As filed with the Securities and Exchange Commission on April 18, 2000
Registration No. 333-71299
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
POST-EFFECTIVE AMENDMENT NO. 2 TO THE
Form S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
(Exact name of registrant as specified in governing instruments)
2221 Olympic Blvd., P.O. Box 2400
Walnut Creek, California 94595
(Address of principal executive offices)
---------------------------
WILLIAM C. OWENS
President
Owens Financial Group, Inc.
2221 Olympic Blvd., P.O. Box 2400
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
<S> <C> <C> <C> <C>
Title of Amount Being Proposed Maximum Proposed Maximum Amount of
Securities Being Registered Registered Offering Price Aggregate Registration Fee
Per Unit Offering Price
=================== ======== ============= =============== =============
Units of Limited 120,000,000 $1.00 $120,000,000 $35,400*
Partnership Interest
============================= =============== ===================== ===================== ==================
</TABLE>
* Paid with the original filing of this registration statement.
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
<S> <C>
Item Number and Caption Location in Prospectus
1. Forepart of Registration Statement and Outside Front Outside Front Cover Page of Prospectus
Cover Page
2. Inside Front and Outside Back Cover Pages of 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>
<PA
Prospectus
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
77,656,111
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 212,702,897 Units held by 2,705 limited partners, as of
December 31, 1999.
The Offering
- --------------------
Offering is 77,656,111 Units for $77,656,111.
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 $77,656,111, less
expenses of the offering estimated not to exceed $41,000, 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 _____________, 2000.
<PAGE>
TABLE OF CONTENTS
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......................18
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......................25
Partnership Management........................25
Mortgage Investments..........................25
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT...................26
SELECTED FINANCIAL DATA............................27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...28
BUSINESS...........................................34
Delinquencies.................................36
Real Estate Owned.............................37
Principal Investment Objectives...............38
Types of Mortgage Loans.......................39
First Mortgage Loans..........................39
Second and Wraparound Mortgage Loans..........39
Third Mortgage Loans..........................39
Construction Loans............................40
Leasehold Interest Loans......................40
Variable Rate Loans...........................40
Interest Rate Caps............................41
Assumability..................................41
Prepayment Penalties..........................41
Balloon Payment...............................41
Equity Interests and Participation In Real
Property......................................41
Debt Coverage Standard for Mortgage Loans.....41
Loan Limit Amount.............................41
Loans to Affiliates...........................41
Purchase of Loans from Affiliates.............42
Borrowing.....................................42
Repayment of Mortgages on Sales of
Properties....................................42
No Trust or Investment Company Activities.....42
Miscellaneous Policies and Procedures.........42
Competition and General Economic Conditions...43
Available Information.........................43
HOW THE PARTNERSHIP PROTECTS ITS RIGHTS
AS A LENDER........................................43
Introduction..................................43
General.......................................43
Parties to a Deed of Trust....................44
Foreclosure...................................44
Provisions in Deeds of Trust..................45
California Usury Law Not Applicable
to Partnership Mortgage Loans.................46
FEDERAL INCOME TAX CONSEQUENCES....................47
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............60
Liabilities of Limited
Partners-Nonassessability.....................61
Term and Dissolution..........................61
General Partner's Interest Upon
Removal, Withdrawal or Termination............61
Meetings......................................62
Voting Rights and Books and Records...........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......................................67
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 2400, Walnut Creek,
California 94595, telephone (925) 935-3840.
Compensation to
General Partner 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,
The Promotional Interest,
Loan origination fees (points) paid by the
borrowers, and
Late payment charges paid by borrowers.
The following table shows the fees paid by the
Partnership to the General Partner during the periods
indicated:
<TABLE>
<CAPTION>
Year ended Year ended Year ended Year ended
12/31/99 12/31/98 12/31/97 12/31/96
<S> <C> <C> <C> <C>
Management Fees * $2,652,882 $3,249,824 $3,879,454 $866,985
Management fees as a % of the average unpaid
balance of loans* 1.37% 1.78% 2.34% 0.56%
Servicing fees $479,592 $472,390 $420,742 $384,004
Servicing fees as a % of the average unpaid
balance of loans 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 distribution per
Partnership Unit (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
toSaleandTransfer 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
77,656,111 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, 1999, there are
212,702,897 Units outstanding held by 2,705 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 You must meet certain standards as an investor in
Standards Units. These are imposed by the Standards 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
$45,000 ($50,000 in the State of Washington),
and a minimum annual gross income of at least
$45,000 ($50,000 in the State of Washington);
or Alternatively, a minimum net worth of
$150,000; or If purchasing for a fiduciary
account, the minimum standards above must be
met by the beneficiary, the fiduciary account,
or by a donor or grantor who directly or
indirectly supplies the funds to purchase the
Partnership Units if the donor or grantor is
the fiduciary
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 47 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. A sale of Units may not be
completed until at least five business days after the
date you received this Prospectus. Subscriptions will
be accepted or rejected within 30 days of their
receipt by the General Partner. If your Subscription
Agreement is accepted, you are then an owner of the
Units and a limited partner of the Partnership. The
General Partner will send you a confirmation of
purchase within five business days of acceptance of
the Subscription Agreement. If you are not accepted,
your purchase payment will be returned to you within
10 business days.
Use of Offering Proceeds If the maximum amount of this offering is sold, the
Partnership will receive $80,526,358, less expenses
of the offering estimated not to exceed $41,000. The
offering proceeds will be received as Units are sold.
All offering proceeds, net of offering expenses and
contingency reserves, will be used for investment in
mortgage loans and operating expenses of the
Partnership.
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 The Partnership has an automatic Distribution
Reinvestment Plan 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; dissolve and windup the
Partnership; remove and replace the General
Partner; and approve or disapprove the sale,
pledge, refinancing, or exchange of all or
substantially all of the Partnership's assets.
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 1997, 1998 and 1999. 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.
Year Ended December 31,
1999 1998 1997
Loans Secured by $200,356,517 $182,721,465 $174,714,607
Trust Deeds
Allowance for Loan $(4,000,000) $(3,500,000) $(3,500,000)
Losses
Total Assets $216,371,517 $202,410,920 $191,325,054
Liabilities $1,759,704 $1,070,118 $593,919
Partners' Capital $214,611,813 $201,340,802 $190,731,135
Total Revenues $21,457,192 $21,041,215 $21,325,850
Operating Expenses $3,977,339 $4,062,523 $5,905,603
Net Income $17,479,853 $16,978,692 $15,420,247
Net Income $17,307,518 $16,810,586 $15,266,045
Allocated to
Limited Partners
Percent of Net 8.4% 8.6% 8.2%
Income Allocated to
Limited Partners
per Weighted
Average Limited
Partnership Unit
Distribution per 8.2% 8.3% 8.7%
Partnership Unit
(Yield)*
- ----------
* Distribution per Partnership Unit (yield) is the annualized 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>
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, adequacy of reserves, 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.
Of the $8,710,000 of loans that was delinquent as of December 31, 1998,
$5,129,000 remained delinquent as of December 31, 1999, $404,000 was
paid off, $1,176,000 was brought current, and $2,001,000 became real
estate acquired through foreclosure of the Partnership.
Between 1993 and 1999, the Partnership foreclosed on $16,420,000 of
delinquent mortgage loans and acquired title to 22 properties securing
the loans. As of December 31, 1999, the Partnership still held title to
thirteen of these properties in the amount of $10,176,000, net of an
allowance for losses of $1,336,000.
The Partnership maintains in its financial statements, as of December
31, 1999:
A $4,000,000 loan loss reserve; and
A $1,336,000 reserve for losses on real estate acquired through
foreclosure.
The General Partner believes these reserves are adequate as of December
31, 1999.
Risks of Large Loans
The Partnership's loans have an average face value of $1,411,000 as of
December 31, 1999. 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 very limited situations. This increases the risk to
the Partnership of material losses in income and assets, which could
reduce distributions to limited partners.
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 86% of the dollar amount of the Partnership's loans as of
December 31, 1999 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 and reduced cash flows on foreclosed
properties than could be earned and received 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 approximately 40% of the total
mortgage loans held by the Partnership as of December 31, 1999.
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 16, under the caption "Notice to California
Residents".
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
Acquisition and origination fees to the General Partner are generally
payable up front from payments made by third party borrowers. In
addition, the General Partner bears the expense of collection
activities and receives all late payment charges from borrowers on
loans owned by the Partnership. 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 $45,000 ($50,000 in the state of Washington) plus
a minimum annual gross income of at least $45,000 ($50,000 in the
state of Washington);
a minimum net worth (exclusive of home, home furnishings and
automobiles) of $150,000 irrespective of annual gross income; or
in purchasing for a fiduciary account, the minimum standards
above are met by the beneficiary, the fiduciary account, or by a
donor or grantor who directly or indirectly supplies the funds to
purchase the Units if the donor or grantor is the fiduciary.
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 47. 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 47.
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 will commit at least 84% of capital contributions
to investment in mortgage loans. 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.
Maximum Offering
(77,656,111 Units
to be Sold)
----------------------------
Amount Percent of
Offering
Gross Offering Proceeds(1)........................ $ 77,656,111 100.00%
Less:
Public Offering Expenses (2)...................... 41,000 0.05%
Proceeds Available for Investment................. $ 77,615,111 99.95%
Less:
Cash Reserves (3).................................. 1,164,842 1.50%
Cash Available for Investment in Mortgage Loans (4) $ 76,450,269 98.45%
- --------
(1) 120,000,000 Units were originally offered under Registration Statement
No. 333-71299. As of March 31, 2000, 42,343,889 Units have been sold
leaving 77,656,111 Units available to be offered under this
Post-Effective Amendment No. 2 to that Registration Statement.
(2) Includes legal, accounting, printing and other expenses of this
offering, estimated not to exceed this amount. The total expenses from
the Registration Statement and its Post Effective Amendment No. 1 were
approximately $171,000 for a total of $212,000.
(3) 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.
(4) 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 38. 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.
CAPITALIZATION OF PARTNERSHIP
The capitalization of the Partnership as of December 31, 1999, 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) 214,611,813 292,267,924
- -------------
(1) Amounts before payment of certain estimated public offering expenses
aggregating an estimated $41,000.
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 December 31,
1999, has contributed $1,074,614. 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 December 31, 1999, the General Partner had been credited
with $1,074,614 of promotional interests. If the maximum 77,656,111 Units is
sold in the present offering, the General Partner will contribute an additional
$388,281 and will be credited with an additional $388,281 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. The General Partner is not
entitled to receive real estate brokerage commissions, property management fees,
insurance services fees or carried interest from the Partnership. In addition,
the General Partner is not entitled to receive reimbursement of acquisition and
origination expenses incurred by the General Partner or its affiliates in the
origination, selection and acquisition of mortgage loans. The General Partner
may not 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.
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.
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 , which, when added to all other fees paid in connection with the servicing
of a particular loan, does not exceed the lesser of the customary, competitive
fee in the community where the loan is placed for the provision of such mortgage
services on that type of loan or up to 0.25% 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. Distributions to the General Partner on
account of the promotional interest cannot exceed 10% of all distributions from
Net Income Available for Distribution per annum. Thus, 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. In
addition, 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.
Acquisition and Origination Fees
Acquisition and origination fees, also called investment evaluation
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 and may be
paid at the placement of the loan or at the time of final repayment of the loan.
The amount of these fees is determined by competitive conditions and the General
Partner 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 years ended December 31,
1999 and 1998, 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>
Year Ended Year Ended
December 31, 1999 December 31, 1998
Form of Compensation Actual Maximum Actual Maximum
Allowable Allowable
<S> <C> <C> <C> <C>
Management Fees*..................... $2,653,000 $ 5,276,000 $ 3,250,000 $ 4,784,000
Promotional Interest................. 68,000 68,000 50,000 50,000
Subtotal............................. $2,721,000 $ 5,344,000 $ 3,300,000 $ 4,834,000
Loan Origination Fees................ $ 6,681,000 $ 6,681,000 $ 1,724,000 $ 1,724,000
Servicing Fees....................... 480,000 480,000 472,000 472,000
Late Payment Charges................. 395,000 395,000 382,000 382,000
Total $ 7,556,000 $ 7,556,000 $ 2,578,000 $ 2,578,000
Grand Total $10,277,000 $12,900,000 $ 5,878,000 $ 7,412,000
Reimbursement of Other Expenses $ 44,000 $ 44,000 $ 151,000 $ 151,000
</TABLE>
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* 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.
Aggregate actual compensation paid by the Partnership and by borrowers
to the General Partner during the years ended December 31, 1999 and 1998,
exclusive of expense reimbursement, was $10,277,000 and $5,878,000,
respectively, or 4.8% and 2.9%, 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 $12,900,000 and
$7,412,000, respectively, or 6.0% and 3.7%, respectively, of partners' capital,
which would have reduced net income allocated to limited partners by
approximately 15.0% and 9.1%, respectively.
Loan origination fees as a percentage of loans purchased by the
Partnership were 5.6%, 2.1% and 3.8% for the years ended December 31, 1999,
1998, and 1997, respectively. In the year ended December 31, 1999, one loan in
the amount of $12,025,000 had a loan origination fee of $2,900,000.
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 Acquisition and Origination 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 up to 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 by others 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 by others for similar services, it is possible
that interest rates on the Partnership's loans might be lower than otherwise
attainable.
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,
1997 ,1998 and 1999, the management fees were 0.97%, 0.56%, 2.34%, 1.78% and
1.37% 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. 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.
When the General Partner purchased a loan from the Partnership, it did
so for an amount equal to or greater than the fair market value of the subject
loan. Should the General Partner subsequently realize a profit from a loan
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 their cost
to the General Partner. 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, William Dutra, senior vice president, and Andrew Navone, vice president
of the General Partner.
Loans to the General Partner
The Partnership cannot make loans to the General Partner, affiliates of
the General Partner, or any limited partnership or entity affiliated with or
organized by the General Partner, except as provided in Article IV. 5. of the
Partnership Agreement.
