UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------

FORM 10-K

(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15( d ) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2014

OR

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to __________

Commission file number 000-54957

OWENS REALTY MORTGAGE, INC.
(Exact Name of Registrant as Specified in Its Charter)

Maryland
 
46-0778087
(State or Other Jurisdiction
 
(I.R.S. Employer Identification No.)
of Incorporation or Organization)
   
     
2221 Olympic Boulevard
   
Walnut Creek, California
 
94595
(Address of Principal Executive Offices)
 
(Zip Code)
     
(925) 935-3840
   
Registrant’s Telephone Number,
   
Including Area Code
   

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
 
NYSE MKT
     
Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [   ]  No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [   ]  No [X]

 
 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

      Large accelerated filer [   ]
        Accelerated filer [X]
      Non-accelerated filer [   ]
        Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [   ] No [X]

The aggregate market value of voting and non-voting equity held by non-affiliates of the registrant was approximately $204,561,000 on the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2014, based on the closing sales price of $19.45 on that date for shares of the registrant’s common stock as reported by the NYSE MKT. For this computation, the registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the registrant and certain other stockholders; such an exclusion shall not be deemed to constitute an admission that any such person is an "affiliate" of the registrant.  


 
As of March 9, 2014, there were approximately 10,768,000 shares of the registrant’s common stock outstanding.
 


 
DOCUMENTS INCORPORATED BY REFERENCE

 


 
Portions of the registrant's definitive proxy statement for the 2015 Annual Meeting of Stockholders to be filed within 120 days after  the registrants Fiscal Year ended December 31, 2014, are incorporated by reference into certain sections of Part III of this Annual Report on Form 10-K.

 
 
 

TABLE OF CONTENTS

PART I
 
 
    Page
     
Item 1.     Business   1
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments 28
Item 2. Properties 28
Item 3. Legal Proceedings 35
Item 4. Mine Safety Disclosures 35
 
PART II
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    35
Item 6 .   Selected Financial Data   36
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk 63
Item 8.    Consolidated Financial Statements and Supplementary Data 64
Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 64
Item 9A.   Controls and Procedures    64
Item 9B. Other Information 65
 
PART III
 
Item 10. Directors, Executive Officers and Corporate Governance   65
Item 11.   Executive Compensation 65
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 65
Item 13. Certain Relationships and Related Transactions, and Director Independence 65
Item 14. Principal Accounting Fees and Services        65

PART IV
 
Item 15.      Exhibits and Consolidated Financial Statement Schedules 66
 
Consolidated Financial Statements and Supplementary Information F-1
 
 


 
 
 



 
EXPLANATORY NOTE REGARDING THIS ANNUAL REPORT

 
As previously announced, as part of a plan to reorganize our business operations so that, among other things, we could elect to qualify as a real estate investment trust (a “REIT”) for federal income tax purposes,  effective May 20, 2013, Owens Mortgage Investment Fund, a California Limited Partnership (the “Predecessor” or “OMIF”) merged with and into Owens Realty Mortgage, Inc., a Maryland corporation (the “Registrant”) with the Registrant as the surviving corporation (the “Merger”) and the Registrant commenced conducting all of the business conducted by the Predecessor.  Upon consummation of the Merger, limited partners of the Predecessor received one share of common stock, par value $0.01 per share, of the Registrant (the “Common Stock”), for every 25 limited partner units of the Predecessor  that they owned, and certain units of the Predecessor representing the general partner interest of Owens Financial Group, Inc. were also exchanged for Common Stock as is discussed in further detail in our consolidated financial statements under “Note 1 - Organization” of this Annual Report on Form 10-K. T he rights of the stockholders of the Registrant are governed by Maryland law and the charter, bylaws and other governing documents of the Registrant.
 
The shares of Common Stock issued pursuant to the Merger were registered under the Securities Act of 1933, as amended, pursuant to a Registration Statement on Form S-4 (File No. 333-184392), which was declared effective by the Securities and Exchange Commission  on February 12, 2013. Pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Registrant is deemed to be the successor issuer to the Predecessor and the Registrant’s Common Stock was subsequently registered under Section 12(b) of the Exchange Act and is listed on the NYSE MKT, LLC.
 
References to Owens Realty Mortgage, Inc. and its subsidiaries, “ORM,” the “Company,” “we”, “us”, or “our” in this Annual Report on Form 10-K (including in the consolidated financial statements and notes thereto in this report) have the following meanings, unless we specifically state or the context requires otherwise:
 
·  
For periods prior to May 20, 2013: the Predecessor and its subsidiaries;
 
·  
For periods from and after May 20, 2013: ORM and its subsidiaries.
 
PART I

Item 1. BUSINESS

We are a specialty finance company that focuses on the origination, investment and management of commercial real estate loans, primarily in the Western U.S. We provide customized, short-term loans to small and middle-market investors and developers that require speed and flexibility. We also hold investments in real estate property. Our investment objective is to provide investors with attractive current income and long-term shareholder value.  Our Common Stock is traded on the NYSE MKT under the symbol “ORM”.

