecourse liabilities, if any,
and his adjusted basis in such Units.
Character of Gain or Loss
Generally, gain on the sale of Units which have been held over 12
months 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 Partnership may have "unrealized receivables"
arising from the ordinary income component of "market discount bonds." 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."
For noncorporate taxpayers, long-term capital gain for assets held
longer than 12 months is subject to a maximum rate of 20% (10% for individuals
in the 15% tax bracket). The amount of ordinary income against which a
noncorporate taxpayer may deduct a capital loss is the lower of $3,000 (or 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.
Tax Rates on a Limited Partner's Share of Ordinary Income from the Partnership
A taxpayer's tax liability with respect to an investment in the
Partnership will depend upon his individual tax bracket. Currently, there are
five tax brackets for individuals. For calendar year 1999, the first bracket is
at 15% (on taxable income not over $43,050 in the case of married taxpayers
filing joint returns), the second at 28% (on taxable income from
$43,050-$104,050), the third at 31% (on taxable income from $104,050-$158,550),
the fourth at 36% (on taxable income from $158,550-$283,150), and the fifth at
39.6% (on taxable income over $283,150).
Depreciation
From time to time the Partnership acquires equity or leasehold
interests in real property by foreclosure or otherwise (e.g., the eleven
properties held by the Partnership as of September 30, 1998 that were acquired
through foreclosure). Generally, the cost of the improvements on any such owned
real property may be recovered through depreciation deductions over a period of
39 years.
Investment Interest
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. Interest expense of the Partnership and interest expense
incurred by limited partners to acquire Units will not be treated as investment
interest if it is attributable to a passive activity of the Partnership.
However, any interest expense allocable to "portfolio investments" is subject to
the investment interest limitations.
Interest attributable to any debt incurred by a limited partner in
order to purchase Units may constitute "investment interest" subject to these
deductibility limitations. Prospective investors 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. 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. We refer to
such an organization, plan or account 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 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:
interest and dividend income;
rents from real property (other than debt-financed property or
property from which participating rentals are derived); and
gains on the sale, exchange or other disposition of assets held
for investment.
The receipt of unrelated business taxable income by a Tax-Exempt Entity
has no effect on its tax-exempt status or on the exemption from tax of its other
income. In certain circumstances, the continual receipt of unrelated business
taxable income may cause certain Tax-Exempt Entities to lose their exemption.
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 Partner intends 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 Units.
Unrelated debt-financed income might be derived in the event that the General
Partner deems it advisable to incur indebtedness in connection with foreclosures
on property where mortgagees have defaulted on their loans.
Subject to certain exceptions, if the Partnership acquires property
subject to acquisition indebtedness, the income attributable to the portion of
the property which is debt financed may be treated as unrelated business taxable
income to the Tax-Exempt Entity holding Units.
Sales of foreclosure property might also produce unrelated business
taxable income if the Partnership is characterized as a "dealer" with respect to
that property. 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. The IRS might not 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 Tax-Exempt Entity is a qualified employee benefit plan or an
individual retirement account, and its Partnership income constitutes unrelated
business taxable income, then 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 or an individual retirement account,
a fiduciary should consider:
whether the investment is in accordance with the documents and
instruments governing the plan;
whether the investment satisfies the diversification requirements
of Section 404(a)(1)(C) of the Employee Retirement Income Security
Act of 1974 ("ERISA");
whether the investment is prudent considering, among other
matters, that there probably will not be a market created in which
the investment can be sold or otherwise disposed of; and
whether the investment would cause the IRS to impose an excise tax
under Section 4975 of the Code.
An investment in the Partnership by 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 that is
established or maintained by an employer, employee organization, or both.
Partnership Tax Returns and Audits
The General Partner prepares the Partnership's information income tax
returns. 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. A partner may report an item inconsistently if
he files a statement with the IRS identifying the inconsistency. Otherwise, the
IRS could assess additional tax necessary to make the partner's treatment of the
item consistent with the partnership's treatment of the item, and even
penalties, without a notice of deficiency or an opportunity to protest the
additional tax in the Tax Court.
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.
General Partner is Tax Matters Partner
A partnership must designate a "tax matters partner" to represent the
partnership in dealing with the IRS. The General Partner 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. 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.
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.
Original Issue Discount Rules
The original issue discount rules under the Tax Code pertain to
mortgage loans and obligations issued by the Partnership. The effect is the
Partnership will realize the amount that economically accrues under a mortgage
during the course of the year (using compound interest concepts) even where a
lesser amount is actually paid or accrued under its terms. Identical concepts
will be used for determining the Partnership's interest deduction on its own
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. Each monthly payment which the Partnership receives from such 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 the return of a
portion of the Partnership's investment in the investment in a mortgage loan and
the payment of a portion of the market discount for the investment in a mortgage
loan.
The Partnership will recognize the amount of each monthly payment
attributable to market discount as ordinary income, but the amount of each
monthly payment representing the return of 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.
No Section 754 Election - Impact on Subsequent Purchasers
Section 754 of the Code permits a partnership to elect to adjust the
basis of its property in the case of a transfer of a Unit. An election would
mean that, with respect to the transferee limited partner only, the basis of his
Units would either be increased or decreased by the difference between his
purchase price for his Unit and his proportionate share of the Partnership's
basis for all Partnership property.
The General Partner has decided that due to the accounting difficulties
which would be involved, it will not make the election pursuant to Section 754.
Consequently, the Partnership's tax basis in its assets will not be adjusted to
reflect the transferee's purchase price of his Units.
This treatment might not be attractive to a prospective purchaser of a
limited partner's Units and a limited partner might have difficulty for that
reason in selling these Units or might be forced to sell at a discounted price.
Taxation of Mortgage Loan Interest
Mortgage loans made by the Partnership may sometimes permit the
Partnership to participate in any appreciation in the value of the properties or
in the cash flow generated by the operation by the borrowers of mortgaged
properties.
The IRS then might seek to recharacterize the 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
mortgaged property. 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 Partner
The General Partner will be paid a management fee for the management
services rendered to the Partnership. The management fee will be payable
monthly, subject to a yearly maximum of 2-3/4% of the average unpaid balance of
the Partnership's mortgage loans at the end of each month. In addition, the
General Partner services Partnership loans, for which it receives from the
Partnership a monthly fee of 1/4 of 1% per year of the unpaid balance of the
Partnership's mortgage loans.
The Partnership will deduct the amount of all management and loan
servicing fees each year in computing the taxable income of the Partnership. The
deductibility of such fees depends on the value of the management services or
loan servicing services rendered, which is a question of fact that may depend on
events to occur in the future.
Due to this uncertainty, tax counsel has not given its opinion as to
the proper tax treatment of these fees, and the IRS may attempt to
recharacterize the Partnership's treatment of such fees by disallowing the
deduction claimed by the Partnership. That action could cause the tax benefits
generated by the payment of such fees to be deferred or lost.
The General Partner may receive investment evaluation fees (commonly
known as mortgage placement fees or "points") from borrowers for evaluating
potential investments of the Partnership. The IRS might take the position that
these fees are constructively paid by the Partnership, which would increase by
the amount of the fees. The fees would then be deductible by the Partnership
only to the extent they are reasonable compensation for the services rendered
and otherwise considered deductible expenditures. Since this is ultimately an
issue of fact which may depend on future events, tax counsel has not given its
opinion on this matter.
The General Partner is entitled to reimbursement from the Partnership
for certain expenses advanced by the General Partner for the benefit of the
Partnership and for salaries and related expenses for nonmanagement and
nonsupervisory services performed for the benefit of the Partnership. The
reimbursement of such expenses by the Partnership will generally be treated in
the same manner as if the Partnership incurred such costs directly.
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 or not of adoption of any
such proposal, the effect of it on the Partnership, or the effective date, which
could be retroactive, of any legislation.
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 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).
ERISA and the Code also 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 Partner
may not permit the purchase of Units with assets of any Qualified Plan
(including a Keogh Plan or IRA) if it:
has investment discretion with respect to the assets of the
Qualified Plan invested in the Partnership, or
regularly gives 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.
Although the General Partner will provide to a limited partner upon his written
request an annual estimate of the value of the Units based upon, among other
things, outstanding mortgage investments, fair market valuation based on trading
will not be possible because there will be no market for the Units.
Plan Assets Generally
If the assets of the Partnership are deemed to be "plan assets" under
ERISA:
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,
certain transactions that the Partnership might seek to enter into
might constitute "prohibited transactions" under ERISA and the
Code because the General Partner would be deemed to be fiduciaries
of the Qualified Plan limited partners, and
audited financial information concerning the Partnership would
have to be reported annually to the Department of Labor.
In 1986, the Department of Labor promulgated final regulations defining
the term "plan assets" (the "Final DOL Regulations"). Under the Final DOL
Regulations, generally, when a plan makes an equity investment in another
entity, the underlying assets of that entity will be considered plan assets
unless:
equity participation by benefit plan investors is not significant,
the entity is a real estate operating company, or
the equity interest is a "publicly-offered security."
Exemption for Insignificant Participation by Qualified Plans. The Final
DOL Regulations provide 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 Partner and its 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.
Exemption For a Real Estate Operating Company. The Final DOL
Regulations also provide 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 DOL Regulations states the Department of
Labor's view that an entity would not be engaged in the management or
development of real estate if it merely services mortgages on real estate. Thus,
it is unlikely that the Partnership would qualify for an exemption from "plan
assets" treatment as a real estate operating company.
Exemption for Publicly Offered Securities. Under the Final DOL
Regulations, a "publicly offered security" is a security that is:
freely transferable,
part of a class of securities that is owned by 100 or more
investors independent of the issuer and of one another, and
either part of a class of securities registered under Section
12(b) or 12(g) of the Securities Exchange Act of 1934, or sold to
the plan as part of an offering of securities to the public
pursuant to an effective registration statement under the
Securities Act 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" is a factual question to be determined on the basis of all
relevant facts.
If a security is part of an offering in which the minimum is $10,000 or
less, however, certain customary restrictions on the owner 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 DOL
Regulations) will 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 DOL Regulations, the Units are held 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 DOL Regulations. As a result, the
underlying assets of the Partnership should not be considered to be plan assets
under the Final DOL Regulations.
SUMMARY OF PARTNERSHIP AGREEMENT,
RIGHTS OF LIMITED PARTNERS AND DESCRIPTION OF UNITS
The Units represent limited partnership interests in the Partnership.
The Amended and Restated Limited Partnership Agreement ("Partnership
Agreement"), as amended as of January ___, 1999, and the California Revised
Limited Partnership Act, Corporations Code Sections 15611 to 15723 (the "RLPA")
govern the rights and obligations of the limited partners. The following is a
summary of the Partnership Agreement. It does not purport to be complete and is
qualified in its entirety by reference to the Partnership Agreement and to the
RLPA. It in no way modifies or amends the Partnership Agreement, Exhibit A to
this Prospectus. As of September 30, 1998, there were 2,649 limited partners of
the Partnership.
Nature of the Partnership
The Partnership is a California limited partnership formed on June 14,
1984 under the California Limited Partnership Act. By an amendment to the
Partnership Agreement made on January ___, 1999, the Partnership has elected to
be governed by the RLPA. The Partnership Agreement authorizes the issuance and
sale of Units for cash up to a maximum outstanding of $500,000,000.
The Responsibilities of the General Partners
The General Partner is the exclusive manager of the Partnership and
controls all of its affairs. The General Partner arranges, makes and places with
the Partnership all of its investments, on terms that it believes are in its
best interests. The General Partner's specific responsibilities, among others,
are these:
to determine how to invest the Partnership's assets;
to execute all documents;
to acquire, sell, trade, exchange or otherwise dispose of
Partnership assets or any interest therein in its discretion;
to cause the Partnership to become a joint venturer, partner or
member of a development or operating entity for properties
acquired by the Partnership through foreclosure;
to manage, operate and develop Partnership property;
to employ or engage persons, including its affiliates, at the
expense of the Partnership required for the operation of the
Partnership's business;
to amend the Partnership Agreement, under certain circumstances,
without the vote of the limited partners;
Limitations on the General Partner
The General Partner has no authority to do any of the following, among
others:
any act in contradiction of the Partnership Agreement;
any act which would make it impossible to carry on the business of
the Partnership;
admit a General Partner without the prior approval of a
majority-in-interest of the limited partners;
dispose of all or substantially all of the Partnership assets or
dissolve the Partnership, without the prior approval of a
majority-in-interest of the limited partners.
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.
Under the RLPA, neither the voting on, proposing, or calling a meeting
of the partners for matters as to which the limited partners are entitled to
vote nor a number of other activities described in the RLPA, will cause the
limited partners to be deemed to be participating in the control of Partnership
business with a resulting loss of limited liability. Such activities consist,
among others, of the right, by a vote of a majority in interest of the limited
partners, to remove and then replace the General Partner; to admit an additional
General Partner; to dissolve and wind up the Partnership; to amend, under
certain circumstances, the Partnership Agreement; to change the nature of the
business; and to approve or disapprove the merger of the Partnership or sale,
mortgage, pledge, refinancing, lease, exchange or other transfer of all or
substantially all of the assets of the Partnership other than in the ordinary
course of business.
Term and Dissolution
The Partnership will continue until December 31, 2034, but may, in
certain circumstances, be dissolved at an earlier date. Under the RLPA, the
Partnership will be dissolved and its business wound up upon the first to occur
of:
the General Partner ceasing to be a general partner, with no
remaining general partner, unless a majority-in-interest of
limited partners (excluding the General Partner's limited
partnership interests) agree in writing to continue the business
of the Partnership and within six months admit at least one new
general partner;
the written consent or vote of a majority-in-interest of the
limited partners in favor of dissolution and winding up of the
Partnership; or
a decree of judicial dissolution.
The General Partner ceases to be a general partner upon its removal,
withdrawal, dissolution or adjudication of bankruptcy.
General Partner's Interest Upon Removal, Withdrawal or Termination
If the General Partner is removed, withdrawn or is terminated, the
Partnership shall pay to the General Partner all amounts then accrued and owing
to the General Partner. Additionally, the Partnership shall terminate the
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 interest. The then present fair market value of such interest shall be
determined by agreement between the 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 the General Partner and the Partnership. The method of payment to the
General Partner should not threaten the solvency or liquidity of the
Partnership.
Meetings
The General Partner may call meetings of the limited partners at any
time and upon written request to the General Partner signed by the limited
partners holding at least 10% of the Units. The General Partner has never called
a meeting of the limited partners and has no present intention of doing so. All
voting by the limited partners has been by written consent, pursuant to notice
as provided in the Partnership Agreement.
Voting Rights
The vote or consent a majority-of-interest of the limited partners is
required, for the following:
to amend the Partnership Agreement, except that the General
Partner may amend 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 Partner's
judgment, is not to the prejudice of the limited partners;
to dissolve and wind up the Partnership;
to remove the General Partner and elect one or more new General
Partners; or
to approve or disapprove the sale, pledge, refinancing or exchange
of all or substantially all of the assets 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 owned by limited partners 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 Partner of the Subscription Agreement signed and delivered by the
investor.
Distributions
All Net Income Available for Distribution (as defined in the
Partnership Agreement), if any, is paid monthly in cash or additional Units
(.99% to the 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, may be used to improve or maintain properties acquired by the
Partnership through foreclosure, may be used to pay operating expenses, or may
be distributed to the partners, in each event, in the sole discretion of the
General Partner. In the event of any distribution of net proceeds, such
distributions will be made to the partners, .99% to the 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 of net proceeds is made. No such distribution will be made to the
General Partner with respect to the portion of their adjusted capital
contribution represented by its promotional interest, until the limited partners
have received 100% of their capital contributions.
All distributions are subject to the payment of expenses and other
liabilities and the establishment and maintenance of reserves which are adequate
in the judgment of the General Partner. See Financial Statements of the
Partnership herein for historical record of net income allocated to limited
partners. All of such amounts were Net Income Available for Distribution to the
limited partners.
Reinvestments
After you purchase Units, you can choose to have your distributions
reinvested rather than receiving cash payments. These are called Reinvested
Distributions. Reinvested Distributions are used to purchase additional Units at
a rate of one Unit for every $1.00 of Reinvested Distributions. Subject to the
right of the General Partner to terminate or reinstate the Reinvestment Plan, it
will continue to be available as long as the limited partner meets all
applicable suitability standards. Reinvested Distributions are normally invested
in mortgage loans of the Partnership.
A limited partner may elect to participate in the Reinvestment Plan at
the time he invests and will be deemed a Reinvestment Plan participant as of
that day. Such limited partner may also make an 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 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 Partner will mail to each Reinvestment Plan 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 Partner 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.