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 General Partner has fiduciary
repsonsibility for the safekeeping and use of all funds and assets of the
Partnership, whether or not in the General Partner's possession or control, and
the General Partner will not employ, or permit another to employ such funds or
assets in any manner except for the exclusive benefit of the General Partner or
any other person. 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; and
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.
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 $15,811,000 on
December 31, 1999. 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 88, 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 49, 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 42, 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 37, is a Senior 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 43, is a licensed real estate
broker, 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 33, 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 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 34. 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 approximately 2,548,000
units (1.2%) of the Partnership as of December 31, 1999. The ownership (common
stock) of the General Partner is as follows: 43.01% by Milton N. Owens, 26.88%
by William C. Owens, 10.75% by Bryan H. Draper and 9.68% each by William E.
Dutra and Andrew J. Navone.
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
As of and for the year ended
December 31
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Loans secured by trust deeds $ 200,356,517 $ 182,721,465 $ 174,714,607 $154,148,933 $ 151,350,591
Less: Allowance for loan losses (4,000,000) (3,500,000) (3,500,000) (3,500,000) (3,250,000)
Real estate held for sale.. 13,733,722 11,155,202 16,047,141 13,221,093 9,612,359
Less: Allowance for losses on (1,336,000) (1,184,000) (1,896,000) (600,000) (600,000)
real estate..............
Cash, cash equivalents and other
assets................... 7,617,278 13,218,253 5,959,306 14,105,992 8,288,818
Total assets............... $ 216,371,517 $ 202,410,920 $ 191,325,054 $ 177,376,018 $ 165,401,768
Liabilities................ $ 1,759,704 $ 1,070,118 $ 593,919 $ 535,914 $ 657,325
Partners' capital
General partners......... 2,104,936 1,967,069 1,864,033 1,731,874 1,623,526
Limited partners.........
212,506,877 199,373,733 188,867,102 175,108,230 163,120,917
Total partners' capital
214,611,813 201,340,802 190,731,135 176,840,104 164,744,443
Total liabilities / $ 216,371,517 $ 202,410,920 $ 191,325,054 $ 177,376,018 $ 165,401,768
Partners' capital....
Revenues................... $ 21,457,192 $ 21,041,215 $ 21,325,850 $ 16,824,479 $ 16,415,301
Operating expenses 69,255
Promotional interest..... 67,907 49,545 70,747 57,395 1,431,616
Management fee........... 2,652,882 3,249,824 3,879,454 866,985 371,000
Servicing fee............ 479,592 472,390 420,742 384,004 224,108
Net real estate operations (145,343) 53,656 70,216 344,298 500,000
Provision for losses on 500,000 -- -- 250,000
loans..................
Provision for losses on 200,000
real estate held for sale 152,000 -- 1,296,000 --
Other.................... 127,947
270,301 237,108 168,444 163,385
Net Income $ 17,479,853 $ 16,978,692 $ 15,420,247 $ 14,758,412 $ 13,491,375
Net income allocated to general
partners................. $ 172,335 $ 168,106 $ 154,202 $ 146,960 $ 135,584
Net income allocated to limited $ 17,307,518 $ 16,810,586 $ 15,266,045 $ 14,611,452 $ 13,355,791
partners.................
Net income allocated to limited
partners per limited partnership
unit..................... $ .08 $ .09 $ .08 $ .08 $ .08
</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
1999 Compared to 1998
The net income increase of $501,000 (3.0%) for 1999 as compared to 1998, was due
to:
an increase in interest income of $1,121,000 from $19,100,000 to
$20,221,000;
a decrease in management fees to the general partner of $597,000;
and
an increase in net income from rental operations from a loss of
$54,000 to net income of $145,000.
The net income increase in 1999 as compared to 1998, was offset by:
a decrease in the gain on sale of real estate of $431,000;
a decrease in interest income from investments of $274,000;
an increase in the provision for loan losses of $500,000; and
an increase in the provision for losses on real estate held for
sale of $152,000.
The increase in interest income on loans secured by trust deeds of
$1,121,000 or 5.9% was primarily a result of the growth in the loan portfolio of
approximately 9.7% even though its weighted average yield decreased from 10.94%
for the year ended December 31, 1998 to 10.84% for the year ended December 31,
1999.
The management fees to the general partner were paid pursuant to the
Partnership Agreement.
Real estate operations resulted in income of $145,000 during the year
ended December 31, 1999 as compared to a loss of $54,000 during 1998. This
increase in income is a result of increased occupancy on two of the
Partnership's properties and reduced operating costs due to legal, insurance and
payroll expenses incurred on the Merced and Oakland properties in the year ended
December 31, 1998 which were not incurred in 1999.
Gain on sale of real estate decreased by $431,000 (33.9%). 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. as the final homes in the development were
completed and sold during 1998. The decrease in gain on sale of homes from the
development limited partnership was partially offset by gains recognized from
the sales of two properties located in Oakland and Vallejo, California during
the year ended December 31, 1999 (see "Real Estate Properties Held for Sale"
below).
Interest income from investments decreased as a result of less cash
held in interest-bearing accounts pending investment in loans during 1999 as
compared to 1998 as the Partnership was able to stay fully invested in loans for
most of the year.
Results of Operations
1998 Compared to 1997
The net income increase of $1,558,000 (10.1%) for 1998 as compared to 1997, was
due to:
an increase in interest income of $858,000 from $18,241,000 to
$19,100,000;
an increase in interest income from investments of $219,000;
a decrease in management fees to the general partner of $630,000;
and
a decrease in the provision for losses on real estate acquired
through foreclosure from $1,296,000 to $0.
The net income increase in 1998 as compared to 1997, was offset by:
a decrease in the gain on sale of real estate of $1,362,000.
The increase in interest income on loans secured by trust deeds of 4.7%
was primarily a result of the growth in the loan portfolio of approximately 4.6%
even though its weighted average yield decreased from approximately 11.07% for
the year ended December 31, 1997 to 10.94% for the year ended December 31, 1998.
The increase was also due to one large loan which earned an approximate annual
yield of 21% during 1998 and was paid off in October 1998.
Interest income from investments increased as a result of increased
cash held in interest-bearing accounts pending investment in loans during 1998
as compared to 1997.
The management fees to the general partner were paid pursuant to the
Partnership Agreement.
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 1998 compared to 1997.
Financial Condition
December 31, 1999, 1998 and 1997
Loan Portfolio
At the end of 1997 and 1998 the number of Partnership mortgage
investments was 215 and 188, respectively, and decreased to 142 by the end of
1999. The average loan balance was $813,000 and $972,000 at the end of 1997 and
1998 respectively, and increased to $1,411,000 as of December 31, 1999.
Approximately $7,415,000 (3.7%) and $8,710,000 (4.8%) of the loans
invested in by the Partnership were more than 90 days delinquent in payment as
of December 31, 1999 and 1998, respectively. Of these amounts, approximately
$850,000 (0.4%) and $3,657,000 (2.0%) were in the process of foreclosure. Loans
more than 90 days delinquent decreased by $1,295,000 (14.9%) from December 31,
1998 to December 31, 1999, primarily due to one loan in the amount of $1,442,000
which was foreclosed on by the Partnership during the year ended December 31,
1999.
A loan loss reserve in the amount of $4,000,000, $3,500,000 and
$3,500,000 was recorded on the books of the Partnership as of December 31, 1999,
1998 and 1997. The General Partner believes that the loan loss reserve is
adequate.
As of December 31, 1999, 1998 and 1997, approximately 40%, 48% and 67%
of the Partnership's mortgage loans were 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.
As of December 31, 1999, 1998 and 1997, approximately 80.7%, 83.8% and
90.5%, respectively, of the loan portfolio was invested in loans on
income-producing properties, 11.3%, 7.6% and 4.1%, respectively, in construction
loans, 7.7%, 7.3% and 4.2%, respectively, in land loans and 0.3%, 1.3% and 1.2%,
respectively, in residential loans. Also, as of these dates, approximately
91.2%, 89.0% and 92.3%, respectively, of the loan portfolio was invested in
first deeds of trust, 8.8%, 10.5% and 7.3%, respectively, in second deeds of
trust and 0.0%, 0.5% and 0.4%, respectively, in third and fourth deeds of trust.
The Partnership's investment in construction loans increased by 63%
since December 31, 1998. Improvement in real estate market conditions has made
development and, thus, construction loans more attractive. All but two of the
Partnership's construction loans are first trust deeds. In addition, only one of
these loans, in the amount of $56,000, is more than 90 days delinquent in
payment as of December 31, 1999.
The Partnership was invested in mortgage loans with variable interest
rates in the amount of $77,310,339 (44.2%), $66,852,000 (36.6%), and $29,024,000
(14.5%) as of December 31, 1997, 1998 and 1999, respectively. The decrease in
the volume of variable rate loans invested in by the Partnership during 1999 was
primarily a result of the market and competitive conditions surrounding the
General Partner's loan underwriting in 1999. Because competition in the lending
industry has increased substantially over the past two years, borrowers seeking
construction loans or loans to purchase properties have wanted shorter-term
loans as their ability to refinance is much stronger in this environment. Such
shorter-term loans (less than two years) are normally originated with fixed
interest rates.
Real Estate Properties Held for Sale
The Partnership currently holds title to thirteen properties that were
foreclosed on from January 1, 1993 through December 31, 1999 in the amount of
$10,176,000, net of allowance for losses of $1,336,000. 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 year ended
December 31, 1999, the Partnership acquired through foreclosure a 91% interest
in 92 residential lots in Lake Don Pedro, California, on which it had a trust
deed investment of $541,000 and 100% interests in a commercial building located
in San Ramon, California and an apartment/retail building located in Oakland,
California, on which it had trust deed investments of $1,442,000 and $17,000,
respectively. During the year ended December 31, 1999, a 6-unit residential
building located in Oakland, California, of which the Partnership owned a 22%
interest, was sold resulting in a gain to the Partnership of $18,000. In
addition, during the year ended December 31, 1999, a 66-acre residential parcel
located in Vallejo, California was sold for cash of $500,000 and a note of
$1,000,000 resulting in a gain to the Partnership of $822,000.
Seven of the Partnership's thirteen properties do not currently
generate revenue. Although expenses from rental properties have decreased from
approximately $699,000 to $582,000 (16.7%) for the year ended December 31, 1998
and 1999, respectively, revenues associated with these properties have increased
from $645,000 to $727,000 (12.7%), thus generating a net income from real estate
held for sale of $145,000 during the year ended December 31, 1999. The increase
in revenues is primarily a result of increased occupancy on two of the
Partnership's properties. The decrease in expenses is due to legal, insurance
and payroll expenses incurred on the Merced and Oakland properties in the year
ended December 31, 1998 which were not incurred in 1999.
As of December 31, 1998 and 1997, the Partnership owned eleven and nine
properties, respectively. Prior to foreclosure, these properties secured
Partnership loans aggregating $7,903,000 and $8,354,000 in 1998 and 1997,
respectively. During the years ended December 31, 1998 and 1997, the Partnership
acquired certain properties through foreclosure on which it had trust deed
investments totaling $508,000 and $3,879,000, respectively.
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 year ended December 31, 1999 and 1998, the Partnership
advanced an additional $1,417,000 and $166,000, respectively, to the corporate
joint venture for development. The total investment in the corporate joint
venture was $2,222,000 and $806,000 as of December 31, 1999 and 1998,
respectively.
The Company received all development approvals and began construction
in July 1999.
Interest Receivable and Due to General Partner
Interest receivable increased from approximately $1,381,000 as of
December 31, 1998 to $2,151,000 as of December 31, 1999 ($770,000 or 55.8%), due
primarily to the growth in the loan portfolio and due to deferred interest
accrued on three loans in the total amount of approximately $460,000, the
majority of which was collected in January and February 2000.
Due to General Partner increased from approximately $391,000 as of
December 31, 1998 to $752,000 as of December 31, 1999 ($361,000 or 92.3%) due
primarily to accrued management fees for the months of November and December
1999 that are paid pursuant to the Partnership Agreement.
Cash and Cash Equivalents, Certificates of Deposit and Commercial Paper
Cash and cash equivalents, certificates of deposit and commercial paper
decreased from approximately $11,779,000 as of December 31, 1998 to $5,466,000
as of December 31, 1999, respectively ($6,313,000 or 53.6%). This decrease is
primarily attributable to loan payoffs that occurred on December 31, 1998 that
did not allow the Partnership sufficient time to reinvest in new loans. Similar
payoffs did not occur on December 31, 1999 and the Partnership was fully
invested in loans on December 31, 1999.
Cash and cash equivalents, certificates of deposit and commercial paper
increased from approximately $4,073,000 as of December 31, 1997 to $11,779,000
as of December 31, 1998, respectively ($7,706,000 or 189%). This increase is
primarily attributable to the rollover of limited partner income during the year
ended December 31, 1998 without the investment in new loans of the same amount.
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 December 31, 1999, management believes that the allowance
for loan losses of $4,000,000 is adequate. As of then, loans secured by trust
deeds include $7,415,000 in loans delinquent over 90 days, of which $850,000 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 the Board of Directors.
Liquidity and Capital Resources
Purchases of Units and loan payoffs provide the capital for mortgage
investments. A substantial increase in general market interest 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.
There was little variation in the percentage of capital withdrawals to
total capital invested by the limited partners between 1994 and 1998, excluding
regular distributions of net income to limited partners. The annualized
withdrawal percentage increased during 1999 primarily due to an increase in the
maximum quarterly amount which could be withdrawn by limited partners from
$75,000 to $100,000 as a result of a change in the Partnership Agreement in
December 1998. Withdrawal percentages have been 7.37%, 6.11%, 7.85%, 6.63%,
7.33%, and 7.99% for the years ended December 31, 1994, 1995, 1996, 1997, 1998
and 1999. 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.
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, for Units
purchased on or after February 16, 1999, 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 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 of these potential
losses at the present time.