We are externally managed and advised by Owens Financial Group, Inc. ("OFG" or “the Manager”), a specialized commercial real estate management company that has originated, serviced and managed alternative commercial real estate investments since 1951. OFG provides us with all of the services vital to our operations and our executive officers and other staff are all employed by OFG pursuant to the management agreement between the Company and the Manager (the “Management Agreement”) and the Company’s charter. The Management Agreement requires OFG to manage our business affairs in conformity with the policies and investment guidelines that are approved and monitored by our Board of Directors. Our Board of Directors is composed of a majority of independent directors. The Audit, Nominating and Corporate Governance and Compensation Committees of the Board are composed exclusively of independent directors.

The Company was incorporated in Maryland on August 9, 2012. Effective May 20, 2013, OMIF, a California Limited Partnership formed in 1984 merged with and into the Company, with the Company as the surviving corporation (the “Merger”), and the Company commenced conducting all of the business conducted by OMIF at the effective time of the Merger.  The Merger was conducted to reorganize our business operations so that, among other things, we could elect to qualify as a real estate investment trust (a “REIT”) for federal income tax purposes. As a qualified REIT we are generally not subject to federal income tax on that portion of our REIT taxable income that is distributed to our stockholders, provided that at least 90% of taxable income is distributed and provided that certain other requirements are met. Certain of our assets that produce non-qualifying income are held in taxable REIT subsidiaries. Unlike other subsidiaries of a REIT, the income of a taxable REIT subsidiary is subject to federal and state income taxes.

 
1
 
OFG arranges, services and maintains the loan and real estate portfolios for the Company. Our loans are secured by mortgages or deeds of trust on unimproved, improved, income-producing and non-income-producing real property, such as condominium projects, apartment complexes, shopping centers, office buildings, and other commercial or industrial properties. No single Company loan may exceed 10% of our assets as of the date the loan is made.

The following table shows the total Company stockholders’ equity, loans, real estate properties and net income (loss) attributable to the Company as of and for the years ended December 31, 2014, 2013, 2012, 2011 and 2010:
 
   
ORM Stockholders’
Equity
 
Loans
 
Real Estate
Properties
 
Net Income
(Loss)
2014……………………….
 
$
184,571,858
 
$
68,033,511
 
$
163,016,805
 
$
7,929,629
 
2013……………………….
 
$
179,874,410
 
$
58,796,293
 
$
135,315,964
 
$
8,732,897
 
2012……………………….
 
$
179,459,931
 
$
70,262,262
 
$
127,773,349
 
$
(1,679,820
)
2011……………………….
 
$
181,045,959
 
$
69,421,876
 
$
145,591,660
 
$
(24,744,255
)
2010……………………….
 
$
219,101,364
 
$
157,665,495
 
$
97,066,199
 
$
(22,837,520
)

As of December 31, 2014, we held investments in 34 loans, secured by liens on title and leasehold interests in real property. Seventy-eight percent (78%) of the loans are located in Northern California. The remaining 22% are located in Southern California, Arizona, Hawaii, Oregon and Washington.

The following table sets forth the types and maturities of loans held by us as of December 31, 2014:

TYPES AND MATURITIES OF LOANS
(As of December 31, 2014)
 
 
Number of Loans
 
Amount
 
Percent
             
Senior loans
33
 
$
65,533,511
 
96.33%
Junior loans*
1
   
2,500,000
 
3.67%
 
34
 
$
68,033,511
 
100.00%
* The junior loans in our portfolio at December 31, 2014 are junior to existing senior loans held by us and are secured by the same collateral.
             
Maturing on or before December 31, 2014
3
 
$
9,476,081
 
13.93%
Maturing on or between January 1, 2015 and December 31, 2016
22
   
39,167,007
 
57.57%
Maturing on or between January 1, 2017 and March 1, 2028
9
   
19,390,423
 
28.50%
 
34
 
$
68,033,511
 
100.00%
             
Commercial
25
 
$
52,531,537
 
77.21%
Residential
7
   
13,491,906
 
19.83%
Land
2
   
2,010,068
 
2.96%
 
34
 
$
68,033,511
 
100.00%

We have established an allowance for loan losses of approximately $2,869,000 as of December 31, 2014. The above amounts reflect the gross amounts of our loans without regard to such allowance.

The average loan balance of the loan portfolio is $2,001,000 as of December 31, 2014. Of such investments, 6.3% earn a variable rate of interest and 93.7% earn a fixed rate of interest. All were negotiated according to our investment standards.

 
2
 
We have other assets in addition to loans, comprised principally of the following, as of December 31, 2014:

·  
$7,662,000 in cash and cash equivalents and restricted cash required to transact our business and/or in conjunction with contingency and escrow reserve requirements;
 
·  
$163,017,000 in real estate held for sale and investment;
 
·  
$2,143,000 in investment in limited liability company;
 
·  
$1,482,000 in interest and other receivables;
 
·  
$1,318,000 in deferred financing costs, net; and
 
·  
$1,138,000 in other assets.
 