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 Partner reserves the right to suspend or terminate the
Reinvestment Plan if:
it determines, in its sole discretion, that the Plan impairs the
capital or the operations of the Partnership;
it determines, in its sole discretion, that an emergency makes
continuance of the plan not reasonably practicable;
any governmental or regulatory agency with jurisdiction over the
Partnership so demands for the protection of the limited partners;
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
the General Partner determines 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. You may transfer your limited partner
interest in the Partnership only by written instrument satisfactory in form to
the General Partner. You may make no transfer of a fractional Unit, and no
transfer if you would then own less than 2,000 Units (other than a limited
partner transferring all of his or her Units or in the event of a transfer by
operation of law). Any transfer must comply with then-current laws, rules and
regulations of any applicable governmental authority, and the person to whom you
would wish to transfer must meet the registration and suitability provisions of
applicable state securities laws. Transferees who wish to become substituted
limited partners may do so only upon the written consent of the General Partner,
and after compliance with Article X 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 within 61 to 91 days after written notice of withdrawal is delivered to
the General Partner, subject to the following limitations:
Except with respect to a personal representative of a deceased
limited partner, no withdrawal may be made until the expiration of
at least one year from the date of a purchase of Units on or after
the date of this Prospectus, other than by way of automatic
reinvestment of Partnership distributions through the Reinvestment
Plan.
Any such cash payments in return of an outstanding Capital Account
will be made by the Partnership from Net Proceeds and Capital
Contributions during the 61 to 91 period after written notice is
provided to the General Partner.
Distributions to withdrawing limited partners are limited to a
maximum of $100,000 per calendar quarter for any limited partner.
The limited partners have the right to receive such distributions
of cash only to the extent such funds are available in excess of
known or anticipated expenses or other liabilities and reserves
therefor; the General Partner is not required to use any other
sources of Partnership funds other than Net Proceeds and Capital
Contributions to fund a withdrawal; nor is the General Partner
required to sell or otherwise liquidate any portion of the
Partnership's assets in order to fund a withdrawal.
During up to 90 days, as applicable, following receipt of written
notice of withdrawal from a limited partner, the General Partner
will not reinvest any Net Proceeds or Capital Contributions into
new loans until the Partnership has sufficient funds available to
distribute to the withdrawing limited partner all of his Capital
Account in cash.
The amount to be distributed to any withdrawing limited partner is
a sum equal to such limited partner's 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 Partnership's net assets.
No more than 10% of the outstanding Units of limited partners may
be withdrawn during any calendar year except upon dissolution of
the Partnership.
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 General Partner may
distribute all remaining amounts in such account to such limited
partner, who will thereupon be deemed to have fully withdrawn from
the Partnership.
All payments in satisfaction of requests for withdrawal are on a
"first-come, first-served" basis. If the sums required to fund
withdrawals in any particular month exceed the amount of cash
available for withdrawals, funds will be distributed first to the
limited partner whose request was first received by the General
Partner, 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
withdrawals or otherwise, the General Partner will continue to
distribute eligible funds to such limited partner until such
withdrawal request is paid in full. Once the General Partner has
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.
Special Power of Attorney
Under the terms of the Partnership Agreement, each limited partner
appoints the General Partner to serve as his attorney-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 Partner 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 Fund, the
General Partner 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 Partner 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. Financial statements
will include the statements of income, balance sheets, statements of cash flows
and statements of partners' capital with a reconciliation with respect to
information furnished to limited partners for income tax purposes. The annual
report will also report on the Partnership's activities for that year, identify
the source of Partnership distributions, set forth the compensation paid to the
General Partner and its affiliates, and provide a statement of the services
performed in consideration therefor and contain such other information as is
deemed reasonably necessary by the General Partner to advise the limited
partners of the affairs of the Partnership.
The Partnership will provide upon written request for review by a
limited partner 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 providing the Form 10-K and Form 10-Q or other document 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 Corporation ("Underwriter"), a wholly-owned subsidiary
of the General Partner and a broker-dealer registered with the SEC and certain
states and a member of the National Association of Securities Dealers, Inc.
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 Corporation, or
certain officers or directors of the 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. No commission will be paid to Owens Securities
Corporations or any other person in connection with the offering of the Units.
The 120,000,000 Units (including reofferings of Units purchased or to
be purchased by the Partnership on withdrawals by Limited Partners) are offered
to the public at $1.00 per Unit. The minimum investment is 2,000 Units ($2,000).
The underwriter and the General Partner have the right to reject any purchase of
Units, but will generally accept or reject Subscription Agreements upon their
receipt. The offering period will continue until terminated by the General
Partner. In addition, at times when the General Partner determines that there
are not suitable loans for investment with the Partnership's funds, the General
Partner may, as was done in 1991, 1992, 1994, 1995, and 1998, suspend the offer
and sale of Units. The offering may not extend beyond one year in certain
jurisdictions without the prior consent of the appropriate regulatory agencies.
195,544,332 Units were outstanding as of September 30, 1998, held by 2,649
limited partners.
Investors who desire to purchase Units should complete the Subscription
Agreement and Power of Attorney (attached as Exhibit B) and return it to Owens
Securities Corporation, P.O. Box 2308, Walnut Creek, CA 94595. Full payment must
accompany all subscriptions. Checks should be made payable to "Owens Mortgage
Investment Fund, a California Limited Partnership." By submitting the
Subscription Agreement and Power of Attorney with payment for the purchase of
Units, the investor:
agrees to be bound by the Partnership Agreement;
grants a special and limited power of attorney to the General
Partner; and
represents and warrants that the investor meets the relevant
suitability standards and is eligible to purchase Units.
LEGAL MATTERS
Certain legal matters in connection with the issuance of Units offered
hereby will be passed upon for the Partnership by Whitehead, Porter & Gordon
LLP, San Francisco, California, legal counsel for the Partnership and the
General Partner.
Tax Counsel for the Partnership is Wendel, Rosen, Black & Dean, LLP,
Oakland, California. Certain members of the firm own or control an aggregate of
1,050,320 Units, none of which were received in connection with the preparation
of any offering of Units. Certain members of the firm and certain trusts for
which members of the firm are trustees, own interests in notes secured by deeds
of trust originated and placed directly with such members, plans or trustees by
the 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 September 30, 1998, was approximately $922,000.
<PAGE>
EXPERTS
The financial statements and financial statement schedule of the
Partnership 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 LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
<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.
KPMG LLP
Oakland, California
February 13, 1998
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
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>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
Statements of Income
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Revenues:
Interest income on loans secured by
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>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
Statements of Partners' Capital
Years ended December 31, 1997, 1996 and 1995
Total
General Limited Partners Partners'
Partners Capital
Units Amount
<S> <C> <C> <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>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
Statements of Cash Flows
Years ended December 31, 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 and accrued liabilities 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 (decrease) 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.
See accompanying notes to financial statements.
<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.
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
(2) Summary of Significant Accounting Policies, Continued
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.
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.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
(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.
(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 1995 and 1996 financial statements to conform to the
1997 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.
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.
(3) Loans Secured by Trust Deeds, Continued
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.
(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>
(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>
5) Real Estate Held for Sale, Continued
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.
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
5) Real Estate Held for Sale, Continued
OFG and Woodvalley totals $102,579 as of December 31, 1997.
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.
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.
<PAGE>
(5) Real Estate Held for Sale, Continued
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:
Any such payments are required to be made only from cash
available for distribution, net proceeds and capital
contributions (as defined) during said 91-day period.
A maximum of $75,000 per partner may be withdrawn during
any calendar quarter (or $100,000 in the case of a deceased
limited partner).
The general partners are not required to establish a
reserve fund for the purpose of funding such payments.
(6) Partners' Capital, Continued
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.
(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>
<PAGE>
(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.
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>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
Interim Balance Sheets
September 30, 1998 and December 31, 1997
(UNAUDITED)
September 30 December 31
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 9,356,194 $ 3,073,115
Certificates of deposit 534,006 1,000,000
Commercial paper 3,040,867 -
Loans secured by trust deeds 176,446,203 174,714,607
Less: Allowance for loan losses (3,500,000) (3,500,000)
-------------- --------------
172,946,203 171,214,607
Real estate held for sale, net of allowance
for losses of $1,184,000 in 1998 and $1,896,000 in 1997 10,229,499 14,151,141
Interest receivable 2,724,432 1,773,608
Other receivables 531,399 112,583
--------------- -------------
Total Assets $199,362,600 $191,325,054
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accrued distributions payable $ 519,376 $ 544,385
Accounts payable and accrued liabilities 1,548,353 49,534
------------ --------------
Total Liabilities 2,067,729 593,919
------------- -------------
PARTNERS' CAPITAL:
General partners 1,946,559 1,864,033
Limited partners (Subject to Redemption) 195,348,312 188,867,102
----------- -----------
Total Partners' Capital 197,294,871 190,731,135
----------- -----------
Total Liabilities and Partners' Capital $199,362,600 $191,325,054
=========== ===========
</TABLE>
See accompanying notes to interim financial statements
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
Interim Statements of Income
For the Nine Months Ended September 30, 1998 and 1997
(UNAUDITED)
September 30 September 30
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Interest income on loans secured by trust deeds $ 14,267,744 $ 13,251,545
Gain on sale of real estate 1,251,943 2,249,142
Other income 586,927 525,130
------------- -------------
Total revenues 16,106,614 16,025,817
----------- -----------
OPERATING EXPENSES:
Management fees to General Partner 2,493,560 3,121,387
Servicing fees to General Partner 356,829 337,664
Promotional interest 38,460 59,856
Administrative 53,220 42,557
Legal and accounting 79,798 77,914
Real estate operations, net 23,280 83,162
Other 13,156 8,843
--------------- ----------------
Total operating expenses 3,058,303 3,731,383
------------- -------------
Net income $ 13,048,311 $ 12,294,434
============ ============
Net income allocated to general partner $ 129,191 $ 119,496
============== ==============
Net income allocated to limited partners $ 12,919,120 $ 12,174,938
============ ============
Net income allocated to limited partners
per weighted limited partnership unit $.066 $.066
==== ====
</TABLE>
See accompanying notes to interim financial statements
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
Interim Statements of Partners' Capital
Nine Months Ended September 30, 1998 and 1997
(UNAUDITED)
Total
General Limited Partners Partners'
Partners Units Amount Capital
<S> <C> <C> <C> <C>
Balances, December 31, 1996 1,732,726 175,303,398 175,107,378 176,840,104
Net income 119,496 12,174,938 12,174,938 12,294,434
Sale of partnership units 116,309 13,060,252 13,060,252 13,176,561
Partners' withdrawals -- (8,704,838) (8,704,838) (8,704,838)
Partners' distributions (119,497) (4,468,141) (4,468,141) (4,587,638)
-------- ---------- ---------- ----------
Balances, September 30, 1997 $ 1,849,034 187,365,609 $ 187,169,589 189,018,623
========= =========== =========== ===========
Balances, December 31, 1997 1,864,033 189,063,122 188,867,102 190,731,135
Net income 129,191 12,919,120 12,919,120 13,048,311
Sale of partnership units 76,918 9,116,648 9,116,648 9,193,566
Partners' withdrawals -- (10,945,087) (10,945,087) (10,945,087)
Partners' distributions (123,583) (4,609,471) (4,609,471) (4,733,054)
-------- ---------- ---------- ----------
Balances, September 30, 1998 $ 1,946,559 195,544,332 $ 195,348,312 197,294,871
========= =========== =========== ===========
</TABLE>
See accompanying notes to interim financial statements
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
Interim Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
(UNAUDITED)
September 30 September 30
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 13,048,311 $ 12,294,434
Adjustments to reconcile net income
to net cash provided by operating activities:
Gain on sale of real estate by limited partnership (1,227,070) (2,249,142)
Gain on sale of real estate properties (24,873) -
Changes in operating assets and liabilities:
Interest receivable (950,824) (66,888)
Other receivables (418,816) -
Accrued distributions payable (25,009) 17,682
Accounts payable and accrued liabilities 1,498,819 174
Deferred income - 132,742
-------------------- ---------------
Net cash provided by operating activities 11,900,538 10,129,002
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of loans secured by trust deeds (62,688,044) (63,406,952)
Principal collected 1,327,576 1,495,912
Loan payoffs 60,270,185 41,632,527
Investment in real estate properties (261,451) (2,378,711)
Net proceeds from disposition of real estate properties 179,555 -
Investment in limited partnership (1,250,395) (3,203,564)
Distributions received from limited partnership 5,944,129 7,141,248
Investment in corporate joint venture (79,566) -
Unsecured loan to General Partner - 488,764
Investments in certificates of deposit (84,006) (150,000)
Proceeds from maturities of certificates of deposit 550,000 -
Investment in commercial paper (3,040,867) -
------------- --------------------
Net cash provided by (used in) investing activities 867,116 (18,380,776)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of partnership Units 9,193,566 13,176,560
Partners' cash distributions (4,733,054) (4,587,638)
Partners' capital withdrawals (10,945,087) (8,704,838)
------------- ------------
Net cash used in financing activities (6,484,575) (115,916)
--------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 6,283,079 (8,367,690)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 3,073,115 11,386,661
----------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 9,356,194 $ 3,018,971
=========== ===========
</TABLE>
See notes 3, 4 and 5 for supplemental disclosure of non-cash investing and
financing activities. See accompanying notes to interim financial statements
<PAGE>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
NOTES TO INTERIM FINANCIAL STATEMENTS
September 30, 1998 and December 31, 1997
(UNAUDITED)
(1) Organization
Owens Mortgage Investment Fund, a California Limited Partnership, (the
Partnership) was formed on June 14, 1984 to invest in loans secured by
first, second and third trust deeds, wraparound, participating 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.
In December 1998, the limited partners voted to amend the Partnership
Agreement and there was a further amendment by the general partner in
January 1999. All such changes have been incorporated into these notes
to the interim financial statements.
The general partner is Owens Financial Group, Inc. (OFG); 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.
OFG is authorized to offer and sell units in the Partnership up to an
aggregate of 500,000,000 units outstanding at $1.00 per unit,
representing $500,000,000 of limited partnership interests in the
Partnership. Limited partnership units outstanding were 195,544,332 and
189,063,122, at September 30, 1998 and December 31, 1997, respectively.
(2) Summary of Significant Accounting Policies
(a) General
In the opinion of the management of the Partnership, the
accompanying unaudited financial statements contain all
adjustments, consisting of normal, recurring adjustments,
necessary to present fairly the financial information included
therein. These financial statements should be read in
conjunction with the audited financial statements included in
the Partnership's Form 10-K for the fiscal year ended December
31, 1997 filed with the Securities and Exchange Commission.
The results of operations for the three-month and nine-month
periods ended September 30, 1998 are not necessarily
indicative of the operating results to be expected for the
full year.
(b) 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.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
(c) 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.
The Partnership accounts for its loans in accordance with 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 Partnership does not recognize interest income on loans
once they are determined to be impaired or once they become
more than ninety days delinquent in payments 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.
(d) Allowance for Loan Losses
The Partnership maintains an allowance for loan losses equal
to $3,500,000 as of September 30, 1998 and December 31, 1997.
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 in monthly
payments greater than ninety days is $13,444,000 and
$5,236,000 as of September 30, 1998 and December 31, 1997,
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. OFG was purchasing
the interest receivable on delinquent Partnership loans in the
total amount of $1,896,000 and $1,485,000 as of September 30,
1998 and December 31, 1997, respectively. As of September 30,
1998 and December 31, 1997, loans totaling $11,548,000 and
$3,751,000, respectively, are classified as non-accrual loans.
OFG has discontinued its purchases of interest receivable and
delinquent loans for all loans acquired by the Partnership
since May 1, 1993 except in very limited situations.
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
the nine months ended September 30, 1998 and the year ended
December 31, 1997 but not collected as of
(2) Summary of Significant Accounting Policies, Continued
September 30, 1998 and December 31, 1997, respectively,
totaled approximately $179,000 and $219,000, respectively.
(e) Cash and Cash Equivalents
Cash and cash equivalents include interest-bearing and
noninterest-bearing bank deposits, money market funds and
short-term certificates of deposit with original maturities of
three months or less.
(f) Marketable Securities
Marketable securities include certificates of deposit and
commercial paper with various financial institutions with
original maturities of up to one year. The Partnership
classifies its debt securities as held-to-maturity, as the
Partnership has the ability and intent to hold the securities
until maturity. These securities are recorded at amortized
cost, adjusted for the amortization or accretion of premiums
or discounts. A decline in the market value of any
held-to-maturity security below cost that is deemed to be
other than temporary results in a reduction in carrying amount
to fair value. The impairment is charged to earnings and a new
cost basis for the security is established. Premiums and
discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective
interest method. Interest income is recognized when earned.
There was no significant difference between the carrying value
and the fair value of marketable securities as of September
30, 1998 and December 31, 1997.
(g) 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 acquired by the Partnership and held for
sale is held in a limited partnership and corporate joint
venture. The Partnership accounts for its investments in the
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 or loss generated from the investment in
limited partnership and corporate joint venture is recorded as
a gain or loss on sale of real estate.
In accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-lived Assets
and Long-lived Assets to Be Disposed Of", the Partnership
periodically compares the carrying value of real estate held
for sale to expected future cash flows for the purpose of
assessing the recoverability of the recorded amounts. If the
carrying value exceeds future cash flows, the assets are
reduced to fair value. There were no required reductions to
the carrying value of real estate held for sale made for the
quarter and nine months ended September 30, 1998 and 1997.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
(h) Income Taxes
No provision is made for income taxes since the Partnership is
not a taxable entity. Accordingly, any income or loss is
included in the tax returns of the partners.