The Partnership has been able to purchase mortgage loans with
relatively strong yields during 1998 and 1999. Although mortgage yields have
increased over the past year, increased competition or changes in the economy
could have the effect of reducing mortgage yields 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 Issues
The General Partner so far has experienced no disruptions in the
operations of its internal information systems during its transition to the year
2000. The General Partner is not aware that any of its vendors experienced any
disruptions during their transition to the year 2000. The General Partner will
continue to monitor the transition to year 2000 and will act promptly to resolve
any problems that occur. If the General Partner or any third parties with which
it has business relationships experience problems related to the year 2000
transition that have not yet been discovered, it could have a material adverse
impact on the General Partner and the Partnership.
<PAGE>
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 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. 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. The Partnership will limit any single loan
and will limit its 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. In addition,
the Partnership may not invest in or make loans on unimproved real property in
an amount in excess of 25% of the total Partnership assets. The Partnership
cannot invest in real estate contracts of sale unless such contracts of sale are
in recordable form and are appropriately recorded in the chain of title.
The following table shows the growth in total Partnership capital,
mortgage investments and net income as of and for the years ended December 31,
1999, 1998, 1997, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Total Partners' Mortgage Net
Capital Investments Income
<S> <C> <C> <C>
1999............................ $ 214,611,813 $ 200,356,517 $ 17,479,853
1998............................ $ 201,340,802 $ 182,721,465 $ 16,978,692
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
</TABLE>
As of December 31, 1999, the Partnership held investments in 142
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. 40% of
the mortgage loans are located in Northern California. The remaining 60% are
located in Southern California, Oregon, Washington, Montana, Colorado, Idaho,
Nevada, Arizona, Hawaii, Texas, Louisiana, South Carolina and Virginia. The
following table sets forth the types and maturities of mortgage investments held
by the Partnership as of December 31, 1999:
<TABLE>
<CAPTION>
TYPES AND MATURITIES OF MORTGAGE INVESTMENTS
(As of December 31, 1999)
Number of Loans Amount Percent
<S> <C> <C> <C>
1st Mortgages.................................... 116 $ 182,725,684 91.20%
2nd Mortgages.................................... 25 17,566,188 8.77%
3rd Mortgages.................................... 1 64,645 .03%
142 $ 200,356,517 100.00%
Maturing on or before December 31, 1999 (1)...... 34 $ 29,450,741 14.70%
Maturing on or between January 1, 2000 and December 77 148,209,255 73.97%
31, 2002.......................................
Maturing on or between January 1, 2003 and September 31 22,696,521 11.33%
1, 2018
142 $ 200,356,517 100.00%
Income Producing Properties...................... 118 $ 161,664,440 80.69%
Construction..................................... 15 22,698,154 11.33%
Unimproved Land.................................. 6 15,438,923 7.70%
Residential...................................... 3 555,000 0.28%
142 $ 200,356,517 100.00%
- --------
<FN>
(1) Past Maturity Loans
</FN>
</TABLE>
The average loan balance of the mortgage loan portfolio of $1,411,000
as of December 31, 1999 is considered by the General Partner to be a reasonable
diversification of investments concentrated in mortgages secured by commercial
properties. Of such investments, 14% earn a variable rate of interest and 86%
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, 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 December 31, 1999, the Partnership was invested in construction
loans of approximately $22,698,000 and in loans partially secured by a leasehold
interest of $10,965,000.
The Partnership has other assets in addition to its mortgage
investments, comprised principally of the following:
$5,466,000 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;
$12,398,000 in real estate acquired through foreclosure
(including $2,222,000 in the corporate joint venture formed to
develop the property located in Los Gatos, California); and
$2,151,000 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
attempt to bring the loan current.
As of December 31, 1999, the Partnership's portfolio included
$7,415,000 (compared with $8,710,000 as of December 31, 1998) of loans
delinquent more than 90 days, representing 3.7% of the Partnership's investment
in mortgage loans. Loans delinquent for at least 90 days have historically
represented between 3% to 10% of the total loans outstanding at any given time.
The balance of delinquent loans at December 31, 1999 includes $850,000 (compared
with $3,657,000 as of December 31, 1998) in the process of foreclosure and $0
(compared with $4,000 as of December 31, 1998) involving loans to borrowers who
are in bankruptcy. The General Partner has recorded an allowance for losses on
loans of $4,000,000 in the financial statements of the Partnership as of
December 31, 1999. 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 $8,710,000 that was delinquent as of December 31, 1998,
$5,129,000 remained delinquent as of December 31, 1999, $404,000 was paid off,
$1,176,000 was brought current, and $2,001,000 became real estate acquired
through foreclosure of the Partnership.
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. However, as
of December 31, 1999, the General Partner was no longer purchasing the
Partnership's receivables on any delinquent loans. The amount of purchases made
and not reimbursed by borrowers during the years ended December 31, 1999 and
1998 was $65,000 and $110,000, 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, 1996, 1997, 1998 and 1999 and
foreclosures by the Partnership during the years ended December 31, 1996, 1997
and 1998 and 1999:
<TABLE>
<CAPTION>
1996 1997 1998 1999
<S> <C> <C> <C> <C>
Delinquent Loans....................... $ 11,348,000 $ 5,236,000 $ 8,710,000 $ 7,415,000
Nonperforming Delinquent Loans......... $ 10,012,000 $ 3,751,000 $ 7,904,000 $ 7,415,000
Loans Foreclosed $ 1,913,000 $ 3,279,000 $ 509,000 $ 2,001,000
Total Mortgage Investments............. $ 154,149,000 $ 174,715,000 $ 182,721,000 $ 200,357,000
Percent of Delinquent Loans to Total Loans 7.36% 3.00% 4.77% 3.70%
Percent of Nonperforming Delinquent Loans
to Total Loans....................... 6.50% 2.15% 4.33% 3.70%
</TABLE>
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 1999, the Partnership foreclosed on $16,420,000 of
delinquent mortgage loans and acquired title to 21 properties securing the
loans. As of December 31, 1999, the Partnership still held title to thirteen of
these properties in the amount of $10,176,000, net of an allowance for losses of
$1,336,000. 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
December 31, 1999.
The Partnership's title to all thirteen properties is held as fee
simple.
There are no mortgages or encumbrances on any of the
Partnership's real estate properties.
Of the thirteen properties held, six 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 of $1,336,000 as of December 31, 1999.
Real estate acquired through foreclosure is typically held for a number
of years before ultimate disposition primarily because the Partnership has the
intent and ability to dispose of the properties for the highest possible price
(such as when market conditions improve). During the time that the real estate
is held, the Partnership may earn less income on these properties than could be
earned on mortgage loans and may have negative cash flow on these properties.
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
purchased by the Partnership, on a loan-by-loan basis. Normally, when the
Partnership has sufficient funds available to invest in a specific loan, the
General Partner will give the Partnership priority in purchasing the loan over
other persons to whom the General Partner may sell loans as a part of its
business. Factors that further influence the General Partner in determining
whether the Partnership has priority over other investors include the following:
All loans originated by the General Partner which are secured by
property located outside the State of California and that satisfy
investment criteria of the Partnership will be acquired by the
Partnership; and
All hypothecation loans will be acquired by the Partnership.
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 meet 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 make a particular mortgage loan.
The General Partner has the power 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 loan. To date, the Partnership has entered into two
such ventures for purposes of developing and disposing of properties acquired by
the Partnership through foreclosure. The General Partner may enter into such
ventures in the future.
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. Most 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 permit the General
Partner to cure any default under the lease.
Variable Rate Loans
Approximately 14.5% ($29,024,000) of the Partnership's loans as of
December 31, 1999 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.
The following is a summary of the various indices described above as of
December 31, 1999 and December 31, 1998:
December 31, December 31,
1999 1998
One-year Treasury Constant Maturity Index 5.95% 4.59%
Five-year Treasury Constant Maturity Index 6.33% 4.59%
Prime Rate Index 8.50% 7.75%
Monthly Weighted Average Cost of Funds for
Eleventh District Savings Institutions 4.77% 4.69%
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 December 31, 1999, $29,024,000 (approximately 14.5%) 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.
Loans to Affiliates
The Partnership will not provide loans to the General Partner,
affiliates of the General Partner, or any limited partnership or entity
affiliated with or organized by the General Partner except as provided in
Article IV.5. of the Partnership Agreement.
Purchase of Loans from Affiliates
The Partnership may purchase loans from the General Partner or its
Affiliates only if the General Partner acquires such loans in its own name and
temporarily holds title thereto for the purpose of facilitating the acquisition
of such loans, and provided that such loans are purchased by the Partnership for
a price no greater than the cost of such loans to the General Partner (except
compensation in accordance with Article IX of the Partnership Agreement), there
is no other benefit arising out of such transactions to the General Partner,
such loans are not in default, and otherwise satisfy all requirements of Article
VI of the Partnership Agreement.
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. The total amount of
indebtedness incurred by the Partnership cannot exceed the sum of 10% of the
aggregate fair market value of all Partnership loans.
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.
Many major institutional lenders have reentered the commercial mortgage
market within the past two years 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. Although mortgage yields have increased over the past year,
increased competition or changes in the economy could again have the effect of
reducing mortgage yields 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.
Available Information
This Prospectus does not contain all information set forth in
Post-Effective Amendment No. 2 to the Registration Statement on Form S-11 (No.
333-71299) 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 in California. 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.
Deed in Lieu
If the borrower is cooperative, the Partnership may accept a Deed in
Lieu of foreclosure. This saves the time and expense of the non-judicial
process, however, acceptance of a Deed in Lieu of foreclosure subjects the
Partnership not only to any superior liens, but also to any subordinate liens.
If after searching the county records in which the real property is situated, it
is determined there are no junior liens, the Partnership may accept the Deed in
Lieu and acquire title insurance insuring the same.
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. In the event the deed of trust secures a leasehold interest in the real
property, the Partnership then steps into the shoes of the lessee under the
lease after the non-judicial foreclosure.
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 may be treated as income from an unrelated trade or
business under the unrelated trade or business taxable income rules discussed
below.
It is not clear whether 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 2000, the first bracket is
at 15% (on taxable income not over $43,850 in the case of married taxpayers
filing joint returns), the second at 28% (on taxable income from
$43,850-$105,950), the third at 31% (on taxable income from $105,950-$161,450),
the fourth at 36% (on taxable income from $161,450-$288,350), and the fifth at
39.6% (on taxable income over $288,350).
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, 1999 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 equal to the lesser of the customary competitive fee
in the community where the loan is placed for the provision of such services on
that type of loan or up to 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 or one or more affiliates of the General Partner
may receive certain fees and commissions from parties other than the Partnership
in connection with making or investing in Mortgage Loans. Such fees and
commissions are defined as "Acquisition and Origination Fees" in the Partnership
Agreement and include any selection fee, mortgage placement fee, nonrecurring
management fee, and any origination fee, loan fee or points paid by borrowers.
The IRS might take the position that these fees are constructively paid by the
Partnership, which would increase the interest income of the Partnership by the
amount of the fees. The fees would then be deductible by the Partnership only to
the extent the fees 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 April 18, 2000, 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 December 31, 1999, there were 2,705 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 February 16, 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 it's
the Partnership's 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, without the concurrence of a majority-in-interest of the limited
partners:
amend the Partnership Agreement in any respect that adversely
affects the rights of the limited partners;
any act in contravention of the Partnership Agreement;
any act which would make it impossible to carry on the business
of the Partnership;
admit a person as a General Partner ;
dispose of all or substantially all of the Partnership assets or
dissolve the Partnership.
Liabilities of Limited Partners-Nonassessability
A limited partner may not be assessed for additional capital
contributions and will not be liable for the liabilities of the Partnership in
excess of such limited partner's capital contribution and share of undistributed
profits, if any.
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 must be fair and must protect the solvency and liquidity of the
Partnership. When the termination is voluntary, the method of payment will be
deemed presumptively fair where it provides for a non-interest bearing unsecured
promissory note with principal payable, if at all, from distributions which the
General Partner otherwise would have received under the Partnership Agreement
had the General Partner not terminated. Where the termination is involuntary,
the method of payment will be deemed presumptively fair where it provides for an
interest-bearing promissory note coming due in no less than 5 years with equal
installments each year.
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 and Books and Records
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;
provided that any amendment which modifies the compensation or
distributions to which the General Partner is entitled or which
affects the duties of the General Partner shall require the
written consent of the General Partner;
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 accounts bear to the aggregate capital accounts of
the partners as of the last day of the calendar month preceding the month in
which such distribution is made. The Partnership will not reinvest Net Income
Available for Distribution, unless it is limited partners' Reinvested
Distributions discussed below. Net Proceeds (defined in the Partnership
Agreement and, generally, consisting of proceeds from the repayment or sale of
mortgage loans or real estate of the Partnership), 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 accounts bear to the aggregate capital accounts 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 account
represented by its promotional interest, until the limited partners have
received 100% of their capital accounts.Reinvestments of Net Proceeds will not
take place unless sufficient cash will be distributed to Partners to pay any
state or federal income tax created by the Capital Transaction that created the
Net Proceeds.
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. The
General Partner will also mail an updated Prospectus to each limited partner
each time a revised Prospectus is filed, which fully describes the Plan,
including the minimum investment amount, the type or source of proceeds which
may be reinvested and the tax consequences of the reinvestment to the limited
partners.
Each limited partner who is a participant in the Reinvestment Plan must
continue to meet the investor suitability standards described in the
Subscription Agreement and Prospectus for participation in each reinvestment. It
is the responsibility of each limited partner to notify the General Partner
promptly if he or she no longer meets the suitability standards.
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
continuation 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 restrictions imposed
to preserve the tax status of the Partnership or the characterization or
treatment of income or loss to the Partnership, as may be advisable in opinion
of tax counsel to the Partnership; 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 February 16, 1999, 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 60 days after the end of each quarter of the Partnership, the
General Partner will transmit to each limited partner a report which includes a
balance sheet, a statement of income for the quarter then ended, a statement of
cash flows for the quarter then ended and other pertinent information regarding
the Partnership and its activities during the quarter covered by the report, all
of which may be unaudited. 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
and identify the source of Partnership distributions, as is deemed reasonably
necessary by the General Partner to advise the limited partners of the affairs
of the Partnership. In addition, the annual report will contain a breakdown of
the costs reimbursed to the General Partner and affiliates. Within the scope of
the annual audit of the General Partner's financial statements, the independent
certified public accountants must verify the allocation of such costs to the
Partnership by, at a minimum, a review of the time records of individual
employees (the costs of whose services were reimbursed) and a review of the
specific nature of the work performed by each such employee. The additional
costs of such verification will be itemized by said accountants and may be
reimbursed to the General Partner by the Partnership only to the extent that
such reimbursement when added to the costs for administrative services rendered
does not exceed the competitive rate for such services as determined by this
paragraph.