Delinquencies

Management does not regularly examine the existing loan portfolio to see if acceptable loan-to-value ratios are being maintained because the majority of loans in our portfolio mature in a period of only 1-2 years. Management performs an internal review on a loan secured by property in the following circumstances:

·  
payments on the loan 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 normally includes conducting a physical evaluation of the property securing the loan and the area in which the property is located, and obtaining information regarding the property’s occupancy. In some circumstances, management may determine that a more extensive review is warranted, and may obtain an updated appraisal, updated financial information on the borrower or other information. As of December 31, 2014, we obtained updated appraisals on certain of the properties securing our trust deed investments and certain of our wholly- and majority- owned real estate properties.

As of December 31, 2014 and 2013, we had six and ten loans, respectively, that were impaired totaling approximately $22,316,000 and $31,738,000, respectively. This included two and five matured loans totaling $8,614,000 and $16,908,000, respectively. In addition, one and three loan(s) totaling approximately $862,000 and $1,290,000 were past maturity but less than 90 days delinquent in monthly payments as of December 31, 2014 and 2013, respectively (combined total of impaired and past maturity loans of $23,178,000 and $33,028,000, respectively). Of the impaired and past maturity loans, approximately $0 and $6,981,000, respectively, were in the process of foreclosure and none involved borrowers who were in bankruptcy as of December 31, 2014 and 2013. We foreclosed on three and six loans during the years ended December 31, 2014 and 2013, respectively, with aggregate principal balances totaling $7,671,000 and $26,187,000, respectively, and obtained the properties via the trustee’s sales.

During the year ended December 31, 2014, the terms of one impaired loan were modified as a troubled debt restructuring. The loan was rewritten as the borrower had paid the principal balance down partially from sale proceeds. The maturity date was extended by six months to April 2015. All other terms of the loan remained the same. Management believes that no specific loan loss allowance is needed on this modified loan given the estimated underlying collateral value.

During the year ended December 31, 2013, the terms of two impaired loans were modified as troubled debt restructurings. One such impaired loan was modified to combine all principal, delinquent interest and advances into principal and provide for amortizing payments at a reduced interest rate over an extended maturity of 15 years. The borrower is now delinquent in making payments on this modified loan. The other impaired loan was rewritten during the year whereby the Company repaid the unrelated first deed of trust on the subject property of approximately $5,899,000 and refinanced its second deed of trust by combining them into one first deed of trust in the amount of $9,625,000 with interest at 10% per annum due in five years. As part of the modification, approximately $659,000 of past due interest on our original note was paid from the proceeds of the rewritten loan, which was recorded as a discount against the principal balance of the new loan because the loan was impaired (net principal balance of $8,966,000). In addition, we loaned the borrower an additional $2,500,000 to fund certain improvements to the property (aggregate principal balance of $11,466,000). Management believes that no specific loan loss allowance is needed on either of these modified loans given the estimated underlying collateral values.

 
3
 
Of the $31,738,000 in loans that were impaired as of December 31, 2013, $22,316,000 remained impaired as of December 31, 2014, $6,981,000 of such loans were foreclosed on and became real estate owned by the Company during 2014, and $2,441,000 were paid off by the borrowers.

Following is a table representing our delinquency/impairment experience and foreclosures as of and during the years ended December 31, 2014, 2013, 2012, 2011 and 2010:
 
   
2014
 
2013
 
2012
 
2011
   
2010
Delinquent/Impaired Loans
 
$
22,316,000
 
$
31,738,000
 
$
49,252,000
 
$
52,327,000
 
$
121,565,000
Loans Foreclosed
 
$
7,671,000
 
$
26,187,000
 
$
2,000,000
 
$
61,438,000
 
$
36,174,000
Total Loans
 
$
68,034,000
 
$
58,796,000
 
$
70,262,000
 
$
69,422,000
 
$
157,665,000
Percent of Delinquent Loans to Total Loans
   
32.80%
   
53.98%
   
70.10%
   
75.38%
   
77.10%

If the delinquency rate increases on loans held by us, our interest income will be reduced by a proportionate amount. If a loan held by us is foreclosed on, we will acquire ownership of real property and the inherent benefits and detriments of such ownership.

Compensation to the Manager

The Manager receives various forms of compensation and reimbursement of expenses from the Company and compensation from borrowers as set forth in the Company’s charter and summarized below.

Compensation and Reimbursement from the Company

Management Fees

Management fees are paid by the Company to the Manager monthly and cannot exceed 2.75% annually of the average unpaid balance of our loans at the end of each of the 12 months in the calendar year. Since this fee is paid monthly, it could exceed 2.75% in one or more months, but the total fee in any one year is limited to a maximum of 2.75%, and any amount paid above this must be repaid by the Manager to the Company. The Manager is entitled to receive a management fee on all loans, including those that are delinquent. The Manager believes this is justified by the added effort associated with such loans. In certain past years, the Manager has chosen not to take the maximum allowable compensation; however, due to reduced levels of loans held by the Company in recent years, the Manager has elected to take close to the maximum compensation that it is able to take and will likely continue to take the maximum compensation for the foreseeable future.