(3) Loans Secured by Trust Deeds
Loans secured by trust deeds as of September 30, 1998 and December 31,
1997 are as follows:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
---- ----
<S> <C> <C>
Income-producing properties $ 157,902,115 $ 165,201,582
Single-family residences 2,159,101 2,088,606
Unimproved land 16,384,987 7,424,419
-------------- -------------
$ 176,446,203 $ 174,714,607
=========== ===========
First mortgages $ 159,185,333 161,275,350
Second mortgages 16,699,954 12,744,274
Third mortgages or all-inclusive deeds of trust 560,916 694,983
------------- -------------
$ 176,446,203 $ 174,714,607
=========== ===========
</TABLE>
Scheduled maturities of loans secured by trust deeds as of September
30, 1998 and the interest rate sensitivity of such loans is as follows:
<TABLE>
<CAPTION>
Fixed Variable
Year ending interest interest
September 30, rate rate Total
<S> <C> <C> <C>
1998 (Past Maturity) $ 17,466,378 4,155,449 21,621,827
1999 27,954,241 8,958,250 36,912,491
2000 48,449,477 19,139,027 67,588,504
2001 4,948,481 4,984,755 9,933,236
2002 1,810,634 10,545,467 12,356,101
2003 1,011,705 3,051,760 4,063,465
Thereafter (through 2012) 7,435,357 16,535,222 23,970,579
------------ ---------- ------------
$ 109,076,270 67,369,930 176,446,203
=========== ========== ===========
</TABLE>
Variable rate loans use as indices the one and five year Treasury
Constant Maturity Index (4.41% and 4.24%, respectively, as of September
30, 1998), the prime rate (8.50% as of September 30, 1998) and the
weighted average cost of funds index for Eleventh District savings
institutions (4.899% as of September 30, 1998). 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 $21,622,000 of
loans which are past maturity as of September 30, 1998, of which
$7,448,000 represents loans for which interest payments are delinquent
over ninety days. During the nine months ended September 30, 1998 and
the year ended December 31, 1997, the Partnership refinanced loans
totaling $9,941,000 and $2,741,000, respectively, thereby extending the
maturity dates of such loans.
The Partnership's total investment in loans delinquent over ninety days
is $13,444,000 and $5,236,000 as of September 30, 1998 and December 31,
1997, respectively. Of these amounts, approximately $3,893,000 and
$3,279,000 were in the process of foreclosure as of September 30, 1998
and December 31, 1997. OFG has purchased the Partnership's receivables
for delinquent interest of $82,000 and $73,000, related to delinquent
loans for the nine months ended September 30, 1998 and 1997,
respectively.
The Partnership's investment in delinquent loans as of September 30,
1998 totals approximately $13,444,000, of which $8,026,000 has a
specific related allowance for credit losses totaling approximately
$2,215,000. There is a specific and non-specific allowance for credit
losses of $1,285,000 for the remaining balance of $5,418,000 and for
other current loans. There was no additional allowance for credit
losses during the nine months ended September 30, 1998.
The average recorded investment in impaired loans was $7,074,000 and
$7,998,000 during the nine months ended September 30, 1998 and the year
ended December 31, 1997, respectively. Interest income received on
impaired loans during the nine months ended September 30, 1998 and the
year ended December 31, 1997, totaled approximately $420,000 and
$722,000, respectively, $360,000 and $670,000 of which was paid by
borrowers and 978855628$60,000 and $52,000 of which related to
purchases of interest receivable by OFG, respectively.
As of September 30, 1998 and December 31, 1997, the Partnership's loans
secured by deeds of trust on real property collateral located in
Northern California totaled approximately 54% ($95,425,000) and 67%
($117,352,000), 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 on 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) Real Estate Held for Sale
Real estate held for sale includes the following components as of
September 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
---- ----
<S> <C> <C>
Real estate properties held for sale $ 9,165,112 $ 9,699,656
Investment in limited partnership 345,458 3,812,122
Investment in corporate joint venture 718,929 639,363
----------- -----------
$ 10,229,499 14,151,141
========== ==========
</TABLE>
Gain on sale of real estate includes the following components for the
nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
September 30 September 30
1998 1997
<S> <C> <C>
Gain on sale of real estate properties $ 24,873 -
Gain on sale of real estate by limited partnership 1,227,070 2,249,142
----------- -----------
$ 1,251,943 2,249,142
=========== ===========
</TABLE>
(a) Real Estate Properties Held for Sale
Real estate properties held for sale at September 30, 1998 and
December 31, 1997 consists of the following properties
acquired through foreclosure in 1993 through 1998:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
---- ----
<S> <C> <C>
Light industrial warehouse, Merced, California, net of
valuation allowance of $350,000 $ 650,028 650,000
Commercial lot/residential development, Vallejo, California 1,039,116 1,030,566
Commercial lot, Sacramento, California, net of valuation
allowance of $250,000 299,828 299,828
Office building and undeveloped land, Monterey, California,
net of valuation allowance of $200,000 1,885,731 1,902,855
Manufactured home subdivision development, Ione,
California, net of valuation allowance of $384,000 2,565,010 2,451,286
Self storage, Oakland, California 453,815 444,063
Undeveloped land, Reno, Nevada 215,420 230,000
Manufactured home subdivision development, Sonora,
California, net of valuation allowance of $712,000 as
of December 31, 1997 --- 1,149,807
Light industrial building, Paso Robles, California 1,547,422 1,541,251
Commercial building, Sacramento, California 30,000 ---
Commercial building, Gresham, Oregon 425,557 ---
22% interest in 6-unit residential building, Oakland,
California 53,185 ---
---------- ----------
$ 9,165,112 9,699,656
========= =========
</TABLE>
(4) Real Estate Held for Sale, Continued
The acquisition of certain 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 $508,742 and
$3,273,258 for the nine months ended September 30, 1998 and
1997, respectively.
In February 1998, OFG purchased the manufactured home
subdivision development property located in Sonora, California
from the Partnership for $1,150,000. The Partnership carried
back a loan secured by a trust deed on the property for the
full purchase price. The note bears interest at 8% per annum
and is due on demand.
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 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
lienholder's 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.
(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
was 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 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 exercised their option of purchasing 34
similar lots which are interspersed among the 30 lots being
developed by WV-OMIF Partners. WV-OMIF Partners incurred
certain infrastructure costs which benefit all 64 lots,
including the 34 lots developed by OFG and Woodvalley. As of
September 30, 1998, OFG and Woodvalley had developed and sold
28 lots. As of September 30, 1998, OFG and Woodvalley had
reimbursed all shared development costs in the total amount of
$750,675 to WV-OMIF Partners from the sale of homes.
<PAGE>
(4) Real Estate Held for Sale, Continued
During the nine months ended September 30, 1998 and 1997, the
Partnership advanced an additional $1,250,395 and $3,203,564
to WV-OMIF. WV-OMIF sold thirteen homes during the nine months
ended September 30, 1998 for proceeds of $6,443,101, and the
net gain allocable to the Partnership was $1,227,070,
including interest income of $173,203. WV-OMIF Partners
distributed $5,944,129 (including $102,579 in reimbursements
from OFG and Woodvalley) to OMIF during the nine months ended
September 30, 1998. WV-OMIF Partners sold fourteen homes
during the nine months ended September 30, 1997 for proceeds
of $7,545,606 and the net gain allocable to the Partnership
was $2,249,142, including interest income of $274,557. WV-OMIF
Partners distributed $7,141,248 (including $628,980 in
reimbursements from OFG and Woodvalley) to OMIF during this
period. The Partnership's investment in WV-OMIF Partners
totaled $345,458 and $3,812,122 as of September 30, 1998 and
December 31, 1997, 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
incurred prior to the property being contributed to the
Company and advanced $10,621 to the Company for development.
During the nine months ended September 30, 1998, the
Partnership advanced an additional $79,566 to the Company for
development. The total investment in the corporate joint
venture totals $718,929 and $639,363 as of September 30, 1998
and December 31, 1997, respectively.
(4) 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.
(5) Partners' Capital
(a) Allocations, Distributions and Withdrawals
In accordance with the partnership agreement, the
Partnership's profits and losses are allocated to each limited
partner and OFG in proportion to their respective capital
accounts.
Distributions of net income are made monthly to the limited
partners in proportion to their weighted average capital
accounts as of the last day of the preceding calendar month.
Accrued distributions payable represent amounts to be
distributed in January and October, 1998 based on their
capital accounts as of December 31, 1997 and September 30,
1998, respectively.
The Partnership makes monthly net income 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 $7,789,174 and $7,550,799 for the nine
months ended September 30, 1998 and 1997, respectively.
Reinvested distributions are not shown as partners' cash
distributions or proceeds from sale of partnership units in
the accompanying statements of cash flows.
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 61 to
91 days after written notices are delivered to OFG, subject to
the following limitations, among others:
o No withdrawal of units can be requested or made until at
least one year from the date of purchase of those units,
on or after the date of this Prospectus, other than units
received under the Partnership's Dividend Reinvestment
Plan.
o Any such payments are required to be made only from net
income available for distribution, net proceeds and
capital contributions (as defined) during said 91-day
period.
(5) Partners' Capital, Continued
o A maximum of $100,000 per partner may be withdrawn during
any calendar quarter.
o The general partner is 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.
(b) Promotional Interest of General Partner
OFG has contributed capital to the Partnership in the amount
of 0.5% of the limited partners' aggregate capital accounts
and, together with its promotional interest, the general
partner has an interest equal to 1% of the limited partners'
capital accounts. This promotional interest of OFG of up to
1/2 of 1% is recorded as an expense of the Partnership and
credited as a contribution to OFG's capital account as
additional compensation. As of September 30, 1998, OFG had
made cash capital contributions of $995,622 to the
Partnership. OFG is required to continue cash capital
contributions to the Partnership in order to maintain its
required capital balance.
The promotional interest expense charged to the Partnership
was $38,460 and $59,856 for the nine months ended September
30, 1998 and 1997, respectively.
(6) Contingency Reserves
In accordance with the partnership agreement and to satisfy the
Partnership's liquidity requirements, the Partnership is required to
maintain contingency reserves in an aggregate amount of at least 1-1/2%
of the capital accounts of the limited partners. The cash capital
contribution of OFG (amounting to $995,622 at September 30, 1998), up
to a maximum of 1/2 of 1% of the limited partners' capital accounts
will be available as an additional contingency reserve, if necessary.
The contingency reserves required at September 30, 1998 and December
31, 1997 were approximately $3,980,000 and $3,829,000, respectively.
Certificates of deposit, commercial paper and certain cash equivalents
as of the same dates were accordingly maintained as reserves.
(7) 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.
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.
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 must be equal to or less than
the stated limits. Management fees amounted to approximately
(7) Transactions with Affiliates, Continued
$2,494,000 and $3,121,000 for the nine months ended September 30, 1998
and 1997, respectively, and are included in the accompanying statements
of income. Service fee payments to OFG approximated $357,000 and
$338,000 for the nine months ended September 30, 1998 and 1997,
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 $292,000 and $258,000 for the nine
months ended September 30, 1998 and 1997, respectively.
OFG originates all loans the Partnership invests in and receives an
investment evaluation fee from borrowers. Such fees earned by OFG
amounted to approximately $1,341,000 and $1,983,000 for the nine months
ended September 30, 1998 and 1997, respectively.
During the nine months ended September 30, 1998, the Partnership sold
the manufactured home subdivision development in Sonora, California to
OFG at a loss of approximately $2,000. An allowance for loss on this
property in the amount of $712,000 had been recorded in 1997;
therefore, the loss for the nine months ended September 30, 1998 was an
additional $2,000. The Partnership carried back a loan from OFG for the
entire purchase price of $1,150,000.
During the nine months ended September 30, 1997, OFG purchased one
delinquent loan secured by a trust deed from the Partnership at face
value in the total amount of $273,000 for assumption of a loan of the
same amount. OFG subsequently foreclosed on the loan.
Included in loans secured by trust deeds at September 30, 1998 and
December 31, 1997 are notes totaling $2,095,332 and $2,215,549,
respectively, which are secured by properties owned by OFG. The loans
bear interest at 8% per annum and are due on demand. The Partnership
earned interest income of approximately $104,000 and $133,000 during
the nine months ended September 30, 1998 and 1997, respectively, from
OFG under loans secured by trust deeds.
(8) 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 three and
nine month periods. These amounts were approximately 195,746,000 and
188,928,000 for the three months ended September 30, 1998 and 1997,
respectively, and 194,839,000 and 185,346,000 for the nine months ended
September 30, 1998 and 1997, respectively.
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 presents
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.
KPMG 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
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.
(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.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
Loan administration fees are earned for servicing real estate
mortgage loans owned by private and institutional investors,
including OMIF. The fees are generally calculated as a
percentage of the outstanding principal balances of the loans
serviced and are recorded as income when earned. The maximum
servicing fee payable by OMIF is .25% per annum of the average
unpaid principal balance of the loans. Such fees earned on loans
serviced for OMIF totaled approximately $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.
(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.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
(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.
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.
(2) Summary of Significant Accounting Policies, Continued
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.
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.
(7) Investment in Joint Venture, Continued
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.
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>
(8) Real Estate Held for Sale, Continued
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.
<PAGE>
(12) Incentive Stock Options, Continued
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>
OWENS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
INTERIM FINANCIAL STATEMENT
In the opinion of the management of Owens Financial Group, Inc., a California
Corporation (OFG) all adjustments necessary for a fair statement of financial
position for the interim period presented herein have been made. All such
adjustments are of a normal, recurring nature. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
However, management of OFG believes that the disclosures contained herein are
adequate to make the information presented not misleading. It is suggested that
this Unaudited Condensed Consolidated Balance Sheet be read in conjunction with
the corresponding audited Consolidated Balance Sheet and the Notes thereto
included elsewhere in this Prospectus.
<PAGE>
<TABLE>
<CAPTION>
OWENS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Interim Consolidated Balance Sheet
September 30, 1998
(UNAUDITED)
Assets
<S> <C>
Cash and cash equivalents $ 2,116,531
Investment in delinquent loans, less allowance for losses of $150,000 129,222
Trust deeds receivable, less allowance for losses of $325,000 1,098,072
Trust deeds held for sale 785,000
Receivables from affiliates 987,477
Investment in limited partnership 2,406,495
Investment in real estate joint venture 3,012,807
Investment in preferred stock of corporation 1,000,000
Real estate held for sale, net of allowance for losses of $415,000 3,164,376
Property and equipment, net of accumulated depreciation of $545,536 15,570
Other assets 526,618
-----------
$ 15,242,168
===========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and other accrued expenses 258,856
Accrued bonus, pension and profit sharing expense 69,903
Mortgages payable 2,330,549
Note payable to bank 785,000
Note payable to former shareholders 4,093,149
---------
Total liabilities 7,537,457
Shareholders' equity
Common stock, $1 par value, authorized 100,000 shares; issued and outstanding 45,500 45,500
Additional paid-in capital 1,193,577
Retained earnings 6,822,815
Notes receivable from shareholders (357,181)
------------
Total shareholders' equity 7,704,711
------------
$ 15,242,168
============
</TABLE>
See accompanying note to interim consolidated balance sheet.
<PAGE>
OWENS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Note to Interim Consolidated Balance Sheet
September 30, 1998
(UNAUDITED)
(1) Shareholders' Equity
During the nine months ended September 30, 1998, the Company
repurchased 32,000 shares of common stock from certain shareholders for
notes payable in the amount of $4,792,605. Subsequent to repurchase,
the Company made payments on the notes in the amount of $699,456. The
balance of notes payable to former shareholders was $4,093,149 as of
September 30, 1998. In addition, options exercised during the nine
months ended September 30, 1998 totaled 1,000 for a total of $44,960.
<PAGE>
A-17
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, A CALIFORNIA LIMITED PARTNERSHIP
THIS AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT (the
"Agreement"), dated __________, 1999, is made and entered into by and among
Owens Financial Group, Inc. as General Partner (the "General Partner"), and the
Limited Partners of Owens Mortgage Investment Fund, a California Limited
Partnership (hereinafter referred to collectively as the "Limited Partners").
RECITALS
A. Owens Mortgage Investment Fund, a California Limited Partnership
(the "Partnership") was formed on June 14, 1984, under the California Uniform
Limited Partnership Act, under the name Owens Mortgage Investment Fund II.
Effective October 16, 1992, the Partnership changed its name to its current
name.
B. The Limited Partnership Agreement was amended and restated as of
October 16, 1992, and December 14, 1998, and it is desired to again amend and
restate the Agreement as hereinafter set forth.
The Partners therefore agree as follows:
I. FORMATION
1. California Revised Limited Partnership Act. The Partnership was
formed on June 14, 1984 and, until this Agreement, has been governed by and
pursuant to the provisions of California Corporations Code, Title 2, Chapter 2,
known as the Uniform Limited Partnership Act (the "Act"). The General Partner,
pursuant to and by this Agreement, elects under California Corporations Code ss.
15712(b)(1) to have the Partnership governed henceforth by California
Corporations Code, Title 2, Chapter 3, the California Revised Limited
Partnership Act.
2. Name. The name of the Partnership is "Owens Mortgage Investment
Fund, a California limited partnership."
3. Place of Business. The principal place of business for the
Partnership is located at 2221 Olympic Blvd., Walnut Creek, CA 94595; provided,
however, that the General Partner may change the address of the principal office
by notice in writing to all Limited Partners. In addition, the Partnership may
maintain such other offices and places of business as the General Partner may
deem advisable at any other place or places within the United States.