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 not more than 90 days after the closing of the fiscal
year end, and on Form 10-Q not more than 45 days after 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 77,656,111 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.
212,702,897 Units were outstanding as of December 31, 1999, held by 2,705
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 2400, 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
approximately 1,472,000 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 December 31, 1999, was approximately
$580,000.
EXPERTS
The financial statements of the Partnership as of December 31, 1999 and
1998, and for each of the years in the three-year period ended December 31,
1999, and the balance sheet of Owens Financial Group, Inc., as of December 31,
1999, 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, 1999 and 1998, and
the related statements of income, partners' capital and cash flows for each of
the years in the three-year period ended December 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
KPMG LLP
San Francisco, California
February 11, 2000
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
Balance Sheets
December 31, 1999 and 1998
1999 1998
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 5,216,326 $ 8,260,599
Certificates of deposit 250,000 434,006
Commercial paper - 3,084,044
Loans secured by trust deeds 200,356,517 182,721,465
Less: allowance for loan losses (4,000,000) (3,500,000)
196,356,517 179,221,465
Interest receivable 2,150,952 1,380,530
Other receivables - 59,074
Real estate held for sale, net of allowance
for losses of $1,336,000 in 1999 and
$1,184,000 in 1998 12,397,722 9,971,202
$ 216,371,517 $ 202,410,920
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accrued distributions payable $ 577,281 $ 522,827
Due to General Partner 751,759 391,098
Accounts payable and accrued liabilities 430,664 156,193
Total liabilities 1,759,704 1,070,118
Partners' Capital:
General partner 2,104,936 1,967,069
Limited partners (units subject to redemption):
Authorized 500,000,000 units in 1999 and
1998; 340,956,729 and 305,172,278
units issued and 212,702,897 and 199,569,753
units outstanding in 1999 and 1998, respectively 212,506,877 199,373,733
Total partners' capital 214,611,813 201,340,802
$ 216,371,517 $ 202,410,920
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
Statements of Income
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
<S> <C> <C> <C>
REVENUES:
Interest income on loans secured
by trust deeds $ 20,221,120 19,099,723 18,241,427
Gain on sale of real estate 840,640 1,271,757 2,633,414
Other income 395,432 669,735 451,009
Total revenues 21,457,192 21,041,215 21,325,850
OPERATING EXPENSES:
Management fees to General Partner 2,652,882 3,249,824 3,879,454
Servicing fees to General Partner 479,592 472,390 420,742
Promotional interest to General Partner 67,907 49,545 70,747
Administrative 30,000 73,849 56,687
Legal and accounting 168,142 144,195 102,914
Real estate operations, net (145,343) 53,656 70,216
Other 72,159 19,064 8,843
Provision for loan losses 500,000 - -
Provision for losses on real estate
held for sale 152,000 - 1,296,000
Total operating expenses 3,977,339 4,062,523 5,905,603
Net income $ 17,479,853 16,978,692 15,420,247
Net income allocated to general
partner $ 172,335 168,106 154,202
Net income allocated to limited
partners $ 17,307,518 16,810,586 15,266,045
Net income allocated to limited
partners per weighted average
limited partnership unit $ .08 .09 .08
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
Statements of Partners' Capital
Years ended December 31, 1999, 1998 and 1997
Total
General Limited Partners Partners'
Partner 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 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
Net income 168,106 16,810,586 16,810,586 16,978,692
Sale of partnership units 99,084 14,210,969 14,210,969 14,310,053
Partners' withdrawals -- (14,377,618) (14,377,618) (14,377,618)
Partners' distributions (164,154) ( 6,137,306) ( 6,137,306) ( 6,301,460)
Balances, December 31, 1998 1,967,069 199,569,753 199,373,733 201,340,802
Net income 172,335 17,307,518 17,307,518 17,479,853
Sale of partnership units 135,814 20,537,603 20,537,603 20,673,417
Partners' withdrawals -- (18,306,472) (18,306,472) (18,306,472)
Partners' distributions (170,282) ( 6,405,505) ( 6,405,505) ( 6,575,787)
Balances, December 31, 1999 $ 2,104,936 212,702,897 $ 212,506,877 214,611,813
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 17,479,853 16,978,692 15,420,247
Adjustments to reconcile net income
to net cash provided by operating activities:
Gain on sale of real estate by limited partnership - (1,246,884) (2,355,075)
Gain on sale of real estate properties (840,640) (24,873) (278,339)
Provision for loan losses 500,000 - -
Provision for losses on real estate properties
held for sale 152,000 - 1,296,000
Changes in operating assets and liabilities:
Interest and other receivables (711,348) 446,587 (505,624)
Accrued distributions payable 54,454 (21,558) 32,929
Accounts payable and accrued liabilities 274,471 156,193 -
Due to General Partner 360,661 341,564 25,076
Net cash provided by operating activities 17,269,451 16,629,721 13,635,214
Cash flows from investing activities:
Purchases of loans secured by trust deeds (119,403,718) (83,714,828) (78,449,432)
Principal collected 1,663,685 1,793,240 2,484,071
Loan payoffs 91,288,643 74,556,044 53,449,102
Sales of loans to third and related parties at face value 7,816,294 - -
Investment in real estate properties (263,886) (350,225) (2,061,944)
Net proceeds from disposition of real estate 942,659 267,799 955,418
Investment in limited partnership - (1,409,099) (4,152,918)
Distributions received from limited partnership - 6,468,105 7,573,669
Investment in corporate joint venture (1,416,609) (166,198) (67,510)
Maturity of (investment in) commercial paper 3,084,044 (3,084,044) -
Maturities of (investments in) certificates
of deposit, net 184,006 565,994 (150,000)
Net cash used in investing activities (16,104,882) (5,073,212) (20,419,544)
Cash flows from financing activities:
Proceeds from sale of partnership units 20,673,417 14,310,053 17,206,030
Partners' cash distributions (6,575,787) (6,301,460) (6,219,910)
Partners' capital withdrawals (18,306,472) (14,377,618) (12,515,336)
Net cash used in financing activities (4,208,842) (6,369,025) (1,529,216)
Net (decrease) increase in cash and cash equivalents (3,044,273) 5,187,484 (8,313,546)
Cash and cash equivalents at beginning of year 8,260,599 3,073,115 11,386,661
Cash and cash equivalents at end of year $ 5,216,326 8,260,599 3,073,115
See notes 3, 4 and 5 for supplemental disclosure of non-cash investing and
financing activities. See accompanying notes to financial statements.
</TABLE>
<PAGE>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(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.
The general partner of the Partnership 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 212,702,897,
199,569,753 and 189,063,122 as of December 31, 1999, 1998 and 1997,
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. The Partnership does not recognize
interest income on loans once they are determined to be
impaired until the interest is collected in cash. A loan is
impaired when, based on current information and events, it is
probable that the Partnership will be unable to collect all
amounts due according to the contractual terms of the loan
agreement or when the payment of principal or interest is 90
days past due. 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 had an allowance for loan losses equal to
$4,000,000 and $3,500,000 as of December 31, 1999 and 1998,
respectively. Management of the Partnership believes that
based on historical experience and a review of the loans and
their respective collateral, the allowance for loan losses is
adequate in amount.
The outstanding balance of all loans delinquent in monthly
payments greater than 90 days is $7,415,000 and $8,710,000 as
of December 31, 1999 and 1998, 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 90 days past due,
unless OFG purchases the interest receivable from the
Partnership. OFG purchased the interest receivable on
delinquent Partnership loans in the total amount of $0 and
$806,000 in the years ended December 31, 1999 and 1998,
respectively. As of December 31, 1999 and 1998, loans totaling
$7,415,000 and $7,904,000, respectively, are classified as
non-accrual loans. OFG 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, insurance and mortgage
interest pursuant to senior indebtedness. Purchases of
interest receivable and payments made on loans by OFG during
1999 and 1998 but not collected as of December 31, 1999 and
1998, respectively, totaled approximately $230,000 and
$270,000, respectively.
(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, money market accounts and short-term
certificates of deposit with original maturities of three
months or less.
(e) 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 December 31,
1999 and 1998.
(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 corporate joint venture. The Partnership accounts
for its investment in the corporate joint venture under the
equity method of accounting because the Partnership does not
have control of the joint venture. The 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
corporate joint venture. Any profit generated from the
investment in the corporate joint venture is recorded as a
gain 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. The Partnership increased the allowance
for losses on real estate held for sale by $152,000 during the
year ended December 31, 1999. There were no required
reductions to the carrying value of real estate held for sale
made for the year ended December 31, 1998.
(g) Income Taxes
No provision is made for income taxes since the Partnership is
not a taxable entity. Accordingly, any income or loss is
included in the tax returns of the partners.
(3) Loans Secured by Trust Deeds
Loans secured by trust deeds as of December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
--------------- -------------
<S> <C> <C>
Income-producing properties $ 161,664,440 153,171,370
Construction 22,698,154 13,923,720
Unimproved land 15,438,923 13,276,729
Residential 555,000 2,349,646
--------------- ----------------
$ 200,356,517 182,721,465
=============== ================
First mortgages $ 182,725,684 162,597,467
Second mortgages 17,566,188 19,223,907
Third mortgages 64,645 548,967
Fourth mortgages -- 351,124
-------------- ---------------
$ 200,356,517 182,721,465
============= ===============
</TABLE>
<PAGE>
Scheduled maturities of loans secured by trust deeds as of December 31,
1999 and the interest rate sensitivity of such loans is as follows:
<TABLE>
<CAPTION>
Fixed Variable Total
interest interest
rate rate
-------------------- ----------------- ------------------
<S> <C> <C> <C>
Year ending December 31:
1999 (past maturity) $ 26,202,801 3,247,940 29,450,741
2000 78,376,511 5,854,959 84,231,470
2001 34,280,552 2,156,570 36,437,122
2002 23,297,926 4,242,737 27,540,663
2003 178,724 2,428,847 2,607,571
2004 5,308,575 6,419,188 11,727,763
Thereafter (through 2018) 3,687,040 4,674,147 8,361,187
---------------- --------------- ---------------
$ 171,332,129 29,024,388 200,356,517
================ =============== ===============
</TABLE>
Variable rate loans use as indices the one- and five-year Treasury
Constant Maturity Index (5.95% and 6.33%, respectively, as of December
31, 1999), the prime rate (8.50% as of December 31, 1999) and the
weighted average cost of funds index for Eleventh District savings
institutions (4.77% as of December 31, 1999). 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 1999 include approximately $29,451,000 of
loans which are past maturity as of December 31, 1999, of which
$5,826,000 represents loans for which interest payments are delinquent
over 90 days. During the years ended December 31, 1999 and 1998, the
Partnership refinanced loans totaling $7,436,000 and $9,941,000,
respectively, thereby extending the maturity dates of such loans.
The Partnership's investment in loans delinquent over 90 days as of
December 31, 1999 totals approximately $7,415,000, of which $5,686,000
has a specific related allowance for credit losses totaling
approximately $1,225,000. There is a specific and non-specific
allowance for credit losses of $2,775,000 for the remaining delinquent
loans of $1,729,000 and for other current loans. There was an
additional allowance for credit losses of $500,000 during the year
ended December 31, 1999. There was no net additional allowance for
credit losses during the year ended December 31, 1998. Of the
delinquent loans, approximately $850,000 and $3,657,000 were in the
process of foreclosure as of December 31, 1999 and 1998.
The average recorded investment in impaired loans was $7,944,000 and
$7,190,000 during the years ended December 31, 1999 and 1998,
respectively. Interest income received on impaired loans during the
years ended December 31, 1999 and 1998 totaled approximately $213,000
and $546,000, respectively, $213,000 and $466,000 of which was paid by
borrowers and $0 and $80,000 of which related to purchases of interest
receivable by OFG, respectively.
As of December 31, 1999 and 1998, the Partnership's loans secured by
deeds of trust on real property collateral located in Northern
California totaled approximately 40% ($79,542,000) and 48%
($87,013,000), 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.
During the year ended December 31, 1999, the Partnership sold for cash
full interests in ten loans to third parties and to related parties in
the amounts of $7,082,000 and $764,000, respectively. The sale of all
the loans resulted in no gain or loss in the accompanying financial
statements.
During 1998, the Partnership invested in a loan in the amount of
$2,000,000 that is secured by an assignment of a 49% interest in a
limited liability company (LLC) and a direct 2% ownership in the LLC.
The LLC owns a retail shopping center located in Sedona, Arizona.