Servicing Fees

The Manager may act as servicing agent on any or all of the loans held by the Company and expects to continue to service all such loans.  In consideration for acting as the servicing agent, the Manager receives from the Company 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 services on that type of loan or up to 0.25% per year of the unpaid balance of loans held by the Company at the end of each month. The Manager has historically been paid the maximum servicing fee allowable.

Reimbursement of Other Expenses

The Manager is reimbursed by the Company for the actual cost of goods and materials used for or by the Company and obtained from unaffiliated entities and the actual cost of services of non-management and non-supervisory personnel related to the administration of the Company (subject to certain limitations contained in the charter).

 
4
 
Compensation from Borrowers

In addition to compensation from the Company, the Manager also receives compensation from borrowers under our loans arranged by the Manager.

Acquisition and Origination Fees

The Manager is 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 Company (including any selection fee, mortgage placement fee, nonrecurring management fee, and any origination fee, loan fee, or points paid by borrowers, or any fee of a similar nature). The acquisition and origination fees are paid by borrowers, and thus, are not an expense of the Company. These fees may be paid at the placement, extension or refinancing 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 Manager and may have a direct effect on the interest rate borrowers are willing to pay the Company.

Late Payment Charges

The Manager is entitled to receive all late payment charges paid by borrowers on delinquent loans held by the Company (including additional interest and late payment fees).  The late payment charges are paid by borrowers and collected by the Company with regular monthly loan payments or at the time of loan payoff.  These are recorded as a liability (Due to Manager) when collected and are not recognized as an expense of the Company. Generally, on the majority of our loans, the late payment fee charged to the borrower for late payments is 10% of the payment amount. In addition, on the majority of our loans, the additional interest charge required to be paid by borrowers once a loan is past maturity is in the range of 3%-5% (paid in addition to the pre-default interest rate).

Other Miscellaneous Fees

We remit other miscellaneous fees to the Manager, which are collected from loan payments, loan payoffs or advances from loan principal (i.e. funding, demand and partial release fees).

The Manager may voluntarily accept compensation that is less than the maximum fees and compensation described above, so long as no such change will result in a significant adverse impact on the stockholders of the Company.

Principal Investment Objectives

Our principal investment objectives are to preserve the capital of the Company and to provide periodic cash distributions to stockholders. It is not our intent to provide tax-sheltered income.

We invest in real estate loans primarily in the Western United States.  The loans we invest in are selected for us by OFG from loans originated by OFG or non-affiliated mortgage brokers. When OFG or a non-affiliated mortgage broker originates a loan for us, the borrower is identified, the loan application is processed and the loan is made available to us. We believe that our loans are attractive to borrowers because of the expediency of OFG’s loan approval process, which is approximately ten to twenty days.

        We generally employ the same or similar underwriting standards as conventional lenders, such as banks. However, as a specialty finance lender, we are more willing to invest in real estate loans to borrowers that conventional lenders may have rejected for not being creditworthy.  When making these loans we attempt to mitigate the added risk by requiring greater equity in the property.  Borrowers are willing to pay us higher interest rates than conventional lenders charge to obtain these loans. In addition, we usually are able to generate higher fees and charge higher interest rates for our loans because we typically can underwrite and close a loan more rapidly than a conventional lender.  The loans we invest in are typically short in duration, usually less than three years, and bridge the acquisition or improvement of properties that undergo an economic transformation. The short maturity terms of our loans add a degree of risk, as the borrowers are forced to find suitable replacement financing or to sell their property in order to pay off the loan.

 
5
 
 
Investment in Real Estate Loans

Our acquisition and investment policies are to invest at least 86.5% of our capital in real estate loans and activities related thereto.  Due to the declining economy and reductions in real estate values prior to 2013, we have experienced increased foreclosures which have resulted in our ownership of significantly more real estate than in the past. Therefore, while we initially adhered to our policies of investing at least 86.5% of our capital in real estate loans, economic conditions beyond our control have resulted in less than 86.5% of our capital being accounted for as investments in real estate loans. As of December 31, 2014 , approximately 27 % of our assets were classified as investments in real estate loans (net of allowance for loan losses).  Additionally,   we must maintain a contingency reserve in an aggregate amount of at least 1.5% of our capital.
 

Our loans are predominantly secured by first mortgage or deed of trust liens on the underlying properties purchased or developed with the funds that we make available. We sometimes refer to these real properties as the security properties. We invest primarily in loans on commercial, industrial and multi-family residential income-producing real property. Substantially all loans are arranged by OFG, which is licensed by the State of California as a real estate broker and California Finance Lender. During the course of its business, OFG is continuously evaluating prospective investments. OFG originates loans from mortgage brokers, previous borrowers, and by personal solicitations of new borrowers. We may purchase or participate in existing loans that were originated by other lenders. Such a loan might be obtained by us from a third party at an amount equal to or less than its face value. OFG evaluates all potential loan investments to determine if the security for the loan, loan-to-value ratio and other applicable factors meets our investment criteria and policies.  OFG locates, identifies and arranges virtually all loans we invest in and makes all investment decisions on our behalf.   In evaluating prospective loan investments, OFG 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 generated by the property;
 
·  
potential for rental rate increases;
 
·  
the marketability 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 that OFG believes are relevant.