4. Addresses for the General Partner and Limited Partners. The
principal place of business of the General Partner is 2221 Olympic Boulevard,
Walnut Creek, California 94595. The address for each of the Limited Partners is
that address shown on the books and records of the Partnership located at its
principal place of business. The Limited Partners may change such places of
residence by written notice to the Partnership, which notice shall become
effective upon receipt.
5. Term. The Partnership commenced on June 14, 1984. Unless earlier
dissolved under the provisions of this Agreement, the Partnership will dissolve
on December 31, 2034.
6. Purpose. The business and purposes of the Partnership are to make or
purchase first, second, third, wraparound, participating and construction
mortgage loans and mortgage loans on leasehold interests, and to do all things
reasonably related thereto, including, but not limited to, developing, managing
and either holding for investment or disposing of real property acquired through
foreclosure.
7. Agent for Service of Process; Tax Matters Partner. So long as the
General Partner maintains a principal place of business in California, the
General Partner is the Partnership's agent for service of process. If the
General Partner moves from California, the Limited Partners will designate a new
agent for service of process. The General Partner also is the "Tax Matters
Partner" as defined in Section 6231(a)(7) of the Internal Revenue Code of 1986,
as amended.
II. DEFINITIONS
The following terms shall have the following respective meanings:
"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 Account" means the definition in Article III hereof.
"Capital Contribution" means the total investment and contribution to
the capital of the Partnership by a Partner in cash, by way of automatic
reinvestment of Partnership distributions and, in the case of the General
Partner, its Promotional Interest as hereinafter defined.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or corresponding provisions of subsequent revenue laws.
"Late Payment Charges" means additional charges paid by borrowers on
delinquent loans and loans past maturity held by the Partnership, including
additional interest and late payment fees.
"Majority-In-Interest" means Limited Partners holding a majority of the
outstanding Units (excluding any Units held by the General Partner).
"Mortgage Loans" means notes, debentures, bonds, and other evidence of
indebtedness or obligations which are negotiable or nonnegotiable and which are
secured or collateralized by mortgages.
"Net Income Available for Distribution" means Profits and Losses, as
defined below, reduced by amounts set aside for restoration or creation of
reserves and increased by amounts provided by the reduction or elimination of
reserves at the discretion of the General Partner.
"Net Proceeds" means the cash proceeds from any repayment of principal
from the payoff or other disposition of the Partnership's Mortgage Loans or from
the disposition of other Partnership asset remaining after deducting all
expenses relating to the transaction.
"Partners" means the General Partner and the Limited Partners.
"Person" means any natural person, partnership, corporation,
association, or other legal entity.
"Profits and Losses" means, for each fiscal year or other period, an
amount equal to the Partnership's taxable income or loss for such year or
period, determined in accordance with Code Section 703(a) (for this purpose, all
items of income, gain, loss, or deduction required to be stated separately
pursuant to Code Section 703(a)(1) shall be included in taxable income or loss).
"Promotional Interest" means one-half (1/2) of one percent (1%) of the
aggregate Capital Accounts of the Limited Partners, said Promotional Interest
being an expense of the Partnership.
"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 loans or interests therein.
"Regulations" means, except where the context indicates otherwise, the
permanent, temporary, proposed, or proposed and temporary regulations of the
United States Department of the Treasury under the Code, as such regulations may
be lawfully changed from time to time.
"Unit" means an interest in the Partnership and represents a
contribution either in cash or through reinvestment of distributions of One
Dollar ($1.00) to the capital of the Partnership by a Limited Partner, and
entitles the holder thereof to the rights and interests of Limited Partners as
herein provided.
III. PARTNERSHIP INTEREST AND CAPITAL
III 1. Capital Contributions of Partners. The capital of the
Partnership shall be contributed by the Limited Partners and the General
Partner. The Limited Partners shall contribute to the capital of the Partnership
cash or reinvested distributions in the amount of One Dollar ($1.00) for each
Unit subscribed. The General Partner shall contribute to the capital of the
Partnership cash in an amount equal to one-half of one percent (1/2 of 1%) of
the aggregate of the Capital Accounts of the Limited Partners. The General
Partner shall receive the Promotional Interest in the capital of the
Partnership.
2. Sale of Units. In the General Partner's sole discretion, Units up to
an aggregate outstanding amount of $500,000,000 may be offered and sold by the
Partnership. Purchasers of such Units shall become Limited Partners immediately
on acceptance of subscriptions by the General Partner.
3. Limited Partners' Reinvested Distributions: A Limited Partner may
elect to participate in the Partnership's Reinvested Distributions Plan (the
"Plan") at the time of his purchase of Units, by making such election in the
form of Subscription Agreement for Units executed by each Limited Partner.
Participation in the Plan will commence as of the date of acceptance by the
Partnership of the Limited Partner's Subscription Agreement. Subsequently, a
Limited Partner may revoke any previous election or make a new election to
participate in the Plan 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 ten (10) days prior to the end of the calendar month;
otherwise the notice is effective the following month.
Distributions to which a Limited Partner participating in the Plan is
entitled shall be used to purchase additional Units at $1.00 per Unit
("Reinvested Distributions"). 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 to participate in the plan, distributions made by
the Partnership subsequent to the month in which the revocation notice is
received by the partnership shall be made in cash to the Limited Partner instead
of being reinvested in Units.
The General Partner will mail to each Limited Partner who is a
participant in the Plan a statement of account describing the Reinvested
Distributions received, the number of Units purchased thereby, the purchase
price per Unit, and the total number of Units held by the Limited Partner,
within thirty (30) days after the Reinvested Distributions have been credited.
The terms and conditions of the Plan may be amended, supplemented, or
terminated for any reason by the Partnership at any time by mailing notice
thereof at least thirty (30) days prior to the effective date of such action to
each Limited Partner who is a participant in the Plan at his last address of
record.
The General Partner, in its sole discretion, may suspend or terminate
the Plan if:
(a) it determines that the Plan impairs the capital or the
operations of the Partnership or that an emergency makes continuance of the Plan
not reasonably practicable;
(b) any governmental or regulatory agency with jurisdiction
over the Partnership so demands for the protection of Limited Partners;
(c) in the opinion of counsel for the Partnership, such Plan
is not permitted by federal or state law; or repurchase, sales, assignments,
transfers and the exchange of Units in the Partnership within the previous
twelve (12) consecutive months would result in the Partnership being considered
terminated within the meaning of Section 708 of the Code; or
(d) it determines that allowing any further Reinvested
Distributions would give rise to a material risk that the Partnership would be
treated for any taxable year as a "publicly traded partnership," within the
meaning of Code Section 7704.
4. 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 Partnership.
5. Capital Accounts. The Partnership shall maintain a Capital Account
for each Partner. Initially, the Capital Account of each Partner shall be the
amount equal to the initial Capital Contribution made by such Partner in
exchange for his or her interest in the Partnership. Thereafter, each Partner's
Capital Account shall be maintained in accordance with the provisions of Section
1.704-1(b)(2)(iv) of the Regulations and will be determined as follows:
(a) To each Partner's Capital Account there shall be credited
the amount of cash contributed by such Partner to the Partnership, and such
Partner's distributive share of Partnership profits.
(b) To each Partner's Capital Account there shall be debited
the amount of cash distributed to such Partner pursuant to any provision of this
Agreement and such Partner's distributive share of Partnership losses.
In the event any interest in the Partnership is transferred in
accordance with the terms of this Agreement, the transferee shall succeed to the
Capital Account of the transferor to the extent it relates to the transferred
interest.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulation Section 1.704-1(b) and shall be interpreted and applied in a manner
consistent with such Regulations. In the event the General Partner shall
reasonably determine that it is prudent to modify the manner in which the
Capital Accounts, or any debits or credits thereto, are computed in order to
comply with such Regulations, the General Partner may make such modification,
provided that it is not likely to have a material effect on the amounts
distributable to any Partner pursuant to Article XIII hereof upon the
dissolution of the Partnership. The General Partner also shall (a) make any
adjustments that are necessary or appropriate to maintain equality between the
Capital Accounts of the Partners and the amount of Partnership capital reflected
on the Partnership's balance sheet, as computed for book purposes, in accordance
with Regulations Section 1.704-1(b)(2)(iv)(q), and (b) make any appropriate
modifications in the event unanticipated events (for example, the acquisition by
the Partnership of oil or gas properties) might otherwise cause this Partnership
not to comply with Regulation Section 1.704-1(b).
Neither a Limited Partner nor a General Partner is entitled to withdraw
any part of his or its Capital Account or to receive any distributions from the
Partnership except as specifically provided in this Agreement. No interest shall
be paid on any Capital Contribution.
6. No Liability of Limited Partners. A Limited Partner shall not be or
become liable for the obligations of the Partnership in an amount in excess of
his Capital Account.
IV. MANAGEMENT
1. Control in General Partner. Subject to the provisions of Article
IV.2., and except as otherwise expressly stated elsewhere in this Agreement, the
General Partner has exclusive control over the business of the Partnership,
including the power to assign duties, to determine how to invest the
Partnership's assets, to sign bills of sale, title documents, leases, notes,
security agreements, mortgage loans and contracts, and to assume direction of
the business operations. As manager of the Partnership and its business, the
General Partner has all duties generally associated with such position,
including, but not limited to, dealing with Limited Partners, being responsible
for all accounting, tax and legal matters, performing internal reviews of the
Partnership's investments and loans, determining how and when to invest the
Partnership's capital, and determining the course of action to take with respect
to Partnership loans that are in default; and has all the powers with respect
and ancillary thereto. Without limiting the generality of the foregoing, such
powers include the right:
(a) To evaluate potential Partnership investments and to
expend the capital of the Partnership in furtherance of the Partnership's
business;
(b) To acquire, hold, lease, sell, trade, exchange, or
otherwise dispose of all or any portion of Partnership property or any interest
therein at such price and upon such terms and conditions as the General Partner
may deem proper;
(c) To cause the Partnership to become a joint venturer,
partner or member of an entity formed to own, develop, operate and/or dispose of
properties owned or co-owned by the Partnership acquired through foreclosure of
a Mortgage Loan;
(d) To manage, operate and develop Partnership property, or to
employ and supervise a property manager who may, or may not, be an affiliate of
the General Partner;
(e) To borrow money from banks and other lending institutions
for any Partnership purpose, and as security therefor, to encumber Partnership
property;
(f) To repay in whole or in part, refinance, increase, modify,
or extend, any obligation, affecting Partnership property;
(g) To employ from time to time, at the expense of the
Partnership, persons, including the General Partner or its affiliates, required
for the operation of the 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 Partner determines 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 Partner may deem advisable or
appropriate; provided, however, that any such agreement or contract between the
Partnership and the General Partner or between the Partnership and an affiliate
of the General Partner shall contain a provision that such agreement or contract
may be terminated by the Partnership without penalty on sixty (60) days' written
notice and without advance notice if the General Partner or affiliate who is a
party to such contract or agreement resigns or is removed pursuant to the terms
of this Agreement. Whenever possible, contracts between the Partnership and
others shall contain a provision recognizing that the Limited Partners shall
have no personal liability for performance or observance of the contract;
(h) To maintain, at the expense of the 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;
(i) To purchase, at the expense of the Partnership, liability
and other insurance to protect the property of the Partnership and its business;
(j) To refinance, recast, modify, consolidate, or extend any
Mortgage Loan or other investment owned by the Partnership;
(k) To pay all expenses incurred in connection with the
operation of the Partnership;
(l) To file tax returns on behalf of the Partnership and to
make any and all elections available under the Code, as amended;
(m) Without the 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
and regulations, including without limitation, federal and state securities and
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 Partner, is not to the prejudice of the
Limited Partners.
(n) To elect to have the Partnership governed by the
California Revised Limited Partnership Act, California Corporations Code, Title
2, Chapter 3, pursuant to Section 15712(b)(1) thereof.
The General Partner shall give prompt written notice to all Limited Partners of
each change to this Agreement made pursuant to subsection (m).
2. Limitations on General Partner's Authority. The General Partner has
no authority to:
(a) do any act in contravention of this Agreement;
(b) do any act which would make it impossible to carry on the
ordinary business of the Partnership;
(c) confess a judgment against the Partnership;
(d) possess Partnership property or assign the rights of the
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 a Majority-In-Interest, 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 Partnership, without the prior affirmative vote or
consent of a Majority-In-Interest;
(g) amend this Agreement without the prior affirmative vote or
consent of a Majority-In-Interest, except as permitted by Article IV.1.(m);
(h) dissolve the Partnership without the prior affirmative
vote or consent of a Majority-In-Interest;
(i) grant to the General Partner or any of its affiliates an
exclusive right to sell any Partnership assets;
(j) receive or permit the General Partner or any affiliate of
the General Partner to receive any insurance brokerage fee or write any
insurance policy covering the Partnership or any Partnership property;
(k) receive from the Partnership a rebate or participate in
any reciprocal business arrangement which would enable the General Partner or
any of its affiliates to do so;
(l) commingle the Partnership's Partnerships with those of any
other person;
(m) use or permit another to use the Partnership's assets in
any manner, except for the exclusive benefit of the 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. Right to Purchase Receivables, Loans and Property. The General
Partner, in its sole discretion, may at any time, but is not obligated to:
(a) purchase from the Partnership the interest receivable or
principal on delinquent Mortgage Loans held by the Partnership;
(b) purchase from a senior lienholder the interest receivable
or principal on mortgage loans senior to Mortgage Loans held by the Partnership
held by such senior lienholder;
(c) use its own monies to cover any other costs associated
with Mortgage Loans held by the Partnership such as property taxes, insurance
and legal expenses;
(d) purchase from the Partnership real estate acquired by the
Partnership through foreclosure.
The consideration paid pursuant to the above, must be equal to or greater than
the fair market value of the asset being acquired.
4. Extent of General Partner's Obligation. The General Partner shall
devote such of its time to the business of the Partnership as it determines, in
good faith, to be reasonably necessary to conduct its business. The General
Partner shall not be bound to devote all of its business time to the affairs of
the Partnership, and the General Partner and its Affiliates may engage for their
own account and for the account of others in any other business ventures and
employments, including ventures and employments having a business similar or
identical or competitive with the business of the Partnership. As a fiduciary of
the Partnership, the General Partner agrees that the assets of the Partnership
will not be commingled with the assets of the General Partner or any other
person and will be used or expended solely for the use of the Partnership. The
Partnership shall not permit a Limited Partner to contract away the fiduciary
duty owed to such Limited Partner by the General Partner under common law. If at
any time the General Partner owns any units as a Limited Partner, its right to
vote such units will be waived and not considered outstanding in any vote for
removal of the General Partner or for amendment of this Agreement or otherwise.
5. Indemnification of General Partner.
(a) Neither the General Partner nor any of its Affiliates,
agents or attorneys (hereinafter, an "Indemnified Party") shall be liable,
responsible or accountable in damages or otherwise to any other Partner, the
Partnership, its receiver or trustee (The Partnership, its receiver or trustee
are hereinafter referred to as "Indemnitors") for, and the Indemnitors agree to
indemnify, pay, protect and hold harmless each Indemnified Party (on the demand
of such Indemnified Party) from and against any and all liabilities,
obligations, losses, damages, actions, judgments, suits, proceedings, reasonable
costs, reasonable expenses and disbursements (including, without limitation, all
reasonable costs and expenses of defense, appeal and settlement of any and all
suits, actions or proceedings instituted against such Indemnified Party or the
Partnership and all reasonable costs of investigation in connection therewith)
(collectively referred to as "Liabilities" for the remainder of this Section)
which may be imposed on, incurred by, or asserted against such Indemnified Party
or the Partnership in any way relating to or arising out of any action or
inaction on the part of the Partnership or on the part of such Indemnified Party
in connection with services to or on behalf of the Partnership (and with respect
to an Indemnified Party which is an Affiliate of the General Partner for an act
which the General Partner would be entitled to indemnification if such act were
performed by it) which such Indemnified Party in good faith determined was in
the best interest of the Partnership. Notwithstanding the foregoing, each
Indemnified Party shall be liable, responsible and accountable, and neither the
Partnership nor Indemnitor shall be liable to an Indemnified Party, for any
portion of such Liabilities which resulted from such Indemnified Party's (i) own
fraud, gross negligence or misconduct or knowing violation of law, (ii) breach
of fiduciary duty to the Partnership or any Partner, or (iii) breach of this
Agreement, regardless of whether or not any such act was first determined by the
Indemnified Party, in good faith, to be in the best interests of the
Partnership. If any action suit or proceeding shall be pending against the
Partnership or any Indemnified Party relating to or arising out of any such
action or inaction, such Indemnified Party shall have the right to employ, at
the reasonable expense of the Partnership (subject to the provisions of
Subsection 5(b), below), separate counsel of such indemnified Party's choice in
such action, suit or proceeding. The satisfaction of the obligations of the
Partnership under this Section shall be from and limited to the assets of the
Partnership and no Limited Partner shall have any personal liability on account
thereof.