(4) Real Estate Held for Sale
Real estate held for sale includes the following components as of December 31,
1999 and 1998:
1999 1998
-------------- -------------
Real estate properties held for sale $ 10,175,552 9,165,641
Investment in corporate joint venture 2,222,170 805,561
-------------- -------------
$ 12,397,722 9,971,202
============== =============
Gain on sale of real estate includes the following components for the years
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Gain on sale of real estate $ 840,640 24,873 278,339
properties
Gain on sale of real estate by -- 1,246,884 2,355,075
limited partnership
------------- ------------ -------------
$ 840,640 1,271,757 2,633,414
============= ============ =============
</TABLE>
<PAGE>
(a) Real Estate Properties Held for Sale
Real estate properties held for sale as of December 31, 1999 and
1998 consists of the following properties acquired through
foreclosure in 1993 through 1999:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Light industrial warehouse, Merced, California, net of $ 522,121 650,028
valuation allowance of $350,000 as of December 31,
1999 and 1998
Commercial lot/residential development, Vallejo, 361,432 1,039,116
California
Commercial lot, Sacramento, California, net of 299,828 299,828
valuation allowance of $250,000 as of December 31,
1999 and 1998
Office building and undeveloped land, Monterey, 2,053,163 1,885,731
California, net of valuation allowance of $200,000
as of December 31, 1999 and 1998
Manufactured home subdivision development, Ione, 2,366,289 2,554,079
California, net of valuation allowance of $384,000
as of December 31, 1999 and 1998
Light industrial building, Oakland, California 453,815 433,815
Undeveloped land, Reno, Nevada 215,895 215,420
Light industrial building, Paso Robles, California 1,557,502 1,558,882
Commercial building, Sacramento, California 30,000 30,000
Commercial building, Gresham, Oregon 448,444 425,557
22% interest in 6-unit residential building, Oakland, -- 53,185
California
91% interest in 92 residential lots, Lake Don Pedro, 560,184 --
California
Commercial building, San Ramon, California, net of 1,289,746 --
valuation allowance of $152,000 as of December 31,
1999
Residential/retail building, Oakland, California 17,133 --
----------- -----------
$ 10,175,552 9,145,641
=========== ==========
</TABLE>
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 $2,000,044, $508,686
and $3,279,349 for the years ended December 31, 1999, 1998 and
1997, respectively.
During 1999, a six-unit residential building located in Oakland,
California, in which the Partnership owned a 22% interest, was
sold resulting in a gain to the Partnership of $18,000. In
addition, a 66-acre residential parcel located in Vallejo,
California was sold by the Partnership for cash of $500,000 and a
note of $1,000,000 resulting in a gain to the Partnership of
$822,000.
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 included interest at 8% per annum and was due on
demand. The loan was repaid by OFG in November 1998.
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 lienholders trustee
sale for $1,350,000; thus, eliminating 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. 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 Partnership provided advances to
the WV-OMIF Partners to develop and construct the homes. The
Partnership received interest at a rate of prime plus 2% on the
advances to WV-OMIF Partners.
During 1998 and 1997, the Partnership advanced an additional
$1,409,099 and $4,152,918, respectively, to WV-OMIF Partners for
the continued development and construction of the homes. WV-OMIF
sold fourteen homes during the year ended December 31, 1998 for
proceeds of $6,987,101 and the net gain allocable to the
Partnership was $1,246,884, including interest income of $176,440.
WV-OMIF Partners distributed $6,468,105 (including $102,579 in
reimbursements from OFG and Woodvalley) to OMIF during the year
ended December 31, 1998. WV-OMIF Partners sold fifteen homes
during the year ended December 31, 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. The final home in WV-OMIF
Partners was completed and sold in October 1998.
(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 is providing loans to the Company to develop and
construct the building and is entitled to receive interest at a
rate of prime plus 2% on the loans it makes to the Company. As of
December 31, 1999 and 1998, the Partnership had total assets of
$2,431,000 and $1,031,000, respectively.
During the years ended December 31, 1999 and 1998, the Partnership
advanced an additional $1,416,609 and $166,198, respectively, to
the Company for development. The total investment in the corporate
joint venture totals $2,222,170 and $805,561 as of December 31,
1999 and 1998, respectively.
The net cash flows from the operations of the Company are to be
distributed in accordance with the following priorities: (1) to
the Partnership and to BGC until the sum of all current and prior
distributions of net cash flows equals the members' priority
return on capital, if any, 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
In December 1998, the limited partners voted to amend the Partnership
Agreement and there was a further amendment by OFG in February 1999. All
such changes have been incorporated into this note and elsewhere in the
financial statements where applicable.
(a) Allocations, Distributions and Withdrawals
In accordance with the Partnership Agreement, the Partnership's
profits, gains 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 to
partners in January of the subsequent year based on their capital
accounts as of December 31.
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 $10,703,230,
$10,326,334 and $10,077,144 for the years ended December 31, 1999,
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 partners'
capital and 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, for units purchased on or after February 16,
1999, other than units received under the
Partnership's Reinvested Distribution Plan.
o Any such payments are required to be made only from
net proceeds and capital contributions (as defined)
during said 91-day period.
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, OFG 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 December 31, 1999, OFG
had made cash capital contributions of $1,074,612 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
$67,907, $49,545 and $70,747 for the years ended December 31,
1999, 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 $1,074,612 as of December 31, 1999), 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 as of December 31, 1999 and 1998 were
approximately $4,320,000 and $4,063,000, respectively. Certificates of
deposit, commercial paper and certain cash equivalents as of the same
dates were accordingly maintained as reserves.
(7) 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>
1999 1998
-------------- -------------
<S> <C> <C>
Partners' capital per financial statements $ 214,611,813 201,340,802
Accrued interest income (2,150,952) (1,380,530)
Allowance for loan losses 4,000,000 3,500,000
Allowance for real estate held for sale 1,336,000 1,184,000
Accrued distributions 577,281 522,827
Other (208,121) 8,979
-------------- -------------
Partners' capital per federal income tax return $ 218,166,021 205,176,078
============== =============
</TABLE>
(8) 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 the twelve months in the calendar year 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 1/12 of the maximum limits, at the end of
the calendar year the sum of the fees collected for each of the 12 months
is equal to or less than the stated limits. Management fees amounted to
approximately $2,653,000, $3,250,000 and $3,879,000 for the years ended
December 31, 1999, 1998 and 1997, respectively, and are included in the
accompanying statements of income. Service fees amounted to approximately
$480,000, $472,000 and $421,000 for the years ended December 31, 1999,
1998 and 1997, respectively, and are included in the accompanying
statements of income.
As of December 31, 1999 and 1998, the Partnership owed management and
servicing fees to OFG in the amounts of $751,759 and $391,098,
respectively.
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 $395,000, $382,000, and $409,000 for
the years ended December 31, 1999, 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 $6,681,000, $1,724,000 and $2,994,000 on loans
originated of $119,404,000, $83,715,000 and $78,449,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. Such fees as a
percentage of loans purchased by the Partnership were 5.6%, 2.1% and 3.8%
for the years ended December 31, 1999, 1998 and 1997, respectively. In
the year ended December 31, 1999, one loan in the amount of $12,025,000
had an investment evaluation fee of $2,900,000.
During the year ended December 31, 1998, OFG purchased the manufactured
home subdivision development in Sonora, California from the Partnership
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 year ended December 31, 1998 was an additional $2,000. The
Partnership carried back a loan from OFG for the entire purchase price of
$1,150,000 which was paid off in November 1998.
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. An additional property
was sold by OFG during 1998 for a gain of approximately $58,000.
OFG has purchased the Partnership's receivables for delinquent interest
of $65,000 and $110,000, related to delinquent loans for the years ended
December 31, 1999 and 1998, respectively.
Included in loans secured by trust deeds as of December 31, 1998 was a
note in the amount of $180,000, which was secured by a property owned by
an affiliate of OFG. The loan earned interest at 8% per annum and was
repaid during 1999. The Partnership earned interest income of
approximately $4,000, $143,000 and $188,000 during the years ended
December 31, 1999, 1998 and 1997, respectively, from OFG and affiliates
under loans secured by trust deeds.
(9) 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. These
amounts were 206,607,637, 195,482,129 and 186,954,376 for the years ended
December 31, 1999, 1998 and 1997, respectively.
(10) 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 Commercial Paper
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 $200,356,517
approximates the fair value as of December 31, 1999. 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 $4,000,000 as of
December 31, 1999 should also be considered in evaluating the fair
value of loans secured by trust deeds.
<PAGE>
Independent Auditors' Report
The Shareholders
Owens Financial Group, Inc.:
We have audited the accompanying consolidated balance sheet of Owens Financial
Group, Inc. and subsidiaries (the Company) as of December 31, 1999. 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, 1999 in conformity with
generally accepted accounting principles.
KPMG LLP
San Francisco, California
February 11, 2000
<PAGE>
<TABLE>
<CAPTION>
OWENS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1999
Assets
<S> <C>
Cash and cash equivalents $ 6,419,989
Investment in delinquent loans, less allowance for losses of $150,000 519,771
Trust deeds receivable, less allowance for losses of $258,778 4,546,077
Trust deeds held for sale 18,884,738
Receivables from affiliates 749,206
Investment in limited partnership 2,615,285
Investment in corporations 1,958,671
Real estate held for sale, net of allowance for losses of $448,803 2,403,522
Property and equipment, net of accumulated depreciation of $588,298 626,431
Other assets 93,073
$ 38,816,763
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and other accrued expenses 105,269
Accrued bonus, pension and profit sharing expense 518,872
Note payable to bank 18,884,738
Notes payable to former shareholders 3,497,357
Total liabilities 23,006,236
Shareholders' equity:
Common stock, $1 par value, authorized 100,000 shares; issued and
outstanding 46,500 46,500
Additional paid-in capital 1,237,537
Retained earnings 14,920,126
Notes receivable from shareholders (393,636)
Total shareholders' equity 15,810,527
$ 38,816,763
See accompanying notes to consolidated balance sheet.
</TABLE>
<PAGE>
OWENS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1999
(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 sheets include the accounts
of the Company and its wholly owned subsidiaries, Investors'
Yield, Inc. (IY) and Owens Securities Corporation (OSC). 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 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 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) Cash and Cash Equivalents
Cash and cash equivalents includes approximately $6,201,049
invested in money market funds as of December 31, 1999.
(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 $6,681,000 for the year
ended December 31, 1999.
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 administration fee
payable by OMIF is 0.25% per annum of the average unpaid principal
balance of the loans. Such fees earned on loans serviced for OMIF
totaled approximately $476,000 for the year ended December 31,
1999.
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 12 months for
services rendered as manager of OMIF. Such fees totaled
approximately $2,387,000 for the year ended December 31, 1999.
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 12 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 $395,000 for the year ended December
31, 1999.
(d) Investment in Delinquent Loans
The allowance for losses on the investment in delinquent loans is
maintained at a level considered by management to provide
adequately for potential losses related to purchases of
receivables for interest and advances of other payments.
(e) Investment in Limited Partnership
Investment in limited partnership reflects the Company's equity
basis in OMIF. Under the equity method of accounting, the original
investment is recorded at cost and is adjusted periodically to
recognize additional investments made by the Company and the
Company's share of profits, losses and distributions after the
date of acquisition.
(f) Investment in Corporations
The Company accounts for its investments in stock of privately
owned corporations at cost less any valuation allowance required
for impairments in fair value. Dividends from stock are recognized
as income when received. Investments in stock of publicly traded
corporations are classified as available for sale and are recorded
at fair value. As of December 31, 1999, cost approximated fair
value for all investments in publicly traded corporations.
(g) Investment in Real Estate Joint Ventures
The Company accounts for its investment in joint ventures, which
it does not control, under the equity method of accounting. The
joint venture investments in real estate are 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
ventures. Any profit generated from the investment in joint
ventures is recorded as a gain on sale of real estate.
(h) 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 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.
(i) 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 between 30 and 40
years. Furniture and equipment is depreciated using an accelerated
method over the estimated useful lives of the respective assets
(generally five to seven years).
(j) 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.
(3) Investment in Delinquent Loans and Allowance for Losses
Investment in delinquent loans include approximately $306,000 of interest
receivable purchased from OMIF and advances made on behalf of borrowers
on OMIF loans as of December 31, 1999. Interest receivables purchased and
advances made during 1999 on OMIF loans which are still outstanding as of
December 31, 1999 approximate $230,000.
(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 2009 and have interest
rates ranging from 10% to 15%.
Trust deeds held for sale as of December 31, 1999 consist of loans that
have been funded and were sold after year-end to investors. Such deeds
are valued at historical cost, which is believed to approximate current
market value as determined by outstanding commitments from investors.
(5) Receivables from Affiliates
Receivables of $749,206 as of December 31, 1999 represent management and
servicing fees due from OMIF.
(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, 1999, OMIF's total investment in loans
was approximately $200,357,000. 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 $443,093 and $420,417 as of December 31, 1999,
respectively.
(7) Investment in Corporations
Investment in corporations as of December 31, 1999 consists of the
following:
Investment in preferred and common stock of Corporation $ 1,400,000
Other investments in corporations 558,671
------------
$ 1,958,671
============
In 1998, the Company purchased 625,000 shares of preferred stock in a
privately owned corporation (Corporation). Corporation is a start-up
company which sells high-speed internet communications to apartment
complexes, universities and municipalities. The Company paid $1.60 a
share for the preferred stock and recorded an initial investment of
$1,000,000. During 1999, the Company paid $0.80 per share and acquired an
additional 500,000 shares of common stock for $400,000, for a total
investment of $1,400,000. In August 1999, Corporation merged with three
other entities to form a new corporation. As a result of the merger, the
Company's existing shares of preferred and common stock were converted to
1,180,000 shares of common stock of the new corporation. The merged
entity provides high-speed internet communications to a variety of
customers and markets including commercial business, the hospitality
industry and public municipalities.
Other investments in corporations as of December 31, 1999 consist of a
number of investments in young, private and public companies principally
involved in internet related activities.
(8) Investments in Real Estate Joint Venture
As of December 31, 1998, the Company had an investment in another joint
venture to make improvements to land and construct single-family homes
located in Martinez, California where the Company had made contributions
totaling $96,298. During 1999, the Company made additional contributions
totaling $981,759. In 1999, the property was sold to a third-party
developer and the joint venture was dissolved, resulting in a
distribution of $1,100,000 and a gain on sale on real estate of $21,943.
(9) Real Estate Held for Sale
Real estate held for sale as of December 31, 1999 consists of the
following:
<TABLE>
<S> <C>
Commercial building, Benicia, California, net of valuation allowance of $ 354,402
$160,000 as of December 31, 1999
Commercial property, Turlock, California 145,842
Industrial building, Pittsburg, California, net of valuation allowance of 233,670
$24,000 as of December 31, 1999
Motel property, Turlock, California, net of valuation allowance of $175,728 400,000
as of December 31, 1999
Residential property, Ione, California --
Residential development, Sonora Vista, California, net of valuation allowance 1,079,953
of $89,075 as of December 31, 1999
Light industrial property, Napa, California 120,655
Residential property, Orangevale, California 69,000
---------------
$ 2,403,522
===============
</TABLE>
The Company sold two properties during 1999 for a gain of approximately
$44,000.