Types of Loans

We invest in first, second, and third mortgage and deed of trust loans, wraparound and participating mortgage and deed of trust loans, construction mortgage and deed of trust loans on real property, and loans on leasehold interest mortgages and deeds of trust. We do not ordinarily make or invest in mortgage and deed of trust loans with a maturity of more than 15 years, and most loans have terms of one to three years. Virtually all loans provide for monthly payments of interest and some also provide for principal amortization. Most of our loans provide for payments of interest only and a payment of principal in full at the end of the loan term. OFG does not originate loans with negative amortization provisions. We do not have any policies directing the portion of our assets that may be invested in construction or rehabilitation loans, loans secured by leasehold interests and second, third and wrap-around mortgage and deed of trust loans. However, OFG recognizes that these types of loans are riskier than first deeds of trust on income-producing, fee simple properties and will seek to minimize the amount of these types of loans in our portfolio. Additionally, OFG will consider that these loans are riskier when determining the rate of interest on the loans.

 
6
 
First Mortgage Loans

First mortgage and deed of trust loans are secured by first deeds of trust on real property. Such loans are generally for terms of one to three years. In addition, such loans do not usually exceed 75% of the appraised value of improved real property and 50% of the appraised value of unimproved real property.

Second and Wraparound Mortgage Loans

Second and wraparound mortgage and deed of trust 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 secured 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, we generally make principal and interest payments on behalf of the borrower to the holders of the prior mortgage loans.

Third Mortgage Loans

Third mortgage and deed of trust 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 secured property.

Construction and Rehabilitation Loans

Construction and rehabilitation loans are loans made for both original development and renovation of property. Construction and rehabilitation loans invested in by us are generally secured by first deeds of trust on real property for terms of six months to two years. In addition, if the secured property is being developed, the amount of such loans generally will not exceed 75% of the post-development appraised value. We will not usually disburse funds on a construction or rehabilitation loan until work in the previous phase of the project has been completed, and an independent inspector has verified completion of work to be paid for. In addition, we require the submission of signed labor and material lien releases by the contractor in connection with each completed phase of the project prior to making any periodic disbursements of loan proceeds. As of December 31, 2014, our loan portfolio contains eleven construction/rehabilitation loans with aggregate principal balances totaling $15,288,000.

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 at origination. 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 OFG to cure any default under the lease. As of December 31, 2014, our loan portfolio does not contain any leasehold interest loans.

Prepayment Penalties and Exit Fees

Generally, the loans we invest in do not contain prepayment penalties or exit fees. If our loans are at a high rate of interest in a market of falling interest rates, the failure to have a prepayment penalty provision or exit fee in the loan allows the borrower to refinance the loan at a lower rate of interest, thus providing a lower yield to us on the reinvestment of the prepayment proceeds. While our loans do not contain prepayment penalties, many instead require the borrower to notify OFG of the intent to payoff within a specified period of time prior to payoff (usually 30 to 120 days) . If this notification is not made within the proper time frame, the borrower may be charged interest for that number of days that notification was not received.

Balloon Payment

As of December 31, 2014, 99.6% of our loans provided for a “balloon payment” on the principal amount due upon maturity of the loan (including both interest only and amortizing loans with a balloon payment). As of December 31 , 2014, one loan (0.4% of total loans) was a fully amortizing loan with a principal balance of approximately $254,000 and a remaining term of 158 months. There are no specific criteria used in evaluating the credit quality of borrowers for loans requiring balloon payments. Furthermore, a substantial period of time may elapse between the review of the financial statements of the borrower and the date when the balloon payment is due. As a result, there is no assurance that a
 
 
7
 
borrower will have sufficient resources to make a balloon payment when due. To the extent that a borrower has an obligation to pay the  loan principal in a large lump sum payment, its ability to repay the loan may be dependent upon its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial amount of cash. As a result, these loans can involve a higher risk of default than amortizing loans (where principal is paid at the same time as the interest payments).

Repayment of Loans on Sales of Properties

We may require a borrower to repay a loan upon the sale of the secured property rather than allow the buyer to assume the existing loan. This may be done if OFG determines that repayment appears to be advantageous to us based upon then-current interest rates, the length of time that the loan has been held by us, the credit-worthiness of the buyer and our objectives and policies. The net proceeds from any sale or repayment are invested in new loans, held as cash or distributed at such times and in such intervals as OFG, in its sole discretion, determines.