(b) Cash advances from Partnership funds to an Indemnified Party for
legal expenses and other costs incurred as a result of any legal action
initiated against an Indemnified Party by a Limited Partner are prohibited. Cash
advances from Partnership funds to an Indemnified Party for reasonable legal
expenses and other costs incurred as a result of any legal action or proceeding
are permissible if (i) such suit, action or proceeding relates to or arises out
of any action or inaction on the part of the Indemnified Party in the
performance of its duties or provision of its services on behalf of the
Partnership; (ii) such suit, action or proceeding is initiated by a third party
who is not a Limited Partner; and (iii) the Indemnified Party undertakes by
written agreement to repay any funds advanced pursuant to this Section in the
cases in which such Indemnified Party would not be entitled to indemnification
under Subsection 5(a) above. If advances are permissible under this Section, the
Indemnified Party shall have the right to bill the Partnership for, or otherwise
request the Partnership to pay, at any time and from time to time after such
Indemnified Party shall become obligated to make payments therefor, any and all
amounts for which such Indemnified Party believes in good faith that such
Indemnified Party is entitled to indemnification under Subsection 5(a) above.
The Partnership shall pay any and all such bills and honor any and all such
requests for payment within 60 days after such bill or request is received. In
the event that a final determination is made that the Partnership is not so
obligated for any amount paid by it to a particular Indemnified Party, such
Indemnified Party will refund such amount within 60 days of such final
determination, and in the event that a final determination is made that the
Partnership is so obligated for any amount not paid by the Partnership to a
particular Indemnified Party, the Partnership will pay such amount to such
Indemnified Party within 60 days of such final determination.
(c) Notwithstanding anything to the contrary contained in Subsection
5(a) above, neither the General Partner nor any of its Affiliates, agents, or
attorneys, nor any person acting as a broker-dealer with respect to the Units
shall be indemnified from any liability, loss or damage incurred by them arising
due to an alleged violation of federal or state securities laws unless (i) there
has been a successful adjudication on the merits of each count involving alleged
securities law violations as to the particular Indemnified Party, or (ii) such
claims have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular Indemnified Party, or (iii) a court of
competent jurisdiction approves a settlement of the claims against the
particular Indemnified Party and finds that indemnification of the settlement
and related costs should be made. Prior to seeking a court approval for
indemnification, the General Partner shall undertake to cause the party seeking
indemnification to apprise the court of the position of the Securities and
Exchange Commission and the California Commissioner of the Department of
Corporations with respect to indemnification for securities violations.
(d) The Partnership shall not incur the cost of the portion of any
insurance which insures any party against any liability as to which such party
is prohibited from being indemnified as set forth above.
(e) For purposes of this Section 5, an Affiliate, agent or attorney of
the General Partner shall be indemnified by the Partnership only in
circumstances where such person has performed an act on behalf of the
Partnership or the General Partner within the scope of the authority of the
General Partner and for which the General Partner would have been entitled to
indemnification had such act been performed by it.
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 Partnership, nor have the
power to sign for or bind the Partnership to any agreement or document.
Notwithstanding the foregoing, Limited Partners holding at least a
Majority-In-Interest may, without the concurrence of the General Partner, vote
or consent in writing in accordance with Article VIII.3 of this Agreement (and
such vote or consent will be required) to:
(a) amend this Agreement,
(b) dissolve and windup the Partnership,
(c) remove the 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 Partnership.
2. The Limited Partners and their designated representatives shall have
access to all books and records of the Partnership during normal business hours.
A list of the names and addresses of all Limited Partners is maintained as a
part of the records of the 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 Partnership may make or purchase Mortgage Loans of such duration
and on such real property and with such additional security as the General
Partner in its 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 Partner.
2. The Partnership will not incur indebtedness for the purpose of
making or purchasing Mortgage Loans, except:
(a) to prevent default under prior loans or to discharge them
entirely if this becomes necessary to protect the Partnership's Mortgage Loans,
and
(b) to assist in the development or operation of any real
property on which the Partnership has theretofore made or purchased a Mortgage
Loan and has subsequently taken over the operation thereof as a result of
default or to protect such Mortgage Loan.
3. The 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 or purchased.
4. The 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 or purchasing of each Mortgage Loan. The
Partnership shall also receive an independent, on-site appraisal for each
property on which it makes or purchases a Mortgage Loan. All such appraisals
shall be conducted by a licensed and qualified independent fee appraiser
certified by the state in which the property being appraised is located. 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 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 lienholder as loss
payees, and, where such senior lienholder exists, a 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 Partner or its 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 Partner or its affiliates shall at all times retain at least a
10% interest in such loan.
7. The Partnership will maintain a contingency reserve in an aggregate
amount of at least 1-1/2% of the aggregate Capital Accounts of the Limited
Partners. The cash Capital Contributions of the General Partner specified in
Article III.1. of this Agreement, up to a maximum of 1/2 of 1% of the aggregate
Capital Accounts of the Limited Partners, will be available as an additional
contingency reserve if considered necessary by the General Partner.
VII. ACCOUNTING RECORDS, REPORTS AND MEETINGS
1. Books of Accounts and Records. The Partnership's books and records
are maintained in accordance with Code Section 703(a) at the principal office of
the Partnership, and each Partner has 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
Partnership and shall reflect all transactions and be appropriate and adequate
for the business of the Partnership. The Partnership shall file all required
documents with the applicable regulatory agencies.
2. Cash and Cash Equivalents and Marketable Securities. Partnership
cash, cash equivalents and marketable securities are deposited and/or invested
in the name of the Partnership in one or more financial institutions designated
by the General Partner and shall be withdrawn on the signature of the General
Partner or any person or persons authorized by it.
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 Partner, or a Limited Partner or 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 Partner. As soon as
possible, but in all cases, within ten (10) days following receipt of such
request, and at any time a meeting is called by the General Partner, the General
Partner 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 Partner,
convenient to the Limited Partners, which is not less than fifteen (15) days nor
more than sixty (60) days after the sending 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 Agreement. There shall be deemed to be a quorum at any meeting of the
Partnership at which a Majority-In-Interest attend such meeting in person or by
a valid proxy. The General Partner shall be entitled to notice of and to attend
all meetings of the Limited Partners, regardless of whether called by the
General Partner. Any action that may be taken at any meeting of the Limited
Partners may be taken without a meeting if a consent in writing, setting forth
the action so taken, shall be signed by Limited Partners holding a
Majority-in-Interest.
4. Reports. Within sixty (60) days after the end of each fiscal year of
the Partnership, the General Partner 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 one hundred twenty (120) days after the end of
the Partnership's calendar year, the General Partner 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 the Partnership's statements
of income, balance sheets, statements of cash flows and statements of 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 Partner and its
affiliates, and provide a statement of the services performed in consideration
therefor and contain such other information as is deemed reasonably necessary by
the General Partner 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 ninety (90) days of the closing of the
fiscal year end, and on Form 10-Q within forty-five (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.
VIII. ALLOCATIONS AND DISTRIBUTIONS
1. Allocations of Profits and Losses. Profits and Losses for any fiscal
year shall be allocated: (i) ninety-nine and 01/100 percent (99.01%) to the
Limited Partners in proportion to their Capital Accounts, and (ii) 99/100
percent (.99%) to the General Partner.
2. Distributions.
(a) Net Income Available for Distribution. Net Income
Available for Distribution shall be allocated ninety-nine percent and 01/100
(99.01%) to the Limited Partners and 99/100 percent (.99%) to the General
Partner and shall be distributed in cash to those Limited Partners who have on
file with the Partnership their written election to receive such distributions.
A pro rata share of the total Net Income Available for Distribution to Limited
Partners shall be distributed monthly in cash to each Limited Partner who has on
file with the Partnership his written election to receive such distributions, in
proportion to the weighted average Capital Account of each Limited Partner
during the preceding calendar month. All sums of Net Income Available for
Distribution not so distributed to the Limited Partners shall be credited
proportionately to the Capital Accounts of the remaining Limited Partners and
reinvested in Units in accordance with Article III.3. The General Partner's
proportionate share of Net Income Available for Distribution shall be
distributed to the General Partner or credited to its Capital Accounts.
(b) Net Proceeds. Net Proceeds, if any, may be reinvested in
new loans, may be used to improve or maintain properties acquired by the
Partnership through foreclosure, may be used to pay operating expenses or may be
distributed to the Partners, in each event in the sole discretion of the General
Partner. In the event of any distributions of Net Proceeds, such distributions
shall be made to the Partners according to the allocations described in
Subsection 1 above, provided that no such distributions are to be made to the
General Partner with respect to that portion of its Capital Account represented
by the Promotional Interest, until the Limited Partners shall have received 100%
of their Capital Accounts.
IX. TRANSACTIONS BETWEEN THE PARTNERSHIP AND
THE GENERAL PARTNER
1. Compensation to General Partner From the Partnership. The General
Partner is entitled to receive the following fees, compensation and expense
reimbursements from the Partnership:
(a) Management Fee. In consideration of the management
services rendered to the Partnership, the General Partner is entitled to receive
from the Partnership a management fee payable monthly, subject to a maximum of
2-3/4% per annum, of the average unpaid balance of the Partnership's Mortgage
Loans at the end of each month in the calendar year. Although the management fee
is paid monthly, the maximum payment is calculated on an annual basis; thus, the
management fee in any one month could exceed .2292% (2-3/4% / 12 months) of the
unpaid balance of the Partnership's Mortgage Loans at the end of such month,
provided that the maximum annual management fee shall not exceed 2-3/4% of the
average unpaid balance of the Partnership's Mortgage Loans at the end of each
month in the calendar year. In the event the management fee paid by the General
Partner in a calendar year exceeds such 2-3/4%, the General Partner shall
promptly refund such excess to the Partnership.
(b) Promotional Interest. The Promotional Interest.
(c) Partnership Expenses. All of the Partnership's expenses
shall be billed directly, to the extent practicable, to and paid by the
Partnership. Reimbursement to the General Partner, or its affiliate, for any
expenses advanced by the General Partner including, but not limited to, legal
and accounting expenses, printing costs, goods, services and materials used by
or for the Partnership and filing fees will be made from cash available for
distribution immediately following the expenditure. Except as indicated in this
Article IX.1(c), the General Partner or any affiliate shall not be reimbursed by
the Partnership for any indirect expenses incurred in performing services for
the Partnership, such as officers' salaries, rent, utilities, and other overhead
items. The Partnership, however, may reimburse the General Partner 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
Partner or its 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 Partnership shall not exceed the lesser of (a) the actual cost of such
services, or (b) the amounts which the 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
Partnership. The reimbursement for expenses provided for in this Article IX.1(c)
shall be made to the General Partner regardless of whether any distributions are
made to the Limited Partners under the provisions of Article VIII.2.
(d) Loan Servicing Fee. The General Partner may act as
servicing agent with respect to all Partnership loans, in consideration for
which it shall be entitled to receive from the Partnership a monthly fee of up
to 3 of 1% per annum of the unpaid balance of the Partnership's Mortgage Loans
at the end of each month.
2. Payments by Borrowers.
(a) Investment Evaluation Fee. The General Partner or one or
more affiliates of the General Partner may receive investment evaluation fees
(also known as mortgage placement fees or "points") payable by borrowers for
services rendered in connection with the evaluation of potential investments of
the Partnership.
(b) Late Payment Charges. The General Partner shall receive
all Late Payment Charges paid by borrowers on delinquent loans held by the
Partnership.
3. Loans to General Partner or Affiliates. The Partnership may not make
loans to the General Partner or to any affiliate of the General Partner, except
in the following circumstances.
The Partnership may make a loan to the General Partner or any affiliate
of the General Partner or the General Partner or any affiliate of the General
Partner may become an obligor on a Mortgage Loan held by the Partnership in
instances where (1) the General Partner or an affiliate purchases a defaulted
Mortgage Loan from the Partnership at fair market value and subsequently
forecloses on the related loan, becoming the obligor thereunder; or (2) the
Partnership forecloses on a Mortgage Loan and then sells the related property to
the General Partner or an affiliate at or greater than its fair market value in
exchange for a secured note payable to the Partnership in the same amount.
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. Partnership Interests. A Limited Partner's interests in the
Partnership may be transferred by written instrument satisfactory in form to the
General Partner, 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 Partner,
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) 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
(c) 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(b) 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 of a Limited Partner shall have the right to become a
Limited Partner unless the General Partner has consented in writing to the
substitution of such Limited Partner, the granting or denial of which shall be
within the absolute discretion of the General Partner.
XI. DEATH, LEGAL INCOMPETENCY, OR WITHDRAWAL OF A LIMITED PARTNER
1. Effect of Death or Legal Incompetency of a Limited Partner on the
Partnership. The death or legal incompetency of a Limited Partner shall not
cause a dissolution of the Partnership or entitle the Limited Partner or his
estate to a return of capital.
2. Rights of Personal Representative. On the death or legal
incompetency of a Limited Partner, his personal representative shall have all
the rights of a Limited Partner for the purpose of settling his estate or
managing his property, including the rights of assignment and withdrawal.
3. Withdrawal of Limited Partners. To withdraw, or partially withdraw
from the Partnership, a Limited Partner must give written notice thereof to the
General Partner and may thereafter obtain the return, in cash, of his Capital
Account, or the portion thereof as to which he requests withdrawal, within 61 to
91 days after written notice of withdrawal is delivered to the General Partner,
subject to the following limitations:
(a) except with regard to the right of the personal
representative of a deceased Limited Partner under Section 2 of this Article XI,
no notice of withdrawal shall be honored and no withdrawal made until the
expiration of at least one year from the date of a purchase of Units by any
Limited Partner on or after the date of effectiveness of this Agreement, other
than by way of automatic reinvestment of Partnership distributions.
(b) any such cash payments in return of an outstanding Capital
Account shall be made by the Partnership only from Net Proceeds and Capital
Contributions.
(c) a maximum of $100,000 may be withdrawn by any Limited
Partner during any calendar quarter;
(d) the Limited Partners shall have the right to receive such
distributions of cash from their Capital Accounts only to the extent such funds
are available; the General Partner shall not be required to establish a reserve
fund for the purpose of funding such payments; the General Partner shall not be
required to use any other sources of Partnership funds other than those set
forth in Subsection 3(a) above; the General Partner shall not be required to
sell or otherwise liquidate any portion of the Partnership's loan portfolio in
order to make a cash distribution of any Capital Account;
(e) during the ninety (90) days following receipt of written
notice of withdrawal from a Limited Partner, the General Partner shall not
refinance any loans of the Partnership or reinvest any Net Proceeds or Capital
Contributions in new loans or other nonliquid investment unless and until the
Partnership has sufficient funds available to distribute to the withdrawing
Limited Partner the amount of his Capital Account in cash that he is
withdrawing;
(f) the amount to be distributed to any withdrawing Limited
Partner shall be a sum equal to the amount of such Limited Partner's Capital
Account as of the date of such distribution, as to which the Limited Partner has
given a notice of withdrawal under this subsection 3, notwithstanding that such
sum may be greater or lesser than such Limited Partner's proportionate share of
the current fair market value of the Partnership's net assets;
(g) in no event shall the General Partner permit the
withdrawal during any calendar year of total amounts from the Capital Accounts
of Limited Partners that exceeds ten percent (10%) of the aggregate Capital
Accounts of all outstanding Limited Partners' Units, except upon the vote of the
Limited Partners to dissolve the Partnership pursuant to Article V above;
(h) requests by Limited Partners for withdrawal will be
honored in the order in which they are received by the General Partner. If any
request may not be honored, due to any limitations imposed by this subsection 3
(except the one year holding limitation set forth in subsection 3(a)), the
General Partner will so notify the requesting Limited Partner in writing, whose
request, if not withdrawn by the Limited Partner, will subsequently be honored
if and when the limitation no longer is imposed; and
(i) if a Limited Partner's Capital Account would have a
balance of less than $2,000 following a requested withdrawal, the General
Partner, at its discretion, may distribute to such Limited Partner the entire
balance in such account.
XII. BANKRUPTCY, WITHDRAWAL, REMOVAL, OR
DISSOLUTION OF THE GENERAL PARTNER
1. Removal of the General Partner. A Majority-In-Interest by vote or
written consent given in accordance with Article VII.3 of this Agreement may
remove the General Partner. Written notice of such removal setting forth the
effective date thereof shall be served upon the General Partner and, as of the
effective date, shall terminate all of its rights and powers as a General
Partner.
2. Dissolution or Continuance of Partnership. The filing of a
certificate of dissolution, withdrawal, removal, or adjudication of bankruptcy
of the General Partner (any of which events is 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
Partnership and the Terminated General Partner. No other events affecting the
General Partner shall constitute or be a "Terminating Event." A Terminating
Event shall dissolve the Partnership and cause it to be wound up pursuant to
subsection (b) below, unless the Partnership is continued by a new general
partner elected in place of the Terminated General Partner by a
Majority-In-Interest, as set forth in (a) below.
(a) Following a Terminating Event, if a Majority-In-Interest
of the Limited Partners promptly by written consent agree to continue the
business of the Partnership and within six (6) months of such Terminating Event
admit one or more General Partners, then the Partnership shall continue without
dissolution and winding up.
(b) If a Majority-In-Interest do not agree by written consent
to continue the business of the Partnership or do not act to admit one or more
new General Partners within six (6) months of the Terminating Event, the
Partnership is dissolved and its affairs shall be wound up in accordance with
Article 8 of the California Revised Limited Partnership Act, Sections 15681 to
15685, and Article XIII of this Agreement.