(10) Note Payable to Bank
The Company has a line of credit agreement with a bank which provides
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
$25,000,000, of which $18,884,738 was outstanding as of December 31,
1999. 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.
Borrowings under this line of credit bear interest at the bank's prime
rate, which was 8.50% as of December 31, 1999. The line of credit expires
on May 31, 2000. Management expects to renew the line of credit in the
normal course of business.
(11) Notes Payable to Former Shareholders
In 1998 the Company repurchased 32,000 shares of common stock from
retiring and existing personnel for total consideration of $4,792,605. Of
the total consideration, the Company paid $40,000 in cash and issued
promissory notes for the remaining $4,752,605. As of December 31, 1999,
the balance on the notes payable to former shareholders was $3,497,357.
The promissory notes are scheduled for annual repayments through 2002,
subject to established restrictions set by the Company. These
restrictions state primarily that scheduled annual repayments are not to
exceed 20% of either the Company's net worth or average cash balance in
the six months immediately prior to the cash payment. The scheduled
principal repayments consist of the following, subject to the above
restrictions:
<PAGE>
Year ending December 31:
2000 $ 1,989,000
2001 800,000
2002 708,357
-------------
$ 3,497,357
=============
The promissory notes issued to the former shareholders require monthly
interest payments on the outstanding balance of the note from OFG at the
prime rate of interest with a floor rate of 8.0%. The applicable rate as
of December 31, 1999 was 8.5%. As a result of this transaction, the
Company incurred interest expense in the amount of $286,715 during the
year ended December 31, 1999.
(12) Profit Sharing and Pension Plans
The Company maintains defined contribution profit sharing and pension
plans (the Plans) covering substantially all full-time employees.
Contributions to the Plans are determined by the rules of the Plans and
the Board of Directors and are dependent on gross payroll of eligible
employees and statutory limitations of the Internal Revenue Code.
Contributions to the Plans were $300,303 for the year ended December 31,
1999.
(13) Incentive Stock Options
Outstanding incentive stock options granted by the Company at an exercise
price of $44.96 per share totaled 1,000 as of December 31, 1999. Options
exercised during the year ended December 31, 1999 totaled 1,000 at an
exercise price of $44.96 per share in each year. One thousand options are
exercisable in the year ended December 31, 2000. Any portion of an option
not exercised in any year that the option is exercisable may not be
exercised in any subsequent year.
The shares issued under options exercised during 1999 were issued in
exchange for notes receivable of $44,960. The aggregate outstanding
balance of notes receivable from shareholders of $393,636 as of December
31, 1999 bears interest at 6% with a maturity date of March 1, 2008.
<PAGE>
(14) Leases
The Company leases its offices under a noncancelable operating lease from
a partnership in which the Company is a partner. The lease expires
September 30, 2009. There are no renewal options in the lease terms. The
Company is required to pay all operating expenses of the property. The
annual base rent of $142,680 is subject to adjustment each year,
beginning October 1, 1999, for increases in a defined index. Rental
expense for the year ended December 31, 1999 totaled $118,312. Such
expense is net of $27,854 of income earned under a cancelable sublease in
1999.
(15) Loan Administration
As of December 31, 1999, the Company serviced 230 loans owned by private
and institutional investors, including OMIF. Such serviced loans amounted
to approximately $257,669,000 as of December 31, 1999, including
approximately $200,357,000 of loans owned by OMIF. The serviced loans are
not included in the accompanying consolidated balance sheet.
<PAGE>
EXHIBIT A
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR
ANY INTEREST THEREIN OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
FOURTH AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
OWENS MORTGAGE INVESTMENT FUND, A CALIFORNIA LIMITED PARTNERSHIP
THIS FOURTH AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT (the
"Agreement"), dated Apil 17, 2000, 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, December 14, 1998, and February 16, 1999 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 the February 16, 1999 amendment and
restatement (the "Third Amendment and Restatement"), was 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 the Third Amendment and Restatement, elected under California
Corporations Code ss. 15712(b)(1) to have the Partnership governed thenceforth
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. The Partnership may be extended by the affirmative vote of
a Majority-In-Interest of the Limited Partners.
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:
"Acquisition and Origination Expenses" means expenses including but not
limited to legal fees and expenses, travel and communications expenses, costs of
appraisals, accounting fees and expenses, title insurance funded by the
Partnership, and miscellaneous expenses related to the origination, selection
and acquisition of mortgages, whether or not acquired. The General Partner or
its Affiliates shall not receive reimbursement of Acquisition and Origination
Expenses.
"Acquisition and Origination Fees" means the total of all fees and
commissions paid to the General Partner by any party other than the Partnership
in connection with making or investing in Mortgage Loans. Included in the
computation of such fees or commissions shall be any selection fee, mortgage
placement fee, nonrecurring management fee, and any origination fee, loan fee,
or points paid by borrowers to the General Partner, or any fee of a similar
nature, however designated.
"Administrator" means the agency or official administering the
securities law of a state in which Units are registered or qualified for offer
and sale.
"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 or by way of automatic
reinvestment of Partnership distributions and, in the case of the General
Partner, its Promotional Interest as hereinafter defined.
Capital Transaction" means the repayment of principal or prepayment of
a Mortgage Loan to the extent classified as a return of capital under the Code,
and the foreclosure, sale, exchange, condemnation, eminent domain taking or
other disposition of a Mortgage Loan or Real Property subject to a Mortgage
Loan, or the payment of insurance or a guarantee with respect to a Mortgage
Loan.
"Carried Interest" means an equity interest, other than the promotional
interest, in the Partnership which participates in all allocations and
distributions for which full consideration is not paid or to be paid. There
shall be no Carried Interests in the Partnership.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, or corresponding provisions of subsequent revenue laws.
"Controlling Person" means any Person, whatever their title, who
performs functions for the General Partner similar to those of (i) chairman or
member of the board of directors; (ii) executive or senior management, such as
the president, vice-president, or chief financial officer; or (iii) those
holding 5% or more equity interest in the General Partner or a Person having the
power to direct or cause the direction of the General Partner, whether through
the ownership of voting securities, by contract, or otherwise.
"Front-End Fees" means fees and expenses paid by any party to acquire
assets for the Partnership, including Organization and Offering Expenses,
Acquisition and Origination Expenses, Acquisition and Origination Fees, interest
on deferred fees and expenses, and any other similar fees, however designated by
the General Partner.
"Independent Expert" means a Person with no material current or prior
business or personal relationship with the General Partner who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Partnership, and who is qualified to perform such
work.
"Investment in Mortgage Loans" means the amount of Capital
Contributions used to make or invest in Mortgage Loans or the amount actually
paid or allocated to the purchase of mortgages, working capital reserves
allocable thereto (except that working capital reserves in excess of 3.0% shall
not be included), and other cash payments such as interest and taxes but
excluding Front-End Fees.
"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).
"Management Fee" means a fee paid to the General Partner or other
Persons for management and administration of the Partnership.
"Mortgage Loans" means investments of the Partnership that are notes,
debentures, bonds, and other evidence of indebtedness or obligations which are
negotiable or nonnegotiable and which are secured or collateralized by mortgages
or deeds of trust.
"NASAA Guidelines" means the Mortgage Program Guidelines of the North
American Securities Administrators Association, Inc. adopted on September 10,
1996.
"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 net cash proceeds from any Capital
Transaction.
"Net Worth" means the excess of total assets over total liabilities as
determined by generally accepted accounting principles, except that if any of
such assets have been depreciated, then the amount of the depreciation relative
to any particular asset may be added to the depreciated cost of such asset to
compute total assets, provided that the amount of depreciation may be added only
to the extent that the amount resulting after adding such depreciation does not
exceed the fair market value of such asset.
"Organization and Offering Expenses" means those expenses incurred in
connection with and in preparing for registration and subsequently offering and
distributing Units to the public, including sales commissions, if any, paid to
broker-dealers in connection with the distribution of Units and any advertising
expenses.
"Partners" means the holders of Partnership interests, including the
General Partner and the Limited Partners.
"Partnership Interest" means a limited partnership unit or other
indicium of ownership in the Partnership.
"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).
"Program" means a limited or general partnership, limited liability
company, limited liability partnership, trust, joint venture, unincorporated
association or similar organization other than a corporation formed and operated
for the primary purpose of investment in mortgage loans.
"Promotional Interest" means a Partnership Interest held by the General
Partner equal to 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, subject to the limitation set forth in Article IX. 1. (c) of
this Agreement.
"Property Management Fee" means any fee paid for day-to-day
professional property management services.
"Prospectus" shall mean the prospectus that forms a part of the
effective registration statement under the Securities Act of 1933, as amended,
including any preliminary prospectus.
"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, deeds of trust, 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.
"Reinvested Distributions" means Units purchased under the
Partnership's Reinvested Distribution Plan that is described in Article III. 3.
of this Agreement.
"Roll-Up" means a transaction involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly of the Partnership
and the issuance of securities of a Roll-Up Entity. Such term does not include a
transaction involving the conversion of corporate, trust, limited liability
company, or association form of only the Partnership if, as a consequence of the
transaction, there will be no significant adverse change in any of the
following: (a) Partners' voting rights; (b) the term of existence of the
Partnership; (c) General Partner compensation; (d) the Partnership's investment
objectives.
"Roll-Up Entity" means a partnership, real estate investment trust,
corporation, trust, limited liability company or other entity that would be
created or would survive after the successful completion of a proposed Roll-Up
transaction.
"Sponsor" means the General Partner or any Person directly or
indirectly instrumental in organizing, wholly or in part, a Program or any
Person who will manage or participate in the management of a Program, any
Afflilate of any such Person, but does not include a Person whose only relation
with the Program is as that of an independent property manager, whose only
compensation is as such. Sponsor does not include wholly independent third
parties such as attorneys, accountants, and underwriters whose only compensation
is for professional services rendered in connection with the offering of Program
Interests.
"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
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 also 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. Subscriptions shall be
accepted or rejected by the Partnership within 30 days of their receipt by the
General Partner; if rejected, all funds will be returned to the subscriber
within 10 business days.
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 the 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. 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 General Partner will also mail an updated Prospectus to each Limited Partner
each time a new Prospectus is filed, which fully describes the Plan, including
the minimum investment amount, the type or source of proceeds which may be
reinvested and the tax consequences of the reinvestment to the Limited Partners.
Each Limited Partner who is a participant in the Plan must continue to
meet the investor suitability standards described in the Subscription Agreement
and Prospectus for participation in each reinvestment. It is the responsibility
of each Limited Partner to notify the General Partner promptly if he or she no
longer meets the suitability standards.
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 Capital 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 limitations of Article
IV.5 of this Agreement., 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 or resulting
from 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, provided no such change shall adversely
affect the rights of Limited Partners:
(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 the NASAA Guidelines; and
(iv) To make any other change in this Agreement
which, in the judgment of the General Partner, does not adversely affect the
rights 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. Without the concurrence
of a Majority-in-Interest, the General Partner has no authority to:
(a) amend this Agreement in any respect that adversely affects
the rights of the Limited Partners;
(b) do any act in contravention of this Agreement;
(c) do any act which would make it impossible to carry on the
ordinary business of the Partnership;
(d) confess a judgment against the Partnership;
(e) possess Partnership property or assign the rights of the
Partnership in property for other than a partnership purpose;
(f) admit a person as a General Partner;
(g) voluntarily withdraw as General Partner unless such
withdrawal would not affect the tax status of the Partnership and would not
materially adversely affect the Limited Partners;
(h) sell, pledge, refinance, or exchange all or substantially
all of the assets of the Partnership;
(i) dissolve the Partnership;
(j) cause the merger or other reorganization of the
Partnership;
(k) grant to the General Partner or any of its Affiliates an
exclusive right to sell any Partnership assets;
(l) 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;
(m) 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;
(n) commingle the Partnership's assets with those of any other
Person;
(o) use or permit another to use the Partnership's assets in
any manner, except for the exclusive benefit of the Partnership;
(p) 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; or
(q) receive, directly or indirectly, a commission or fee
(except as permitted under Article IX. of this Agreement) in connection with the
reinvestment or distribution of Net Proceeds.
3. Right to Purchase Receivables and Loans. As long as the requirements
of Article VI. 9 of this Agreement are met, 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;
4. Extent of General Partner's Obligation and Fiduciary Duty. The
General Partner shall devote such time to the business of the Partnership as the
General Partner determines, in good faith, to be reasonably necessary to conduct
the business of the Partnership. The General Partner shall not be required 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. The General Partner has fiduciary
responsibility for the safekeeping and use of all funds and assets of the
Partnership, whether or not in the General Partner's possession or control, and
the General Partner will not employ, or permit another to employ such funds or
assets in any manner except for the exclusive benefit of the Partnership. The
General Partner will not allow the assets of the Partnership to be commingled
with the assets of the General Partner or any other Person. 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 regarding any transaction between the Partnership and the
General Partner.
5. Liability and 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 7(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 8, 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. VOTING AND OTHER 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 VII.3 of this Agreement (and
such vote or consent will be required) to:
(a) amend this Agreement (except for any amendment permitted
to be made by the General Partner as provided in Article IV. 4. (m) of this
Agreement; provided that any amendment which modifies the compensation or
distributions to which the General Partner is entitled or which affects the
duties of the General Partner shall require the written consent of the General
Partner).
(b) dissolve and windup the Partnership,
(c) remove the General Partner and elect one or more new
General Partners (see Article XII. 1. and 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.
An alphabetical -list of the names, addresses and business telephone numbers of
all Limited Partners along with the number of Units held by each of them is
maintained as a part of the books and records of the Partnership and shall be
made available on request to any Limited Partner or his representative for a
stated purpose including, without limitation, matters relating to Limited
Partners' voting rights, tender offers, and the exercise of Limited Partners'
rights under federal proxy law. A copy of the Limited Partner list shall be
mailed to any Limited Partner requesting it within ten business days of the
request and may include a reasonable charge for the copy work. The Limited
Partner list shall be updated at least quarterly to reflect changes in the
information contained therein.