Fixed Rate Loans

Approximately 93.7% ($63,718,000) and 82.5% ($48,526,000) of our loans as of December 31, 2014 and 2013, respectively, bear interest at a fixed rate. The weighted average interest rate of such loans as of December 31, 2014 and 2013 was approximately 8.7% and 8.9%, respectively.

Variable Rate Loans

Approximately 6.3% ($4,315,000) and 17.5% ($10,270,000) of our loans as of December 31, 2014 and 2013, respectively, bear interest at a variable rate. Variable rate loans may use indices such as the one, five and ten year Treasury Constant Maturity Index, the Prime Rate Index or the Monthly Weighted Average Cost of Funds Index for Eleventh District Savings Institutions (Federal Home Loan Bank Board). OFG may negotiate spreads over these indices of from 2.0% to 6.5%, 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, 2014 and 2013:

 
December 31, 2014
 
December 31, 2013
       
One-year Treasury Constant Maturity Index
0.25%
 
0.13%
       
Five-year Treasury Constant Maturity Index
1.65%
 
1.75%
       
Ten-year Treasury Constant Maturity Index
2.17%
 
3.04%
       
Prime Rate Index
3.25%
 
3.25%
       
Monthly Weighted Average Cost of Funds for Eleventh District Savings Institutions
0.69%
 
0.78%

It is possible that the interest rate index used in a variable rate loan will rise (or fall) more slowly than the interest rate of other loan investments available to us. OFG attempts to minimize this interest rate differential by tying variable rate loans to indices that are sensitive to fluctuations in market rates. Additionally, most variable rate loans originated by OFG contain provisions under which the interest rate cannot fall below the initial rate.

Variable rate loans generally have interest rate caps. We anticipate that the interest rate cap will be a ceiling that is 2% to 4% above the starting rate with a floor rate equal to the starting rate. For these loans, there is the risk that the market rate may exceed the interest cap rate.

Variable rate loans of five to ten year maturities are not assumable without the prior consent of OFG. We do not expect to invest in or purchase a significant amount of assumable loans. To minimize our risk, any borrower assuming an existing loan will be subject to the same underwriting criteria as the original borrower.
 
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Debt Coverage Standard for Loans

Loans on commercial property generally require the net annual estimated cash flow to equal or exceed the annual payments required on the loan.

Loan Limit Amount

We limit the amount of our investment in any single loan, and the amount of our investment in loans to any one borrower, to 10% of our total assets as of the date the loan is made or purchased.

Loans to Affiliates

We will not provide loans to OFG or an affiliate except for in connection with any advance of expenses or indemnification permitted by our charter, bylaws and the Management Agreement.

Purchase of Loans from Affiliates

We may purchase loans deemed suitable for acquisition from OFG or its affiliates only if:

·  
OFG makes or purchases 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 us for a price no greater than the cost of such loans to OFG (except for compensation in accordance with the terms of the Management Agreement and the charter);

·  
There is no other benefit arising out of such transactions to OFG;

·  
Such loans are not in default, and;

·  
Such loans otherwise satisfy, among other things, the following requirements:
 
·  
We will not make or invest in loans on any one property if at the time of acquisition of the loan the aggregate amount of all loans outstanding on the property, including loans by the Company, 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 documented underwriting criteria.
 
·  
We will limit any single loan and limit the loans to any one borrower to not more than 10% of our total assets as of the date the loan is made or purchased.
 
·  
We will not invest in or make loans on unimproved real property in an amount in excess of 25% of our total assets.
 
Competition

Our major competitors in providing specialty finance loans are other mortgage REIT’s, specialty finance companies, banks, savings and loan associations, thrifts, conduit lenders, institutional investors, and other entities.  No particular competitor dominates the market. Many of the companies against which we compete have substantially greater financial, technical and other resources than us. In addition, there are numerous mortgage REIT’s with investment objectives similar to ours, and others may be organized in the future. Competition in the our market niche depends upon a number of factors, including price and interest rates of the loan, speed of loan processing, cost of capital, reliability, quality of service and support services. We are competitive in large part because OFG generates substantially all loans and is able to provide expedited loan approval, processing and funding. OFG has been in the business of making or investing in loans since 1951.

Regulation of the Manager

We are managed by OFG. OFG, in its capacity as our Manager, is subject to the oversight of our Board of Directors pursuant to the terms and conditions of the Management Agreement and our charter. OFG’s operations as a mortgage broker are subject to extensive regulation by federal, state and local laws and governmental authorities. OFG conducts its real estate mortgage business under a license issued by the State of California. Under applicable California law, the division has broad discretionary authority over OFG’s activities.
 
 
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Employees

The Company does not have employees, other than three full-time and two part-time employees that work directly for its wholly-owned subsidiary, Brannan Island, LLC. OFG provides all of the employees (including our officers) necessary for our operations pursuant to the Management Agreement. As of December 31, 2013, OFG had twelve full-time and five part-time employees. All employees are at-will employees and none are covered by collective bargaining agreements.