3. Rights of Terminated General Partner. Upon the occurrence of a
Terminating Event, the Partnership shall pay to the Terminated General Partner
all amounts then accrued and owing to the Terminated General Partner. The
Partnership shall also terminate the Terminated General Partner's interest in
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 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 Partnership. The method of payment to the Terminated General
Partner shall not threaten the solvency or liquidity of the Partnership.
XIII. DISSOLUTION AND WINDING UP
1. Upon the vote or written consent of a Majority-In-Interest or as
otherwise provided in this Agreement, the Partnership shall be dissolved and
wound up, the assets shall be liquidated and converted to cash and the net
proceeds distributed to the Partners after payment of the debts of the
Partnership as provided herein and by applicable law. In settling accounts after
liquidation, the monies of the Partnership shall be applied in the following
manner:
(a) the liabilities of the Partnership to creditors other than
the General Partner shall be paid or otherwise adequately provided for;
(b) the liabilities of the Partnership to the General Partner
shall be paid or otherwise provided for; and
(c) the remaining assets shall be distributed to the Limited
Partners and the General Partner in the same manner as Net Proceeds are
distributed under Article VIII.2(b) hereof.
2. In the event that, upon dissolution and winding up of the
Partnership, following the sale or other disposition of all of its assets, and
after crediting any gain or charging any loss pursuant to Article VIII, the
General Partner shall have a deficient balance in its Capital Account, then the
General Partner shall contribute in cash to the capital of the Partnership an
amount which is equal to such deficit in its Capital Account.
XIV. SIGNATURES
Any security agreement, chattel mortgage, lease, contract of sale, bill
of sale, or other similar document to which the Partnership is a party, shall be
executed by the General Partner, and no other signatures shall be required.
XV. SPECIAL POWER OF ATTORNEY
Any person who becomes a Limited Partner after the effective date of
this Agreement shall execute and deliver to the General Partner a special power
of attorney in form acceptable to the General Partner (existing Limited Partners
having already executed and delivered same) in which the General Partner 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 and all certificates of Limited Partnership, as well
as all 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 recorded
or which the General Partner deems it advisable to file or record;
2. All other instruments or documents which may be required to be filed
or recorded by the Partnership under the laws of any state or by any
governmental agency, or which the General Partner deems it advisable to file or
record; and
3. All instruments or documents which may be required to effect the
continuation of the Partnership, the admission of additional or substituted
Limited Partners, the withdrawal of Limited Partners, or the dissolution and
termination of the Partnership, provided such continuation, admission,
withdrawal and dissolution and termination are in accordance with the terms of
this Agreement.
The special power of attorney to be concurrently granted upon admission
as such 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 Partner for admission to the
Partnership as a substituted Limited Partner, the special power of attorney
shall survive each assignment for the purpose of enabling the General Partner 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 to the General Partner:
Owens Financial Group, Inc.
2221 Olympic Boulevard
P. O. Box 2400
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 books and records of the Partnership, or in
either case as the General Partner 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 Partnership any right that he or it
may have to maintain any action for partition with respect to the property of
the 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 in this Agreement, the masculine includes
the feminine and neuter and the singular includes the plural, as determined by
the context.
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 Partner may elect, pursuant to Code
Section 754, to adjust the basis of Partnership property under the circumstances
and in the manner provided in Code Sections 734 and 743. The General Partner
shall, in the event of such an election, take all necessary steps to effect the
election.
9. Entire 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
effective this ___ day of ________________, 1999.
GENERAL PARTNER:
2221 Olympic Blvd.
P. O. Box 2400
Walnut Creek, CA 94595
OWENS FINANCIAL GROUP, INC.
By:_____________________________
William C. Owens, President
LIMITED PARTNERS:
By: OWENS FINANCIAL GROUP, INC.
By:_____________________________
William C. Owens, President
As Attorney-In-Fact for the Limited Partners
<PAGE>
B-6
EXHIBIT B
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
Owens Mortgage Investment Fund, A California Limited Partnership
1. SUBSCRIPTION. The undersigned investor ("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 "Limited Partnership 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 Partner has in its sole discretion
accepted Investor's offer of purchase.
2. REPRESENTATIONS BY THE UNDERSIGNED. The Investor represents and
warrants that the Investor:
(a) has received the Prospectus of the Partnership dated
January __, 1999;
(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 repurchase, 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) 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, the
General Partner, and its Affiliates from any and all claims, actions, causes of
action, damages, and expenses (including legal fees and expenses) whatsoever
which may result from a breach or alleged breach of any of the representations
by Investor 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
Investor hereby adopts, accepts, and agrees to be bound by all terms and
provisions of the Limited Partnership Agreement and to perform all obligations
therein imposed upon a Limited Partner with respect to Units to be purchased.
Upon acceptance of this Subscription Agreement by the General Partner 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 Limited Partnership Agreement.
4. LIMITATION ON ASSIGNMENT. The Investor acknowledges that the Units
may be assigned only as provided in the Limited Partnership Agreement and
further acknowledges the restrictions on resale, transfer, or assignment of the
Units set forth in the Limited Partnership Agreement and as described in the
Prospectus.
5. SPECIAL POWER OF ATTORNEY. The Investor hereby makes, constitutes,
and appoints the General Partner of the Partnership to be such person's true and
lawful attorney-in-fact to sign and acknowledge, file and record:
(a) the Limited Partnership Agreement and any amended
certificate of limited partnership, as well as any and all amendments thereto
required under the laws of the State of California or of any other state to be
filed or which the General Partner deems advisable to prepare, execute and 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 Partner deems 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 Limited Partnership 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 Investor and shall not
be affected by the subsequent incapacity of the Investor;
(ii) may be exercised by the General Partner for each
Limited Partner by a facsimile signature of or on behalf of the General Partner
or by listing all of the Limited Partners and by executing any instrument with a
single signature of or on behalf of the General Partner, 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 Partner 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 Investor's subscription
is set forth below and payment of such amount is enclosed by a check payable to
Owens Mortgage Investment Fund, a California Limited Partnership. The Investor
hereby authorizes and directs the General Partner to deliver this Subscription
Agreement to the Partnership and pay the funds delivered herewith to the
Partnership, to the extent the Investor's subscription has been accepted. If the
Investor's subscription is rejected in part, the funds delivered herewith will,
to the extent the application is so rejected, be returned to the Investor as
soon as practicable without interest or deduction, except to the extent of any
interest actually earned.
7. PURCHASE BY FIDUCIARY. If the Investor is purchasing the Units
subscribed hereby in a fiduciary capacity, the above representations and
warranties are to be deemed to have been made on behalf of the person(s) for
whom the Investor is so purchasing except that such person(s) need not be over
18 years of age.
8. NOTIFICATION OF GENERAL PARTNER. The Investor agrees to notify the
General Partner immediately if any of the foregoing statements made herein shall
become untrue.
9. LIMITED PARTNERSHIP AGREEMENT GOVERNS. In the event of any conflict
between the provisions of the Limited Partnership Agreement and any instrument
or document executed, acknowledged, filed or recorded by the General Partner
pursuant to this special power of attorney, the Limited Partnership Agreement
will govern.
10. SUBSCRIPTION AMOUNT. The Investor subscribes $_____________ and
encloses such sum herewith as the purchase price of _____________ Units.
11. REINVESTMENT OF DISTRIBUTIONS. The Partnership maintains a
Distribution Reinvestment Plan ("Plan") under which distributions of income of
the Partnership may be reinvested for the purchase of additional Units, rather
than being received in cash. See Prospectus at page 63. So long as the Investor
meets the suitability standards established by the Partnership and by the
securities law administrator of the state in which the Investor is domiciled,
and subject to possible suspension or termination of the Plan by the General
Partner, as set forth in the Limited Partnership Agreement, the Investor will
continue to participate in the Plan if it elects option A, below. Option B,
below, will constitute an election not to participate in the Plan. The Investor
may change his election at any time by written notice to the Partnership. Please
choose one or the other of the two options by a check mark in the appropriate
blank. If you check neither blank, you will be considered to have elected to
receive your distributions in cash (Option B).
A. ___ Investor elects to participate in the Partnership Distribution
Reinvestment Plan.
B. ___Investor elects not to participate in the Partnership Distribution
Reinvestment Plan and to receive distributions in cash.
12. OWNERSHIP OF UNITS. The Investor'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 Entity's legal name
- --------------------------------------------------------------------------------
Resident Address
- --------------------------------------------------------------------------------
City State Zip Code
- -------------------------------------- -------------------------------------
Home Telephone Number (if applicable) Business Telephone Number
(include area code) (include area code)
Date of Birth ____________________________________ (Individual Investors Only)
Occupation _______________________________________ (Individual Investors Only)
Marital Status (check one): Single____ Married____ (Individual Investors Only)
Citizenship: U.S.____ Other___________________ (Individual Investors Only)
Investment Objective:
Current income with retention of capital ____ (check)
Other (please explain)
- --------------------------------------------------------------------------------
Investor's Financial Status and Suitability:
Net Worth $_____________________
Liquid Net Worth $_____________________
Investor's Years of Investment Experience _____
Investor's Tax Bracket (if individual) ________%
<PAGE>
********************************************************************************
(Please Print)
Name____________________________________________________________________________
First Middle Last
or Entity's legal name
- --------------------------------------------------------------------------------
Resident Address
- --------------------------------------------------------------------------------
City State Zip Code
- -------------------------------------- -------------------------------------
Home Telephone Number (if applicable) Business Telephone Number
(include area code) (include area code)
Date of Birth ____________________________________ (Individual Investors Only)
Occupation _______________________________________ (Individual Investors Only)
Marital Status (check one): Single____ Married____ (Individual Investors Only)
Citizenship: U.S.____ Other___________________ (Individual Investors Only)
Investment Objective:
Current income with retention of capital ____ (check)
Other (please explain)
- --------------------------------------------------------------------------------
Investor's Financial Status and Suitability:
Net Worth $_____________________
Liquid Net Worth $_____________________
Investor's Years of Investment Experience _____
Investor's Tax Bracket (if individual) ________%
<PAGE>
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
(if more than one) Identification Number
ACCEPTED:
Owens Mortgage Investment Fund,
A California Limited Partnership
Owens Financial Group, Inc.,
General Partner
By: ___________________________
William C. Owens, Presiden
Dated: ____________, 19__
<PAGE>
The Account Representative and Principal signing below each have
reasonable grounds to believe, based on information obtained from the above
Investor concerning his or her investment objectives, other investments,
financial situation and needs and any other information known by either of them,
that investment in the Partnership is suitable for such Investor in light of his
or her financial position, net worth and other suitability characteristics, and
that the Investor meets the suitability requirements applicable to this
offering.
The undersigned account representative and principal have advised the
above Investor that no market for the securities being offered exists nor is one
expected to develop, and that the Investor may not be able to liquidate his or
her investment in the event of an emergency or for any other reason.
- ------------------------------------ ----------------------------------------
Signature of Investment Firm Principal Signature of Account Representative
Owens Securities Corporation
- ------------------------------------ ----------------------------------------
Please PRINT Name and Title Please PRINT Account Representative Name
<PAGE>
II-5
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution
The expenses incurred and estimated to be incurred in connection with this
offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee $35,400
National Association of Securities Dealers, Inc. and Blue Sky
Registration Fees 15,700
Accounting Fees and Expenses 18,000
Legal Fees and Expenses 60,000
Printing Fees and Expenses 8,000
Mailing 3,000
Miscellaneous 500
------------
Total $140,600
</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.5
of the Amended and Restated Limited Partnership Agreement which is
included as Exhibit B to 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, a California Limited Partnership
Report of KPMG 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 Interim Balance Sheets (Unaudited) -
September 30, 1998 and December 31, 1997 Interim Statements of
Income (Unaudited) for the nine months ended September 30,
1998 and 1997 Interim Statements of Partners' Capital
(Unaudited) for the nine months ended September 30, 1998
and 1997
Interim Statements of Cash Flows (Unaudited) for the nine
months ended September 30, 1998 and 1997 Interim Notes to
Financial Statements (Unaudited)
<PAGE>
Owens Financial Group, Inc,
Report of KPMG LLP, Independent Auditors
Consolidated Balance Sheet -December 31, 1997
Notes to Consolidated Balance Sheet
Unaudited Condensed Consolidated Balance Sheet - September 30,
1998
(b) Exhibits:
1 Underwriting 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)
5.1 Opinion of Whitehead, Porter & Gordon LLP with Respect to
Legality of the Securities
5.2 Opinion of Wendel, Rosen, Black & Dean, LLP with Respect to
Federal Income Tax Matters
23.1 Consent of Whitehead, Porter & Gordon LLP
23.2 Consent of Wendel, Rosen, Black & Dean, LLP
23.3 Consent of KPMG LLP
24 Power of Attorney
27 Financial Data Schedule
(c) Schedules:
Schedule IV - Mortgage Loans on Real Estate as of December 31, 1997
Item 37. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include 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 post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(5) To send to each limited partner at least on an annual basis a
detailed statement of any transactions with the General Partners or its
affiliates, and of fees, commissions, compensation and other benefits paid, or
accrued to the General Partner or its affiliates for the fiscal year completed,
showing the amount paid or accrued to each recipient and the services performed.
(6) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Registration Statement on Form S-11 (No.
33-__________) and has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Walnut
Creek, State of California on January 27, 1999.
OWENS MORTGAGE INVESTMENT FUND,
A CALIFORNIA LIMITED PARTNERSHIP
By: OWENS FINANCIAL GROUP, INC.
General Partner
By: /s/ BRYAN H. DRAPER
Bryan H. Draper, Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form S-11 (No. 33-________) has been signed below by
the following persons in the capacities and on the dates indicated.
Signature Title Date
OWENS FINANCIAL GROUP INC. General Partner January 27, 1999
By /s/ BRYAN H. DRAPER
Bryan H. Draper
Chief Financial Officer/Secretary
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE IV
OWENS MORTGAGE INVESTMENT FUND
MORTGAGE LOANS ON REAL ESTATE C DECEMBER 31, 1997
Principal Amount
of Loans Subject
to Delinquent
Final Carrying Amount Principal or
Description Interest Rate Maturity date of Mortgages Interest
<S> <C> <C> <C> <C>
TYPE OF LOAN
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 General Partner.
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 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 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
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 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:
</FN>
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount of
Loans Subject
Final Periodic Face Carrying to Delinquent
Interest Maturity 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>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND, A CALIFORNIA LIMITED PARTNERSHIP
INDEX TO EXHIBITS
Exhibit No. Description
<S> <C>
1 Underwriting 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)
5.1 Opinion of Whitehead, Porter & Gordon LLP with Respect to Legality of the Securities
5.2 Opinion of Wendel, Rosen, Black & Dean, LLP with Respect to Federal Income Tax Matters
23.1 Consent of Whitehead, Porter & Gordon LLP
23.2 Consent of Wendel, Rosen, Black & Dean, LLP
23.3 Consent of KPMG LLP
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
<PAGE>
Exhibit 1
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
UNDERWRITING AGREEMENT
This Underwriting Agreement is made and entered into by and among Owens
Mortgage Investment Fund a California Limited Partnership (the "Partnership"),
Owens Financial Group, Inc. (the "General Partner"), and Owens Securities
Corporation, a California corporation (the "Underwriter").
Based upon the mutual covenants and promises contained herein, the
Partnership and the Underwriter hereby agree as follows:
1. Definitions. All terms used herein are defined in the final
Prospectus of the Partnership (the "Prospectus") contained in
the Partnership's Form S-11 Registration Statement
(Registration No. 33-_____), as filed with the Securities and
Exchange Commission, and have the same meanings given therein.
2. Sales. The Underwriter has the right to sell the Partnership's
units of limited partnership interest ("Units") to persons or
entities qualified to purchase them as specified in the
Prospectus on the terms and in the manner specified by the
Prospectus and in accordance with applicable state and federal
laws, and to enter into sales agreements with other
broker/dealers for sales on a best efforts basis of some or
all of such Units. The Underwriter agrees to use its best
efforts to sell or arrange for the sale of such Units.
3. No Commission. No commissions or other compensation will be
paid to the Underwriter for the sale of the Units of the
Partnership.
4. Method of Offer and Sale. The Underwriter will instruct
investors to make checks in payment for
_________________________ Units purchased payable to "Owens
Mortgage Investment Fund, California Limited Partnership".
The Underwriter will act as the processing broker/dealer for
the Partnership's offering and will obtain from each investor
a completed and signed Subscription Agreement, together with
payment for the number of Units being purchased. The
Underwriter may refuse to accept payment or return it to the
investor if, in the Underwriter's opinion, the purchase for
any reason would be inconsistent with the investor
suitability standards set forth in the Prospectus and the
Subscription Agreement, or would for any other reason be
inconsistent with the Prospectus or applicable federal or
state securities laws. Such rejected payments will be
promptly returned to the investor. All payments received and
accepted by the Underwriter will be transmitted for deposit
to the Partnership's account at California Bank & Trust, as
soon as practicable, but in any event by the end of the
second business day following receipt by the Underwriter.