If the General Partner neglects or refuses to exhibit, produce
or mail a copy of the Limited Partner list as requested, the General Partner
shall be liable to any Partner requesting the list for the costs, including
attorneys' fees, incurred by that Partner for compelling the production of the
list, and for actual damages suffered by any Partner by reason of such refusal
or neglect. It shall be a defense that the actual purpose and reason for the
requests for inspection or for a copy thereof, or of using the same for a
commercial purpose other than in the interest of the Partner relative to the
affairs of the Partnership. The General Partner may require the Partner
requesting the Limited Partner list to represent that the list is not requested
for a commercial purpose unrelated to the Partner's interest in the Partnership.
The remedies provided hereunder to Partners requesting copies of the list are in
addition to, and shall not in any way limit, other remedies available to
Partners under federal law, or the laws of California.
VI. INVESTMENT AND OPERATING POLICIES
1. The General Partner shall commit at least 84% of Capital
Contributions to Investment in Mortgage Loans. 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.
The Partnership normally shall not make or invest in Mortgage
Loans on any one property if at the time of the acquisition of the loan the
aggregate amount of all Mortgage Loans outstanding on the property, including
loans of the Partnership, would exceed an amount equal to 80% of the appraised
value of the property as determined by independent appraisal, unless substantial
justification exists because of the presence of other underwriting criteria. For
purposes of this Subsection, the "aggregate amount of all Mortgage Loans
outstanding on the property, including the loans of the Partnership", shall
include all interest (excluding contingent participations in income and/or
appreciation in value of the mortgaged property), the current payment of which
may be deferred pursuant to the terms of such loans. This restriction applies to
all loans, including construction loans.
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.
The total amount of indebtedness incurred by the Partnership
shall at no time exceed the sum of 10% of the aggregate fair market value of all
Partnership loans. The General Partner shall be prohibited from providing
financing to the Partnership.
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 may not invest in or make Mortgage Loans on
unimproved real property in an amount in excess of 25% of the total Partnership
assets.
5. The Partnership may not invest in real estate contracts of sale
otherwise known as land sale contracts unless such contracts are in recordable
form and appropriately recorded in the chain of title.
6. 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 an Independent Expert. Such appraisals will be retained at
the office of the Partnership and will be available for review and duplication
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.
7. There shall at all times be title, fire, and casualty insurance in
an amount equal to the Partnership's Mortgage 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.
8. Mortgage Loans may be purchased from the General Partner or its
Affiliates only if the General Partner acquires such loans in its own name and
temporarily holds title thereto for the purpose of facilitating the acquisition
of such loans, and provided that such loans are purchased by the Partnership for
a price no greater than the cost of such loans to the General Partner (except
compensation in accordance with Article IX of this Agreement), there is no other
benefit arising out of such transactions to the General Partner, such loans are
not in default, and otherwise satisfy all requirements of this Article VI.
Accordingly, all income generated (except Acquisition and Origination Fees) and
expenses associated with a Mortgage Loan so acquired shall be treated as
belonging to the Partnership. The General Partner shall not sell a loan to the
Partnership if the cost of the loan exceeds the funds reasonably anticipated to
be available to the Partnership to purchase the loan.
Normally, when the Partnership has sufficient funds available
to invest in a specific Mortgage Loan, the General Partner will give the
Partnership priority in purchasing such Mortgage Loan over other Persons to whom
the General Partner may sell Mortgage Loans as a part of its business. Factors
that further influence the General Partner in determining whether the
Partnership has priority over other investors include the following: (i) All
loans originated by the General Partner which are secured by property located
outside the State of California and that satisfy investment criteria of the
Partnership will be acquired by the Partnership; (ii) All hypothecation loans
will be acquired by the Partnership.
9. The Partnership shall not sell a Mortgage Loan to the General
Partner unless all of the following criteria are met: (i) the loan is in
default; (ii) the General Partner pays the Partnership an amount in cash equal
to the cost of the loan to the Partnership (including all cash payments and
carrying costs related thereto); and (iii) the General Partner assumes all of
the Partnership's obligations and liabilities incurred in connection with the
holding of the loan by the Partnership.
10. The Partnership shall not acquire a loan from, or sell a loan to,
another Program in which the General Partner has an interest.
11. The Partnership shall not sell a foreclosed property to the General
Partner or to another Program in which the General Partner has an interest.
12. 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.
13. The Partnership will not reinvest Net Income Available for
Distribution, unless it is Limited Partners' Reinvested Distributions under
Article III. 3. of this Agreement.
14. No loans may be made by the Partnership to the General Partner or
an Affiliate except as provided in Article IV. 5. of this Agreement.
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. of this Agreement. 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 sixty days (60) days after the end of each quarter of the
Partnership, the General Partner will transmit to each Limited Partner a report
which includes a balance sheet, a statement of income for the quarter then
ended, a statement of cash flows for the quarter then ended and other pertinent
information regarding the Partnership and its activities during the quarter
covered by the report, all of which may be unaudited.
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 and identify the source of Partnership
distributions as is deemed reasonably necessary by the General Partner to advise
the Limited Partners of the affairs of the Partnership. In addition, the annual
report will contain a breakdown of the costs reimbursed to the General Partner
and Affiliates. The Partnership's independent certified public accountants must
perform agreed-upon procedures to verify the allocation of such costs to the
Partnership by, at a minimum, a review of the time records of individual
employees (the costs of whose services were reimbursed) and a review of the
specific nature of the work performed by each such employee. This review will be
reported on by the independent certified public accountants in a report that is
separate from the Partnership's audited financial statements. The additional
costs of such verification will be itemized by said accountants and may be
reimbursed to the General Partner by the Partnership only to the extent that
such reimbursement when added to the costs for administrative services rendered
does not exceed the competitive rate for such services as determined by this
paragraph.
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 not more than ninety (90) days after the
closing of the fiscal year end, and on Form 10-Q not more than forty-five (45)
days after 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 of this Agreement. 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 Mortgage 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 2 (a) 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. Reinvestment of Net Proceeds
will not take place unless sufficient cash will be distributed to Partners to
pay any state or federal income tax created by the Capital Transaction that
created the Net Proceeds.
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
2.75% 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% (2.75% / 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 2.75% 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 2.75%, the General Partner shall
promptly refund such excess to the Partnership. The Management Fee may be
accrued without interest when Partnership funds are not available for its
payment. Any accrued Management Fee may be paid from the next available Net
Income Available for Distribution or Net Proceeds. No Management Fee may be paid
from Partnership reserves.
(b) 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, which,
when added to all other fees paid in connection with the servicing of a
particular loan, does not exceed the lesser of the customary, competitive fee in
the community where the loan is placed for the provision of such mortgage
services on that type of loan or up to 0.25% per annum of the unpaid balance of
the Partnership's Mortgage Loans at the end of each month.
(c) Promotional Interest. The Promotional Interest cannot
exceed 10% of distributions from Net Income Available for Distribution per
annum.
(d) 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 Affiliates, for any
expenses paid by the General Partner, or its Affiliates, including, but not
limited to, legal and accounting expenses, filing fees, printing costs, goods,
services and materials used by or for the Partnership will be made from Net
Income Available for Distribution immediately following the expenditure. Except
as indicated in this Article IX.1(d), the General Partner or any affiliate shall
not be reimbursed by the Partnership for services for which the General Partner
is entitled to compensation by way of a separate fee.. Excluded from the
allowable reimbursement shall be: (i) rent or depreciation, utilities, capital
equipment, or other administrative items; and (ii) salaries, fringe benefits,
travel expenses, and other administrative items incurred or allocated to any
Controlling Person of the General Partner or Affiliates. 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(d) 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.
(e) No Other Fees. The General Partner is not entitled to
receive real estate brokerage commissions, Property Management Fees, insurance
service fees or a Carried Interest from the Partnership. In addition, the
General Partner is not entitled to receive reimbursement of Acquisition and
Origination Expenses incurred by the General Partner or its Affiliates in the
origination, selection and acquisition of Mortgage Loans.
2. Payments by Borrowers.
(a) Acquisition and Origination Fees. The General Partner or
its Affiliates shall be entitled to receive and retain all Acquisition and
Origination Fees paid or payable by borrowers for services rendered in
connection with the evaluation and consideration 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.
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 XI.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 except where the transfer complies
with any restriction imposed under applicable state securities laws or
regulations with regard to suitability standards;
(c) no transfer may be made if, in the opinion of tax counsel
for the Partnership, it would jeopardize the status of the Partnership as a
partnership for Federal or any applicable state income tax purposes; and
(d) the transferor will pay in advance all legal, recording,
and accounting costs in connection with any transfer, and the cost of any tax
advice necessary under Subsection 2(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 Reinvested Distributions discussed in Article III. 3.
(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 or
any other asset 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. A successor General Partner must be named if the
newly admitted General Partner under this provision is an individual.
(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 must be fair and must protect the solvency and liquidity of the
Partnership. Where the termination is voluntary, the method of payment will be
deemed presumptively fair where it provides for a non-interest bearing unsecured
promissory note with principal payable, if at all, from distributions which the
Terminated General Partner otherwise would have received under the Agreement had
the General Partner not terminated. Where the termination is involuntary, the
method of payment will be deemed presumptively fair where it provides for an
interest bearing promissory note coming due in no less than 5 years with equal
installments each year.
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. ROLL-UP
1. In connection with a proposed Roll-up, an appraisal of all
Partnership assets shall be obtained from a competent, Independent Expert. If
the appraisal will be included in the Prospectus used to offer the securities of
a Roll-Up Entity, the appraisal shall be filed with the Securities and Exchange
Commission and the states as an Exhibit to the Registration Statement for the
offering. Partnership assets shall be appraised on a consistent basis. The
appraisal shall be based on an evaluation of all relevant information and shall
indicate the value of the Partnership's assets as of a date immediately prior to
the announcement of the proposed Roll-Up. The appraisal shall assume an orderly
liquidation of the Partnership's assets over a 12-month period, shall consider
other balance sheet items, and shall be net of the assumed cost of sale. The
terms of the engagement of the Independent Expert shall clearly state that the
engagement is for the benefit of the Partnership and its Limited Partners. A
summary of the independent appraisal, indicating all material assumptions
underlying the appraisal, shall be included in a report to the Partners in
connection with the proposed Roll-up.
2. In connection with a proposed Roll-up, the person sponsoring the
Roll-up shall provide each Limited Partner with a document which instructs the
Limited Partner on the proper procedure for voting against or dissenting from
the Roll-Up and shall offer to Limited Partners voting "no" on the proposal the
choice of: (a) accepting the securities of the Roll-Up Entity offered in the
proposed Roll-Up; or (b) one of the following (i) remaining as Limited Partners
in the Partnership and preserving their interests therein on the same terms and
conditions as existed previously, or (ii) receiving cash in an amount equal to
the Limited Partners' pro rata share of the appraised value of the net assets of
the Partnership.
3. The Partnership shall not participate in any proposed Roll-Up which
would result in Limited Partners having democracy rights in the Roll-Up Entity
which are less than those provided for under Articles IV, V and VII of this
Agreement. If the Roll-Up Entity is a corporation, the voting rights of Limited
Partners shall correspond to the voting rights provided for in these guidelines
to the greatest extent possible.
4. The Partnership shall not participate in any proposed Roll-Up which
includes provisions which would operate to materially impede or frustrate the
accumulation of shares by any purchaser of the securities of the Roll-Up Entity
(except to the minimum extent necessary to preserve the tax status of the
Roll-Up Entity). The Partnership shall not participate in any proposed Roll-Up
which would limit the ability of a Limited Partner to exercise the voting rights
of its securities of the Roll-Up on the basis of the number of Partnership Units
held by that Limited Partner.
5. The Partnership shall not participate in any proposed Roll-Up in
which the Limited Partners' rights of access to the records of the Roll-Up
Entity will be less than those provided for under Article V of this Agreement.
6. The Partnership shall not participate in any proposed Roll-Up in
which any of the costs of the transaction would be borne by the Partnership if
the Roll-Up is not approved by the Limited Partners.
XV. INVESTMENTS IN OR WITH OTHER PROGRAMS
1. The Partnership shall be permitted to invest in general partnerships
or joint ventures (including entities in limited liability company and limited
liability partnership form) with non-Affiliates that own one or more particular
loans, if the Partnership, alone or together with any publicly registered
Affiliate of the Partnership meeting the requirements of paragraph 2 of this
Subsection, acquires a controlling interest in such a general partnership or
joint venture, but in no event shall duplicate fees be permitted. For purposes
of this paragraph, "controlling interest" means an equity interest possessing
the power to direct or cause the direction of the management and policies of the
general partnership or joint venture, including the authority to:
(a) review all contracts entered into by the general
partnership or joint venture that will have a material effect on its business or
assets;
(b) cause a sale of the loan or its interest therein subject
in certain cases where required by the partnership or joint venture agreement,
to limits as to time, minimum amounts, and/or a right of first refusal by the
joint venture partner or consent of the joint venture partner;
(c) approve budgets and major capital expenditures, subject to
a stated minimum amount;
(d) veto any sale of the loan, or, alternatively, to receive a
specified preference on sale or proceeds; and
(e) exercise a right of first refusal on any desired sale by
the joint venture partner of its interest in the mortgage except for transfer to
an Affiliate of the joint venture partner.
2. The Partnership shall be permitted to invest in general partnerships
or joint ventures with other publicly registered Affiliates of the Partnership
if all of the following conditions are met:
(a) the Programs have substantially identical investment
objectives.
(b) there are no duplicate fees.
(c) the compensation to Sponsors is substantially identical in
each Program.
(d) each program must have a right of first refusal to buy if
the other Programs wish to sell assets held in the joint venture.
(e) the investment of each Program is on substantially the
same terms and conditions.