Distribution of Company Information

Our Internet address is www.owensmortgage.com.  We use our web site as a routine channel for distribution of important information, including news releases, U.S. Securities and Exchange Commission (SEC) filings, and certain other financial information. We post filings on our web site as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC, including our annual and quarterly reports on Forms 10-K and 10-Q and current reports on Form 8-K; our proxy statements; and any amendments to those reports or statements. All such postings and filings are available on our web site free of charge. The SEC’s web site, www.sec.gov, contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. We also make available our code of business conduct and ethics, corporate governance guidelines, committee charters, certain Company presentations and fact sheets, and press releases. The content on any web site referred to in this Annual Report on Form 10-K is not incorporated by reference in this Annual Report unless expressly noted.

Our Investor Relations Department can be contacted at 2221 Olympic Blvd., Walnut Creek, CA 94595, Attn: Investor Relations, or by email at investors@owensmortgage.com.

Item 1A. RISK FACTORS

You should consider carefully the risks described below, together with the other information contained in this Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. If any of the identified risks actually occurs, or is adversely resolved, our consolidated financial statements could be materially adversely impacted in a particular fiscal quarter or year and our business, financial condition and results of operations may suffer materially. As a result, the trading price of our Common Stock and your investment in the Company may suffer.

The risks described below are not the only risks we face. Additional risks and uncertainties, including those not currently known to us or that we currently deem to be immaterial also could materially adversely affect our business, financial condition and results of operations.

Risks Related to Our Business

We will rely on our Manager, Owens Financial Group, Inc., to manage our day-to-day operations and select our loans for investment.

Our ability to achieve our investment objectives and to make distributions to you depends upon OFG’s performance in obtaining, processing, making and brokering loans for us to invest in and determining the financing arrangements for borrowers. You will have no opportunity to evaluate the financial information or creditworthiness of borrowers, the terms of loans, the real property that is our collateral or other economic or financial data concerning our loans.  We are obligated to pay OFG an annual management fee up to 2.75% of the average unpaid balance of our outstanding loans at the end of each month.  OFG has no fiduciary obligations to us or our stockholders, is not required to devote its employees full time to our business and may devote time to business interests competitive with our business.

We depend on key personnel of our Manager with long standing business relationships, the loss of whom could threaten our ability to operate our business successfully.

Our future success depends, to a significant extent, upon the continued services of OFG as our manager and OFG’s officers and employees. The loss of services of one or more members of OFG’s management team could harm our business and prospects, including the services of William C. Owens (Chief Executive Officer), Bryan H. Draper (Chief Financial Officer), William E. Dutra (Executive Vice President), Daniel J. Worley (Senior Vice President), Brian M. Haines (Senior Vice President), and Melina A. Platt (Controller), each of whom would likely be difficult to replace because of their extensive experience in the field, extensive market contacts and familiarity with our business. None of these individuals is subject to an employment, non-competition or confidentiality agreement with us or OFG, and we do not maintain “key man” life insurance policies on any of them. Our future success also depends in large part upon OFG’s ability to hire and retain additional highly skilled managerial and operational personnel. OFG may require additional operations people who are experienced in obtaining, processing, making and brokering loans and who also have contacts in the relevant markets. If OFG were unable to attract and retain key personnel, the ability of OFG to make prudent investment decisions on our behalf may be impaired.

 
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Our management has very limited experience operating a REIT, and we cannot assure you that our management’s past experience will be sufficient to successfully manage our business as a REIT. If we fail to comply with REIT requirements, we would incur U.S. federal income taxes at the corporate level, which would reduce our distributions to you.

We have a very short operating history as a REIT, and our management has very limited experience in complying with the income, asset and other limitations imposed by the REIT provisions of the Internal Revenue Code of 1986, as amended (the “Code”). These provisions are complex, and the failure to comply with these provisions in a timely manner could prevent us from qualifying as a REIT or could force us to pay unexpected taxes and penalties. In such event, our net income would be reduced and we would have less funds available for distribution to you.

If we fail to qualify as a REIT, we would be subject to U.S. federal income tax at regular corporate rates. Also, unless the IRS granted us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first fail to qualify. If we fail to qualify as a REIT, we would have to pay significant income taxes and therefore would have less money available for investments or for distributions to our stockholders. This would likely have a significant adverse effect on the value of our Common Stock. In addition, we would no longer be required to make distributions to our stockholders to maintain preferential U.S. federal income taxation as a REIT.

We do not have a policy that expressly prohibits our directors, officers, security holders or affiliates from engaging for their own account in business activities of the types conducted by us.
 
       We do not have a policy that expressly prohibits our directors, officers, security holders or affiliates from engaging for their own account in business activities of the types conducted by us. However,   our code of business conduct and ethics contains a conflicts of interest policy that, unless waived in accordance with the code, prohibits our directors and executive officers, as well as personnel of OFG who provide services to us, from engaging in any transaction that involves an actual conflict of interest with us. In addition, our Management Agreement with OFG does not prevent our Manager and its affiliates from engaging in additional management or investment opportunities, some of which could compete with us.
 