Completed and signed Subscription Agreements will be promptly
delivered to the Partnership, unless purchase is rejected by
the Underwriter as herein provided. The Underwriter may not
reject a purchase of Units after the check for payment has
been forwarded for deposit to the Partnership's account. The
Partnership may reject any purchase for the reasons set forth
herein, and if it does so after payment has been deposited to
the Partnership's account, the Partnership will promptly
thereafter return the payment funds to the purchaser with
notification of the rejected purchase. 5. Underwriter's
Warranties. The Underwriter warrants the following:
(a) It will comply with all state and federal securities
laws and regulations, and with all rules and orders
of state and federal securities authorities in
connection with sales and offers to sell Units,
including the prohibition against any direct or
indirect payment of commissions to non-members of the
National Association of Securities Dealers ("NASD");
(b) It will submit to the Partnership all sales materials
prepared by it in connection with the offer and sale
of Units and will not use any such materials until
they have been reviewed and cleared by applicable
regulatory authorities for use by the Underwriter;
(c) It will make offers and sales only in those states
and jurisdictions in which the Partnership has
qualified its Units for sale;
(d) It will employ and engage only fully and properly
licensed sales personnel in the various states and
jurisdictions in which sales or offers are to be
made;
(e) It will not, nor will any of its agents,
representatives, contractors, employees, officers, or
directors make any representation or statement in
connection with offers or sales other than
representations or statements consistent with those
contained in the Prospectus;
(f) It is a member in good standing of the NASD; and
(g) It will comply with all others terms and conditions set
forth in the Prospectus.
6. Partnership's Warranties. The Partnership warrants the following:
(a) The Prospectus contains no untrue statement of a
material fact nor does it omit to state any material
fact necessary in order to make the statements made
in the light of circumstances under which they are
made, not misleading;
(b) It will comply with all state and federal securities
laws and regulations and with all rules and orders of
state and federal securities authorities in
connection with sales and offers to sell Units; and
(c) Unless prohibited by the Partnership Agreement, it
will indemnify, defend, and hold harmless the
Underwriter from any liability or damage resulting
from the breach of any of the warranties or
obligations contained in this Paragraph 6 or in the
Prospectus, and from any such breach by any of the
Partnership's or General Partner's agents,
affiliates, representatives, contractors, employees,
officers, directors or assigns; provided, however,
that in the case of a final adjudication of alleged
violation of federal or state securities laws, (1)
the Underwriter is found not guilty and/or (2) in the
case of a settlement, the judge is advised of the
NASD's position with respect to indemnification of
affiliated broker/dealers and the judge approves the
indemnification in writing.
<PAGE>
7. Notices. All notices required to be made to either party shall
be made in writing and mailed by first class mail, postage
prepaid, and addressed as follows.
To Partnership: 2221 Olympic Blvd.
Walnut Creek, California 94595
To Underwriter: 2221 Olympic Blvd.
Walnut Creek, California 94595
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
this ___ day of January, 1999.
"Partnership" OWENS MORTAGE INVESTMENT FUND, a
California Limited Partnership
By: Owens Financial Group, Inc.,
General Partner
By: _____________________________
William C. Owens, President
"Underwriter" OWENS SECURITIES CORPORATION
By: _____________________________
William C. Owens, President
<PAGE>
Exhibit 5.1
<PAGE>
WHITEHEAD, PORTER & GORDON LLP
220 montgomery street, suite 1850 o san francisco, ca 94104-3402
telephone: (415) 781-6070
Facsimile: (415) 788-6521
January 27, 1999
Owens Mortgage Investment Fund,
a California Limited Partnership
2221 Olympic Blvd.
Walnut Creek, CA 94595
Ladies and Gentlemen:
We are acting as your counsel in the registration of 120,000,000 Units
of limited partnership interest (the "Units") of Owens Mortgage Investment Fund,
a California Limited Partnership (the "Partnership"), a California limited
partnership having Owens Financial Group, Inc., a California corporation as the
General Partner (the "General Partner"). Such Units are to be sold for cash for
$1.00 each. The Units are being registered with the Securities and Exchange
Commission under a Registration Statement on Form S-11 filed with the Securities
and Exchange Commission on or about January 27, 1999 (as amended, the
"Registration Statement"). We are familiar with the documents and materials
relating to the Partnership relevant to this opinion.
In rendering our opinion, we have reviewed the Amended and Restated
Limited Partnership Agreement and have assumed it will be executed substantially
in the form included as Exhibit "A" to the Prospectus to be filed with the
Securities and Exchange Commission as a part of the Registration Statement (the
"Partnership Agreement"), that a Certificate of Limited Partnership shall be
filed under the California Revised Limited Partnership Act and recorded, and
that the Partnership will be operated in accordance with the provisions of the
Partnership Agreement. We have also assumed that each of the limited partners
will execute the Subscription Agreement and Subscription Agreement Signature
Page included as Exhibit "B" to the Prospectus.
Assuming the forgoing, based on our review of the relevant documents
and materials, it is our opinion that:
(a) The Partnership is duly organized and validly existing and in good
standing under the laws of the State of California; and
(b) Upon payment by the subscribers for Units of their required
capital contributions, the Units will be validly authorized and
legally issued, and will be fully paid and non-assessable.
We hereby consent to the reference to our Firm under the caption "Legal
Opinions" in the Prospectus that forms a part of the Registration Statement and
to the filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
WHITEHEAD, PORTER & GORDON LLP
<PAGE>
Exhibit 5.2
<PAGE>
1111 Broadway, 24th Floor
Oakland, CA 94607-4036
Post Office Box 2047
Oakland, CA 94604-2047
Telephone: (510) 834-6600
Fax: (510) 834-1928
[email protected]
[GRAPHIC OMITTED]
Attorneys at Law
January 27, 1999
Owens Mortgage Investment Fund,
a California Limited Partnership
2221 Olympic Boulevard
Walnut Creek, CA 94595
Re: Federal Income Tax Consequences of an Investment
in Owens Mortgage Investment Fund,
a California Limited Partnership
Ladies and Gentlemen:
We have acted as tax counsel for Owens Mortgage Investment Fund, a
California Limited Partnership (the "Partnership") in connection with the
preparation of the prospectus (the "Prospectus") for the Partnership to be filed
with the Securities and Exchange Commission on January 27, 1999 (No. 33-_____),
pursuant to the Securities Act of 1933, as amended, (the "Act") as part of its
Registration Statement on Form S-11 (the "Registration Statement"). This opinion
as to certain material federal income tax aspects of an investment in the
Partnership is being delivered at your request in connection with the disclosure
requirements under the Act and will be filed as an exhibit to the Prospectus.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings ascribed to them in the Registration Statement.
In connection with our opinion, we have examined: (i) the Registration
Statement and Prospectus; (ii) the Amended and Restated Limited Partnership
Agreement for the Partnership that is attached as Exhibit A to the Prospectus
(the "Partnership Agreement"); (iii) the certificate of the General Partner (the
"Certificate"), dated as of the date hereof; and (iv) such other documents and
records pertaining to the organization and operation of the Partnership as we
have considered necessary or appropriate as a basis for the opinions set forth
below. In our examination we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified or photostatic copies, and the authenticity of the
originals of such copies.
As to any facts material to this opinion, we have relied solely upon:
(i) the matters set forth in the Prospectus, (ii) the assumptions contained
herein, and (iii) the representations and statements of the General Partner, and
its officers and representatives, including the facts set forth in the
Certificate. We have not undertaken any independent investigation or
verification as to any such factual matters.
In rendering our opinion, we have considered the applicable provisions
of the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"), Treasury Regulations promulgated thereunder (the "Regulations"),
pertinent judicial and administrative authorities and interpretative rulings of
the Internal Revenue Service (the "IRS"). As indicated in the substantive
discussion which follows relative to the federal income tax consequences of an
investment in the Partnership, as to certain issues, we are unable to express an
opinion because of uncertainty in the law or for other reasons.
<PAGE>
Owens Mortgage Investment Fund January 27, 1999
WENDEL, ROSEN, BLACK & DEAN, LLP
Whenever a statement herein is qualified by the expressions "to our
knowledge," "we are not aware" or a similar phrase or expression with respect to
our knowledge of matters of fact, it is intended to mean our knowledge is based
upon the documents, instruments and certificates described above and the current
actual knowledge of the attorneys in this firm who are presently involved in
substantive legal representation of the Partnership (but not including any
constructive or imputed notice of any information) and that we have not
otherwise undertaken any independent investigation for the purpose of rendering
this opinion.
Our opinion is limited to the matters discussed below. We give no
opinion with respect to other tax matters, whether federal, state or local, that
may relate to an investment in the Partnership.
No ruling will be requested from the IRS regarding any of the material
federal income tax issues discussed below. Our opinion is not binding on the IRS
and does not constitute a guarantee that the IRS will not successfully challenge
a Limited Partner's tax treatment of any aspect of any investment in the
Partnership. We caution that our opinion is based on the federal income tax laws
as they exist on the date hereof. It is possible that subsequent changes in the
tax law could be enacted and applied retroactively to an investment in the
Partnership and that such changes could result in a materially different result
that the result described in this opinion.
The opinions set forth below represent our conclusions based upon the
documents reviewed by us, the facts and assumptions presented to us and stated
herein. Any material amendments to such documents or changes in any significant
fact or assumption stated herein or in the Certificate could affect the opinions
expressed herein.
Based upon the foregoing and subject to the limitations,
qualifications, exceptions and assumptions set forth herein and the discussion
set forth below, we are of the opinion that:
1. The Partnership will be classified as a partnership rather than as
an association taxable as a corporation for federal income tax purposes.
2. The Partnership will not be classified as a "publicly traded
partnership" for federal income tax purposes.
3. The discussion set forth below under the heading "Other Federal
Income Tax Consequences" and in the Prospectus under the heading "Federal Income
Tax Consequences" is an accurate summary of all material matters discussed
therein.
1. The Partnership Will Be Classified As A Partnership
As discussed in greater detail below, a partnership generally is not
subject to federal income tax if it is classified as a partnership for federal
income tax purposes, but rather each partner is 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. Historically (i.e.,
prior to 1997), one of the more significant issues which had to be addressed in
connection with a discussion of the material federal income tax consequences
relative to a limited partnership was whether the partnership may be classified
as an association taxable as a corporation for income tax purposes under the
entity classification system that existed at that time. However, under
Regulations issued in December 1996 (the so-called "Check-the-Box" Regulations),
a domestic 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. See
Regulation Section 301.7701-3(b)(3)(ii).
The Partnership is a domestic partnership and was classified as a
partnership for tax purposes prior to January 1, 1997. The General Partner has
represented that it will not cause the Partnership to make an election to be
classified as an association taxable as a corporation. Based on the foregoing
and subject to the discussion which follows regarding the tax treatment of
publicly traded partnerships, it is our opinion that that the Partnership will
retain its classification as a partnership for federal income tax purposes.
2. The Partnership Will Not Be Classified As A Publicly Traded Partnership
Section 7704 of the Code treats "publicly traded partnerships" as
corporations for federal income tax purposes. Section 7704(b) of the Code
defines the term "publicly traded partnership" as any partnership the interest
of which are: (i) readily traded on an established securities market; or (ii)
readily tradable on a secondary market or the substantial equivalent thereof.
In June 1988, the IRS issued Notice 88-75 which sets forth
comprehensive guidance concerning the application of Section 7704 prior to the
adoption of final Regulations under Section 7704. Notice 88-75 primarily
addresses the issue of when partnership interests will be considered to be
readily tradable on a secondary market or the substantial equivalent thereof
under Section 7704(b). In November, 1995, the IRS issued final Regulations under
Section 7704 (the "Final PTP Regulations"). See Regulation Section 1.7704-1. The
Final PTP Regulations generally retain the conceptual framework of Notice 88-75,
but contain a number of modifications. The Final PTP Regulations are generally
effective for taxable years beginning after December 31, 1995. However, the
Final PTP Regulations contain a transitional rule which provides that for
partnerships that were actively engaged in an activity before December 4, 1995,
the Final PTP Regulations will not be effective until taxable years beginning
after December 31, 2005, unless the partnership adds a substantial new line of
business after December 4, 1995 (in which case the Final PTP Regulations become
effective for the year in which the new line of business is added). During this
transitional period, such partnerships may continue to rely on Notice 88-75.
The Final PTP Regulations provide that an established securities market
includes: (i) a national securities exchange registered under the Securities
Exchange Act of 1934; (ii) a national securities exchange exempt from
registration because of the limited volume of transactions; (iii) a foreign
securities exchange; (iv) a regional or local exchange; and (v) an interdealer
quotation system that regularly disseminates firm buy or sell quotations by
identified brokers or dealers by electronic means or otherwise (i.e., an
over-the-counter market). See Final PTP Regulations Section 1.7704-1(b).
As indicated above, the primary focus of Notice 88-75 is on determining
when partnership interests will be treated as "readily tradable on a secondary
market or the substantial equivalent thereof." Notice 88-75 and the Final PTP
Regulations each provides a number of safe harbors relative to this
determination. The safe harbors in the Final PTP Regulations generally track
those in Notice 88-75. Included as safe harbors in Notice 88-75 and the Final
PTP Regulations are certain safe harbors described under the heading "Lack of
Actual Trading" (the "Lack of Actual Trading Safe Harbors"). Under the Lack of
Actual Trade Safe Harbors contained in Notice 88-75, interests in a partnership
will not be considered readily tradable on a secondary market or the substantial
equivalent thereof within the meaning of Section 7704(b) of the Code if the sum
of the percentage interests in partnership capital or profits that are sold or
otherwise disposed of during the taxable year does not exceed a specified
percentage (either 5% or 2%) of the total interests in partnership capital or
profits. The determination under Notice 88-75 of whether the specified
percentage is 5% (the "Five Percent Safe Harbor") or 2% (the "Two Percent Safe
Harbor") depends on which of certain designated transfers are disregarded for
purposes of determining whether the percentage limitation has been satisfied.
This is discussed in greater detail below. The Final PTP Regulations contain a
Lack of Actual Trading Safe Harbor which essentially conforms to the Two Percent
Safe Harbor in Notice 88-75.
As noted, certain transfers are disregarded for purposes of determining
whether the Five Percent Safe Harbor or Two Percent Safe Harbor is met under
Notice 88-75 and/or the Final PTP Regulations. For purposes of all of these safe
harbors, the transfers which are disregarded include, but are not limited to,
transfers between family members, transfers at death, transfers in which the
basis is determined under Section 732 of the Code and interests issued by the
partnership for cash, property or services. For purposes of the Two Percent Safe
Harbor under Notice 88-75 and the Final PTP Regulations, the transfers which are
disregarded also include interests in the partnership which are redeemed
pursuant to the "Redemption and Repurchase Safe Harbor" discussed below.
Notice 88-75 and the Final PTP Regulations each contains a safe harbor
for redemption and repurchase agreements (the "Redemption and Repurchase Safe
Harbor"). These safe harbors are substantially identical and provide that the
transfer of an interest in a partnership pursuant to a "redemption or repurchase
agreement" is disregarded for purposes of determining whether interests in the
partnership are readily tradable on a secondary market or the substantial
equivalent thereof certain requirements are met. Notice 88-75 and the Final PTP
Regulations provide that a redemption or repurchase agreement means a plan of
redemption or repurchase maintained by a partnership whereby the partners may
tender their partnership interests for purchase by the partnership, another
partner or certain persons related to another partner. See Section
1.7704-1(e)(3) of the Final Regulations and Section II.E of Notice 88-75.
The requirements which must be met in order to disregard transfers made
pursuant to a redemption or repurchase agreement are: (i) the redemption
agreement requires that the redemption cannot occur until at least 60 calendar
days after the partner notifies the partnership in writing of the partner's
intention to exercise the redemption right; (ii) the redemption agreement
requires that the redemption price not be established until at least 60 days
after receipt of such notification by the partnership (or the price is
established not more than 4 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) during the taxable year of
the partnership, does not exceed 10% of the total interests in partnership
capital or profits. See Section II.E.1 of Notice 88-75 and Section 1.7704-1(f)
of the Final PTP Regulations.
Section XI.3 of the Partnership Agreement provides that, subject to
certain limitations, a Limited Partner may withdraw or partially withdraw from
the Partnership and obtain the return of his outstanding capital account. The
provisions of Section XI.3 constitute a redemption or repurchase agreement
within the meaning of Notice 88-75 and the Final PTP Regulations.
The limitations on a Limited Partner's right to withdraw his capital
account set forth under Section XI.3 include, without limitation: (i) a
requirement that the withdrawal will not be made until at least 61 days after
written notice of withdrawal is delivered to the General Partner; (ii) the
amount distributed to the withdrawing Limited Partner will be a sum equal to
such Limited Partner's capital account as of the date of such distribution; and
(iii) in no event will the General Partner permit the withdrawal during any
calendar year of more than 10% of the outstanding Limited Partner Units. In our
opinion, these limitations satisfy the requirements of Notice 88-75 and the
Final PTP Regulations set forth above.
Section X.2(b) of the Partnership Agreement provides that no transfer
of a Limited Partner's interest in the Partnership 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 income tax purposes.