(f) the Prospectus discloses the potential risk of impasse on
joint venture decisions since no Program controls and the potential risk that
while a Program may have the right to buy the asset from the partnership or
joint venture, it may not have the resources to do so.
3. The Partnership shall be permitted to invest in general partnerships
or joint ventures with Affiliates other than publicly registered Affiliates of
the Partnership only under the following conditions:
(a) the investment is necessary to relieve the Sponsor from
any commitment to purchase a loan entered into in compliance with Article III.
6. prior to the closing of the offering period of the Program;
(b) there are no duplicate fees;
(c) the investment of each entity is on substantially the same
terms and conditions;
(d) the Program provides for a right of first refusal to buy
if the Sponsor wishes to sell a loan held in the joint venture; and
(e) the Prospectus discloses the potential risk of impasse on
joint venture decisions.
4. Other than as specifically permitted in paragraphs 2 and 3 of this
Subsection, the Partnership shall not be permitted to invest in general
partnerships or joint ventures with Affiliates.
5. The Partnership shall be permitted to invest in general partnership
interests of limited partnerships only if the Partnership alone or together with
any publicly registered Affiliate of the Partnership meeting the requirements of
paragraph 2 of this Article acquires a "controlling interest" as defined in
paragraph 1 of this Article, no duplicate fees are permitted, and no additional
compensation beyond that permitted by Article IX shall be paid to the Sponsor.
6. A Program that is an "upper-tier Program" shall be permitted to
invest in interests of other Programs (the "lower-tier Programs") only if the
conditions provided for under Sections V.G. 6. and 7. of the NASAA Guidelines
are met.
XV. 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.
XVII. 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.
XVIII. 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 17th day of April, 2000.
GENERAL PARTNER:
OWENS FINANCIAL GROUP, INC.
By: /William C. Owens/
William C. Owens, President
LIMITED PARTNERS:
By: OWENS FINANCIAL GROUP, INC., GENERAL PARTNER
By: /William C. Owens/
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. A sale of Partnership Units to an
Investor may not be completed until at least five business days after the date
the Investor receives a Prospectus. The General Partner will send each Investor
a confirmation of purchase within five business days of acceptance of the
Subscription Agreement.
2. REPRESENTATIONS BY THE UNDERSIGNED. The Investor represents and
warrants that the Investor:
(a) has received the Prospectus of the Partnership
dated_____________;
(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) 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;
(e) has (i) a minimum net worth (exclusive of home, home
furnishings, and automobiles) of $45,000 ($50,000 in the State of Washington),
plus an annual gross income of at least $45,000 ($50,000 in the State of
Washington); or (ii) minimum net worth (exclusive of home, home furnishings, and
automobiles) of $150,000; or (iii) if purchasing for a fiduciary account, the
minimum standards in (i) or (ii) above are met by the beneficiary, the fiduciary
account, or by a donor or grantor who directly or indirectly supplies the funds
to purchase the Partnership Units if the donor or grantor is the fiduciary;
(f) 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;
(g) 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;
(h) 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
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 $_____________________
Gross Income $_____________________
Investor's Years of Investment Experience _____
Investor's Tax Bracket (if individual) ________%
Please initial here to acknowledge your understanding that it may not be
possible readily to liquidate your investment in the Partnership: _______
<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 $_____________________
Gross Income $_____________________
Investor's Years of Investment Experience _____
Investor's Tax Bracket (if individual) ________%
Please initial here to acknowledge your understanding that it may not be
possible readily to liquidate your investment in the Partnership: _______
********************************************************************************
<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: _____________, 20___
- ------------------------------------ ------------------------------------
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, President
Dated: ____________, ____
<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-1
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:
Accounting Fees and Expenses $ 17,000
Legal Fees and Expenses 10,000
Printing Fees and Expenses 10,000
Mailing 3,000
Miscellaneous 1,000
Total $ 41,000
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, 1999 and 1998
Statements of Income for the three years ended December 31,
1999, 1998 and 1997
Statements of Partners' Capital for the three years ended
December 31, 1999, 1998 and 1997
Statements of Cash Flows for the three years ended December
31, 1999, 1998 and 1997
Notes to Financial Statements
<PAGE>
II-6
Owens Financial Group, Inc,
Report of KPMG LLP, Independent Auditors
Consolidated Balance Sheet -December 31, 1999
Notes to Consolidated Balance Sheet
(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
-----------------------------------
* Previously filed under Registration No. 333-71299 and incorporated
herein by this reference.
(c) Schedules:
Schedule IV - Mortgage Loans on Real Estate as of December 31, 1999
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 registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
<PAGE>
(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 Post-Effective Amendment No. 2 to the
Registration Statement on Form S-11 (No. 333-71299) and has duly caused this
Post-Effective Amendment No. 2 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Walnut Creek, State of California on
April 17, 2000.
OWENS MORTGAGE INVESTMENT FUND, A CALIFORNIA
LIMITED PARTNERSHIP
By: OWENS FINANCIAL GROUP, INC.
General Partner
By:
Bryan H. Draper, Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 2 to the Registration Statement on Form S-11 (No.
333-71299) 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 April 18, 2000
By
Bryan H. Draper
Chief Financial Officer/Secretary
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE IV
OWENS MORTGAGE INVESTMENT FUND
MORTGAGE LOANS ON REAL ESTATE -- DECEMBER 31, 1999
Principal Amount
of Loans Subject
to Delinquent
Description Final Carrying Amount Principal or
Interest Rate Maturity date of Mortgages Interest
<S> <C> <C> <C> <C>
TYPE OF LOAN
Income Producing................ 6.875-14.50% Current to Sept., 2018 $161,664,440 $ 7,359,283
Construction.................... 10.00-14.00% Current to April, 2004 22,698,154 56,062
Land .......................... 10.00-13.00% Current to Aug., 2002 15,438,923 0
Residential..................... 10.50-13.00% Current to Sept., 2002 555,000 0
TOTAL $200,356,517 $ 7,415,345
AMOUNT OF LOAN
$0-250,000...................... 6.875-14.50% Current to Sept., 2014 $ 4,515,050 $ 196,347
$250,001-500,000................ 7.50-13.50% Current to Sept., 2018 10,287,424 0
$500,001-1,000,000.............. 9.00-14.00% Current to Jan., 2014 15,996,375 1,535,000
Over $1,000,000................. 8.00-14.00% Current to May, 2015 169,557,668 5,683,998
TOTAL $200,356,517 $7,415,345
POSITION OF LOAN
First .......................... 6.875-14.50% Current to Sept., 2018 $182,725,684 $ 7,350,700
Second ......................... 10.00-14.50% Current to Aug., 2010 17,566,188 0
Third .......................... 10.00% Current 64,645 64,645
TOTAL $200,356,517 $ 7,415,345
</TABLE>
- ---------------
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 (1/1/97).............................$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
Balance at beginning of period (1/1/98).............................$174,714,607
Additions during period:
New mortgage loans..............................................83,714,828
Loan carried back on sale of real estate to general partner......1,150,000
Subtotal.......................................................259,579,435
Deductions during period:
Collection of principal.........................................76,349,284
Foreclosures.......................................................508,686
Balance at end of period (12/31/98)...........................$182,721,465
Balance at beginning of period (1/1/99).............................$182,721,465
Additions during period:
New mortgage loans.............................................119,403,718
Loan carried back on sale of real estate.........................1,000,000
Subtotal.......................................................303,125,183
Deductions during period:
Collection of principal.........................................92,952,328
Sales of loans secured by trust deeds at face value..............7,816,294
Foreclosures.....................................................2,000,044
Balance at end of period (12/31/99)...........................$200,356,517
During the years ended December 31, 1999, 1998 and 1997, the Partnership
refinanced loans totaling $7,436,000, $9,941,000 and $6,562,000, respectively,
thereby extending the maturity date.
During 1998, the Partnership sold a property located in Sonora, California to
the General Partner for $1,150,000. The Partnership carried back a loan secured
by a trust deed on the property for the full purchase price.
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, 1999. There are no other loans that
exceed 3% of the total loans as of December 31, 1999:
<TABLE>
<CAPTION>
Principal
Amount of
Loans Subject
Final Face Carrying to Delinquent
Interest Maturity Periodic Payment Prior Amount of Amount of Principal or
Description Liens Mortgages Mortgages Interest
Rate Date Terms
<S> <C> <C> <C> <C> <C> <C>
Athletic Club,
Tualatin, OR........... 10.00% 6/1/02 Interest only, None $7,500,000 $7,500,000 $0
balance due at
maturity
Unimproved Land 13.00% 8/31/00 Interest only, None $12,025,000 $12,025,000 $0
Las Vegas, NV.......... balance due at
maturity
Office Building 12.50% 11/1/00 Interest only, None $6,678,000 $6,678,000 $0
San Francisco, CA...... balance due at
maturity
Commercial Retail Centers, 10.00% 5/8/00 Interest only, None $10,600,000 $10,600,000 $0
Great Falls, MT and balance due at
Puyallup, WA........... 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.
OWENS MORTGAGE INVESTMENT FUND, A CALIFORNIA LIMITED PARTNERSHIP
INDEX TO EXHIBITS
Exhibit No. Description
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
- -----------------------------
* Previously filed under Registration No. 333-71299 and incorporated herein by
this reference.
<PAGE>
Exhibit 5.1
WHITEHEAD, PORTER & GORDON LLP
220 Montgomery Street, Suite 1850 o San Francisco, CA 94104-3402
Telephone: (415) 781-6070
Facsimile: (415) 788-6521
April 14, 2000
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 registered with the Securities and Exchange Commission
under a Registration Statement on Form S-11 (No. 333-71299) filed with the
Securities and Exchange Commission on or about January 27, 1999 and amended by
Post-Effective Amendment No.1 (as amended, the "Registration Statement").
In rendering our opinion, we have reviewed the Fourth 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 Post-Effective
Amendment No. 2 to the Registration Statement to be filed on or about April 17,
2000 (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
Matters" 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
April 14, 2000
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
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 as part of Post-Effective Amendment
No. 2 (the "Post-Effective Amendment") to that certain Registration Statement
filed on January 27, 1999 (No. 333-71299), 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
Post-Effective Amendment to the Registration Statement.
In connection with our opinion, we have examined: (i) Post-Effective
Amendment No. 2 to the Registration Statement and the Prospectus; (ii) the
Fourth Amended and Restated Limited Partnership Agreement for the Partnership
that is attached as Exhibit A to the Prospectus (the "Partnership Agreement");
and (iii) the certificate of the General Partner (the "Certificate"), dated as
of the date hereof. 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.
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 may be treated as income from an unrelated trade or business under the
unrelated trade or business taxable income rules discussed below.
It is not clear whether 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 2000, the first bracket is
at 15% (on taxable income not over $43,850 in the case of married taxpayers
filing joint returns), the second at 28% (on taxable income from
$43,850-$105,950), the third at 31% (on taxable income from $105,950-$161,450),
the fourth at 36% (on taxable income from $161,450-$288,350), and the fifth at
39.6% (on taxable income over $288,350). (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., the thirteen properties acquired by
the Partnership through foreclosure from January 1, 1993). See Prospectus, Real
Estate Properties Held for Sale, at page 30. 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 equal to the lesser of the customary,
competitive fee in the community where the loan is placed for the provision of
such services on that type of loan or 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 certain fees and commissions from parties other than the Partnership
in connection with making or investing in Mortgage Loans. Such fees and
commissions are defined as "Acquisition and Origination Fees" in the Partnership
Agreement and include any selection fee, mortgage placement fee, nonrecurring
management fee, and any origination fee, loan fee or points paid by borrowers.
Since any such fees will be payable by parties other than the Partnership, 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 December 31, 1999, certain
members of the firm owned or controlled an aggregate of 1,472,000 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 December 31, 1999, was approximately $580,000.
Very truly yours,
WENDEL, ROSEN, BLACK & DEAN, LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF WHITEHEAD, PORTER & GORDON LLP
We hereby consent to the reference to our firm under the heading "Legal Matters"
in the Prospectus that is part of the Registration Statement on Form S-11 (No.
333-71299), filed with the Securities and Exchange Commission on or about
January 27, 1999 as may be amended by Post-Effective Amendment No. 2 to be filed
on or about April 17, 2000.
WHITEHEAD, PORTER & GORDON LLP
San Francisco, California
April 14, 2000
<PAGE>
EXHIBIT 23.2
<PAGE>
CONSENT OF WENDEL, ROSEN, BLACK & DEAN, LLP
We hereby consent to all references to our firm under the captions "Federal
Income Tax Consequences" and "Legal Matters" in the Prospectus that is part of
the Registration Statement on Form S-11 (No. 333-71299), filed with the
Securities and Exchange Commission on January 27, 1999, as may be amended by
Post-Effective Amendment No. 2 to be filed on or about April 17, 2000 and to the
quotation or summarization in the Prospectus of our legal opinion filed as an
exhibit to the Registration Statement.
WENDEL, ROSEN, BLACK & DEAN, LLP
Oakland, California
April 14, 2000
<PAGE>
EXHIBIT 23.3
<PAGE>
CONSENT OF KPMG LLP
The Partners
Owens Mortgage Investment Fund:
We consent to the use of our report on the balance sheets of Owens Mortgage
Investment Fund as of December 31, 1999 and 1998, and the related statements of
income, partners' capital and cash flows for each of the three years in the
three-year period ended December 31, 1999, and our report on the consolidated
balance sheet of Owens Financial Group, Inc. and subsidiaries as of December 31,
1999, both as included herein and to the reference to our firm under the heading
"Experts" in the Prospectus.
KPMG LLP
San Francisco, California
April 14, 2000
<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 up
to 77,656,111 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 Post-Effective Amendment No. 2 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 17th day of April, 2000. This Power of Attorney
may be executed in any number of counterparts.
Owens Financial Group, Inc.
General Partner
By:
BRYAN H. DRAPER
Secretary and Chief Financial Officer
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<PERIOD-START> JAN-01-1999
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<SECURITIES> 250000
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<CURRENT-ASSETS> 7617278
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<LOSS-PROVISION> 500000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17479853
<INCOME-TAX> 0
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