As set forth in the Certificate, the General Partner has represented
that (i) the Partnership will not register Units or permit any other persons to
register Units for trading on an established securities market within the
meaning of Section 7704(b); (ii) pursuant to the authority conferred by Section
X.2 of the Partnership Agreement, the General Partner 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 the limitation under the
Five Percent Safe Harbor under Notice 88-75, the Two Percent Safe Harbor under
Notice 88-75 or Two Percent Safe Harbor under the Final PTP Regulations,
whichever is applicable (excluding for this purpose transfers which may be
disregarded pursuant to the applicable safe harbor); and (iii) the General
Partner will not permit during any fiscal year of the Partnership any withdrawal
of Units except in compliance with the provisions of Section XI.3 of the
Partnership Agreement.
Based upon the provisions of the Partnership Agreement and the
foregoing representations of the General Partner, we are of the opinion that:
(i) interests in the Partnership will not be traded on an established securities
market within the meaning of Section 7704 of the Code; (ii) the operation of the
Partnership with regard to the withdrawal by Limited Partners will qualify for
the Redemption and Repurchase Safe Harbor; (iii) the operation of the
Partnership with regard to the transfer of Units by Limited Partners will
qualify for either the Two Percent Safe Harbor or the Five Percent Safe Harbor,
whichever, is applicable for a given year; (iv) based on the opinions rendered
in clauses (ii) and (iii) of this paragraph, interests in the Partnership will
not be considered as readily tradable on a secondary market or the substantial
equivalent thereof; and (v) based on the opinions rendered in clauses (i)
through (iv) of this paragraph, the Partnership will not be classified as a
publicly traded partnership for purposes of Section 7704 of the Code.
It should be noted that a partnership which is classified as a publicly
traded partnership under Section 7704 of the Code will not be treated as a
corporation for federal income tax purposes if 90% or more of its gross income
is "qualifying income." Section 7704(c) of the Code defines the term "qualifying
income" for this purpose to include, among other "passive-type" items, interest,
dividends, real property rents, and gains from the sale of real property, but
excludes interest derived in the conduct of a financial business. If a publicly
traded partnership is not taxed as a corporation because it meets the qualifying
income test, the passive loss rules discussed below are applied separately to
the partnership, and a tax-exempt partner's share of the partnership's gross
income is treated as income from an unrelated trade or business for purposes of
the unrelated trade or business taxable income rules discussed below.
It is not clear whether the Partnership would satisfy the "qualifying
income" test of Section 7704(c). (As noted, this inquiry would be relevant only
if it were determined that the Partnership should be classified as a publicly
traded partnership.) It is anticipated that more than 90% of the Partnership's
income will be of the passive-type included in the definition of "qualifying
income" contained in Section 7704(c). However, it is not clear whether the
Partnership would be considered to be engaged in the conduct of a financial
business. If the Partnership were classified as a publicly traded partnership
and considered to be engaged in a financial business, the Partnership would be
treated as a corporation for federal income tax purposes.
3. Other Federal Income Tax Consequences
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.
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
the Partnership's items of income, gain, loss, deduction and credit.
Accordingly, a Limited Partner will be subject to tax on his distributive share
of the Partnership's 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.
Determination of Basis in Units
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 the Partnership's capital by such Limited Partner,
and decreased by (x) his proportionate share of losses of the Partnership, (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.
Allocations of Profits and Losses
The Partners will receive allocations of the Partnership's profits and
losses and cash distributions in the manner described in Article VIII of the
Partnership Agreement. Allocations of profits and losses under a partnership
agreement will be recognized as long as they have "substantial economic effect"
under the Regulations promulgated under Section 704(b) of the Code. In general,
the Regulations provide that an allocation contained in a partnership agreement
will be respected if it satisfies the requirements of one of three tests: (i) it
has "substantial economic effect" (the "substantial economic effect test"); (ii)
it is in accordance with the partners' interest in the partnership (determined
by taking into account all facts and circumstances) (the "partners' interest in
the partnership test"); or (iii) it is "deemed" to be in accordance with the
partners' interest in the partnership.
The substantial economic effect test is a substantially objective test
which effectively creates a safe harbor for compliance with the requirements of
Section 704(b). However, in order to comply strictly with the requirements of
that test, it would be necessary to include in the Partnership Agreement a
lengthy, intricate and complex set of provisions which may have little practical
significance based on the Partnership's anticipated operations. As a result, and
based also on the fact that a principal thrust of the Regulations under Section
704(b) is to prevent losses from being allocated for tax purposes to partners
who do not bear the economic risk of loss associated with such allocations and
that it is not anticipated that the operation of the Partnership and the
allocation provisions of the Partnership Agreement will ever produce a situation
in which a Partner will be allocated losses in excess of the economic losses
actually borne by such Partner, the General Partner has decided not to include
these complex provisions in the Partnership Agreement and to rely instead on the
partners' interest in the partnership test as the basis for justifying the
allocations under the Partnership Agreement.
The allocations contained in the Partnership Agreement are generally
intended to match, insofar as practicable, the allocation of profits for tax
purposes with the economic benefit of cash distributions among the Partners and
the allocation of losses with the related economic burden borne by the
respective Partners. In general, a Partner's interest in profits, losses and
cash distributions are proportionate to his capital account. Since the
allocation of profits, losses and cash distributions under the Partnership
Agreement will be substantially proportionate to the capital accounts of the
Partners, in most instances such allocations should be substantially in
accordance with the partners' interests in the partnership within the meaning of
this alternative test. Therefore, such allocations should be substantially
respected for tax purposes.
Limitations on the Deduction of Losses
It is not anticipated that the Partnership will incur net losses for
income tax purposes in any taxable year. However, if the Partnership were to
incur losses in any year, the ability of a Limited Partner to deduct such losses
would be subject to the potential application of the limitations discussed
below.
(i) The Basis Limitation
Section 704(d) of the Code provides that a partner's share of
partnership losses is allowed as a deduction only to the extent of his adjusted
basis in his partnership interest at the end of the year in which the losses
occur. Losses disallowed under Section 704(d) may be carried forward
indefinitely until adequate basis is available to permit their deduction. Due to
this limitation, a Limited Partner in the Partnership will be precluded from
deducting losses in excess of his adjusted basis in his Units.
(ii) The At Risk Limitation
Under Section 465 of the Code, a taxpayer (other than a widely-held
corporation) may not deduct losses incurred in certain business activities,
including the lending activities 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 such Partner's 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.
(iii) The Passive Loss Rules
Section 469 of the Code limits the deductibility of losses from
"passive activities" for individuals, estates, trusts and certain closely-held
corporations. A passive activity includes an activity which involves the conduct
of a trade or business in which the taxpayer does not materially participate.
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.
The Regulations under Section 469 provide that in certain situations,
net income, but not net loss from a passive activity (or a portion thereof) is
treated as nonpassive. See Regulation Section 1.469-2T(f). One of the items
covered by this Regulation is net income from an "equity-financed lending
activity." An equity-financed lending activity is defined as an activity that
involves a trade or business of lending money, if the average outstanding
balance of liabilities incurred in the activity for the taxable year does not
exceed 80% of the average outstanding balance of the interest-bearing assets
held in the activity for such year.
Based on the manner in which it is anticipated that the Partnership
will conduct its operations, at no time will the average outstanding balance of
Partnership liabilities exceed 80% of the average outstanding balance of the
Partnership's interest earning assets. Consequently, if the Partnership is
deemed to be engaged in the trade or business of lending money, such business
will constitute an equity-financed lending activity, and income of the
Partnership which arises from that trade or business and would otherwise be
considered income from a passive activity will generally be recharacterized as
nonpassive 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 of lending money, then income and
loss will be considered portfolio income and loss. In either event, a Limited
Partner will not be permitted to offset passive losses from other activities
against his share of the income of the Partnership.
There are no cases or revenue rulings dealing with the question of
establishing the criteria for determining whether an entity (other than a bank)
is engaged in the ordinary conduct of a trade or business of lending money for
purposes of Section 469. Presumably, this determination would be dependent, at
least in part, on the facts and circumstances surrounding the Partnership's
operations, including the number of loans made during any particular year. Due
to this uncertainty, we cannot give an opinion as to whether the Partnership
will be considered to be engaged in an equity-based lending activity for this
purpose.
Under Section 67(a) of the Code, 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 subject to this 2% limitation only if the
Partnership is not considered to be in the trade or business of lending money.
Computation of Gain or Loss on Sale or Redemption of Units
Gain or loss on the sale by a Limited Partner of his Units (including a
redemption by the Partnership) will be measured by 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
Character of Gain or Loss
Generally, gain recognized by a Limited Partner on the sale of Units
which have been held over 12 months 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."
For noncorporate taxpayers, long-term capital gain for capital assets
held longer than 12 months is subject to a maximum rate of 20% (10% for
individuals in the 15% tax bracket). The amount of ordinary income against which
a noncorporate taxpayer may deduct a capital loss is the lower of $3,000 (or 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.
Tax Rates on a Partner's Share of Ordinary Income from the Partnership
A taxpayer's tax liability with respect to an investment in the
Partnership will depend upon his individual tax bracket. Currently, there are
five tax brackets for individuals. For calendar year 1999, the first bracket is
at 15% (on taxable income not over $43,050 in the case of married taxpayers
filing joint returns), the second at 28% (on taxable income from
$43,050-$104,050), the third at 31% (on taxable income from $104,050-$158,550),
the fourth at 36% (on taxable income from $158,550-$283,150), and the fifth at
39.6% (on taxable income over $283,150). (As noted above, the long-term capital
gain for capital assets held longer than 12 months is subject to a 20% tax rate
(10% for individuals in the 15% bracket).)
Depreciation
From time to time the Partnership has acquired and anticipates that it
will acquire equity or leasehold interests in real property by direct
investment, foreclosure or otherwise (e.g., eleven properties held by the
Partnership as of September 30, 1998 that were acquired through foreclosure).
See Prospectus, Business--Real Estate Owned, at page 39. Generally, the cost of
the improvements on any such owned real property may be recovered through
depreciation deductions over a period of 39 years. See Section 168(c) of the
Code.
Investment Interest
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. 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 the discussion set
forth above concerning the classification of the Partnership as a partnership
for federal income tax purposes) 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.
The General Partner intends 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 Partner deems it advisable to incur indebtedness in
connection with foreclosures on property where mortgagees have defaulted on
their loans. 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 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
Partner. 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. The General Partner 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 funds of the Partnership 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 of Section 1271 through 1275 of the
Code will apply to 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.
No Section 754 Election - Impact on Subsequent Purchasers
Section 754 of the Code permits a partnership to elect to adjust the
basis of its property in the case of a transfer of a Unit. The effect of such an
election would be that, with respect to the transferee Limited Partner only, the
basis of Partnership property would either be increased or decreased by the
difference between the transferee's basis for his Unit and his proportionate
share of the Partnership's basis for all Partnership property.
The General Partner has advised us that due to the accounting
difficulties which would be involved, it will not cause the Partnership to make
an election pursuant to Section 754 of the Code (a "754 Election"), 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 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 a 754 Election.) This treatment
might not be attractive to prospective purchasers of Units, and consequently, 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
Partner anticipates 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. Consequently, we
cannot render an opinion as to the tax consequences of any of these prospective
transactions, and there is no assurance that the IRS will 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 Partner
The General Partner will be paid a management fee for the management
services rendered to the Partnership. The amount of the management fee will be
payable monthly, subject to a maximum of 2-3/4% per annum, of the average unpaid
balance of the Partnership's mortgage loans at the end of each month in the
calendar year. In addition, the General Partner may act as a servicing agent
with respect to Partnership loans, in which event it will be entitled to receive
from the Partnership a monthly fee of up to 1/4 of 1% per annum of the unpaid
balance of the Partnership's mortgage loans at the end of each month. The
General Partner intends to cause the Partnership to deduct the amount of any
such management fees and loan servicing fees paid each year in computing the
taxable income of the Partnership for such year. The deductibility of such fees
depends in large measure on the value of the management services or loan
servicing services rendered, which is a question of fact that may depend on
events to occur in the future. Due to this uncertainty, we cannot give an
opinion as to the proper tax treatment of the management fee or loan servicing
fee, and the IRS may attempt to recharacterize the Partnership's treatment of
such fees by disallowing the deduction claimed by the Partnership therefor. If
successful, such a recharacterization could cause the tax benefits generated by
the payment of such fees to be deferred.
The General Partner or one or more affiliates of the General Partner
may receive investment evaluation fees (commonly known as mortgage placement
fees or "points") payable by borrowers for services rendered in connection with
the evaluation of potential investments of the Partnership. Since any such fees
will be payable by the borrowers, such payment should not have any effect on the
calculation of the Partnership's taxable income. However, the IRS could take the
position that these fees are constructively 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. Once again since this is ultimately an issue
of fact which may depend on future events, we are not able to render an opinion
regarding the issue.
The General Partner or its affiliate will be entitled to reimbursement
from the Partnership for certain expenses advanced by the General Partner for
the benefit of the Partnership and for salaries and related expenses for
nonmanagement and nonsupervisory services performed for the benefit of the
Partnership. The reimbursement of such expenses by the Partnership will
generally be treated in the same manner as if the Partnership incurred such
costs directly.
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.
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. Limited Partners should consult with their
own tax advisors concerning the applicability and impact of state and local
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 who 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 Partner
and its 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 Partner
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 Partner would be deemed to be a fiduciary 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 final regulations defining
the term "plan assets" (the "Final DOL Regulations"). Under the Final DOL
Regulations, 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 DOL Regulations provide 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 Partner and its 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.
(ii) Exemption For a Real Estate Operating Company. The Final DOL
Regulations also provide 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 DOL Regulations states the Department of Labor's view that an entity would
not be engaged in the management or development of real estate if it merely
services mortgages on real estate. Thus, it is unlikely that 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 DOL
Regulations, 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" is a factual question to
be determined on the basis of all relevant facts and circumstances. If a
security is part of an offering in which the minimum is $10,000 or less,
however, certain customary restrictions on the transfer of partnership interests
necessary to permit partnerships to comply with applicable federal and state
laws, to prevent a termination or reclassification of the entity for federal or
state tax purposes and to meet administrative needs (which are enumerated in the
Final DOL Regulations) will not, alone or in combination, affect a finding that
such securities are transferable. Because the Units will not be subject to any
restrictions on transfer other than those enumerated in the Final DOL
Regulations, the Units are held 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 DOL Regulations. As a result, the underlying assets of the Partnership
should not be considered to be plan assets under the Final DOL Regulations.
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 Partner and its
affiliates in connection with the preparation of certain portions of the
Registration Statement and expects to continue to represent the General Partner
and its affiliates in other matters; (ii) as of September 30, 1998, certain
members of the firm owned or controlled an aggregate of 1,050,320 Units, none of
which were received in connection with the preparation of any offering of Units;
and (iii) certain members of the firm, individually or as trustees of the firm's
qualified pension or profit sharing plan, own interests in notes secured by
deeds of trust originated and placed directly with such members, or trustees by
the 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 September 30, 1998, is approximately $922,000.
Very truly yours,
/s/ Wendel, Rosen, Black & Dean, LLP
WENDEL, ROSEN, BLACK & DEAN, LLP
WRB&D:rag
<PAGE>
EXHIBIT 23.1
<PAGE>
CONSENT OF WHITEHEAD, PORTER & GORDON LLP
With regard to the Registration Statement on Form S-11 (No. 33-__________) to be
filed with the Securities and Exchange Commission on or about January 27, 1999,
by Owens Mortgage Investment Fund, a California Limited Partnership, we hereby
consent to all references to our firm under the caption "Legal Matters" in the
Prospectus which is part of said Registration Statement.
WHITEHEAD, PORTER & GORDON LLP
San Francisco, California
January 27, 1999
<PAGE>
EXHIBIT 23.2
<PAGE>
CONSENT OF WENDEL, ROSEN, BLACK & DEAN, LLP
With respect to the Registration Statement on Form S-11 (No. 33-__________) to
be filed with the Securities and Exchange Commission on or about January 27,
1999, 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
Registration Statement.
WENDEL, ROSEN, BLACK & DEAN, LLP
Oakland, California
January 27, 1999
<PAGE>
EXHIBIT 23.3
<PAGE>
CONSENT OF KPMG 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 LLP
Oakland, California
January 27, 1999
<PAGE>
EXHIBIT 24
<PAGE>
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, a California
Limited Partnership, 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
120,000,000 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, a California Limited Partnership,
and the name of the General Partner thereof, in the capacity indicated below, to
the Registration Statement on Form S-11 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 27th day of January, 1999. This Power of
Attorney may be executed in any number of counterparts.
Owens Financial Group, Inc.,
General Partner
By:/s/ Bryan H. Draper
BRYAN H. DRAPER
Secretary and
Chief Financial Officer
<TABLE> <S> <C>
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<LEGEND>
(Replace this text with the legend)
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<CIK> 841501
<NAME> OWENS MORTGAGE INVESTMENT FUND
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 12,931,067
<SECURITIES> 0
<RECEIVABLES> 3,255,831
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,186,898
<PP&E> 10,229,499
<DEPRECIATION> 0
<TOTAL-ASSETS> 199,362,600
<CURRENT-LIABILITIES> 2,067,729
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 197,294,871
<TOTAL-LIABILITY-AND-EQUITY> 199,362,600
<SALES> 0
<TOTAL-REVENUES> 16,106,614
<CGS> 0
<TOTAL-COSTS> 3,058,303
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,048,311
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,048,311
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,048,311
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
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