Our Manager’s liability is limited under the Management Agreement, and we have agreed to indemnify our Manager against certain liabilities. As a result, we could experience poor performance or losses for which our Manager would not be liable.
 
     Pursuant to the Management Agreement, OFG does not assume any responsibility other than to render the services called for thereunder and is not responsible for any action of our Board of Directors in following or declining to follow its advice or recommendations. Under the terms of the Management Agreement, none of OFG, its officers, stockholders, directors, employees or advisors, among others, will be liable to us or any subsidiary of ours, to our Board of Directors, or to our or any subsidiary’s stockholders, members or partners for any acts or omissions made pursuant to the Management Agreement, except for acts or omissions constituting bad faith, willful misconduct, gross negligence or reckless disregard of OFG’s duties under the Management Agreement, as determined by a final court order. In addition, we have agreed to indemnify, to the fullest extent permitted by law, OFG, its officers, stockholders, directors, employees and advisors, among others, from all losses (including attorneys’ fees) arising from any acts or omissions of such person made in good faith in the performance of OFG’s duties under the Management Agreement and not constituting bad faith, willful misconduct, gross negligence or reckless disregard of such duties.

Under the Management Agreement, termination of our Manager for cause requires that we provide 30 days’ prior written notice to our Manager.

Termination of the Management Agreement with our Manager for cause, including in the event that OFG engages in fraud or embezzlement, misappropriates funds or intentionally breaches the Management Agreement, requires us to provide 30 days’ prior written notice to OFG.  Accordingly, if OFG engages in any of the foregoing activities (or any other activities resulting in a for cause termination), our inability to terminate the Management Agreement for at least 30 days may result in inefficiencies and uncertainties that could ultimately have a material adverse effect on our business, financial condition and results of operations.

 
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Our Manager’s lack of experience with certain real estate markets could impact its ability to make prudent investments on our behalf.

     While we invest in real estate loans throughout the United States, the majority of our loans are in the Western United States.  Real estate markets vary greatly from location to location, and the rights of secured real estate lenders vary from state to state.  OFG may originate loans for us in markets where they have limited experience.  In those circumstances, OFG intends to rely on independent real estate advisors and local legal counsel to assist them in making prudent investment decisions.  You will not have an opportunity to evaluate the qualifications of such advisors, and no assurance can be given that they will render prudent advice to OFG.

Loan defaults, delinquencies and foreclosures will decrease our revenues and net income and your distributions.

We are in the business of investing in real estate loans, and, as such, we are subject to risk of defaults by borrowers. Our performance will be directly impacted by any defaults on the loans in our portfolio. As a specialty finance lender willing to invest in loans to borrowers who may not meet the credit standards of conventional lenders, the rate of default on our loans could be higher than those generally experienced in the real estate lending industry. Any sustained period of increased defaults could adversely affect our business, financial condition, liquidity and the results of our operations, and ultimately your distributions. We seek to mitigate the risk by estimating the value of the underlying collateral and insisting on low loan-to-value ratios. However, we cannot assure you that these efforts will fully protect us against losses on defaulted loans. Any subsequent decline in real estate values on defaulted loans could result in less security than anticipated at the time the loan was originally made, which may result in our not recovering the full amount of the loan. Any failure of a borrower to repay loans or interest on loans will reduce our revenues and your distributions and the value of your interest in the Company. Our appraisals are generally dated within 12 months of the date of loan origination and may not reflect a decrease in the value of the real estate due to events subsequent to the date of the appraisals.

As of December 31, 2014, our portfolio had approximately $22,316,000 in impaired loans, which included approximately $10,728,000 of non-performing loans in non-accrual status. In addition, our investment in loans that were past maturity (delinquent in principal) but less than 90 days delinquent in monthly payments was approximately $ 862,000 as of December 31, 2014 (combined total of delinquent and/or impaired loans of $ 23,178,000 compared to $ 33,028,000 as of December 31, 2013). We also had approximately $51,320,000 of non-income producing real estate held for sale or investment for a total of $62,048,000 in non-performing assets, which represented approximately 34% of our total capital as of December 31, 2014.

It is possible that we will continue to experience reduced net income or further losses in the future, thus negatively impacting future distributions. As non-delinquent loans are paid off by borrowers, interest income received by us may be reduced. In addition, we may foreclose on more delinquent loans, thereby obtaining ownership of more real estate that may result in larger operating losses. Management will attempt to sell many of these properties but may need to sell them for losses or wait until market values recover in the future.

Our underwriting standards may be more lenient than those of conventional lenders, which could result in a higher percentage of foreclosed properties, which could reduce the amount of distributions to you.

Our underwriting standards and procedures may be more lenient than those of conventional lenders in that we will invest in loans secured by property that may not meet the underwriting standards of conventional real estate lenders or make loans to borrowers who may not meet the credit standards of conventional lenders.  This may lead to more non-performing assets in our loan portfolio and create additional risks to your return. We approve real estate loans more quickly than other lenders. We rely on third-party reports and information such as appraisals and environmental reports to assist in underwriting loans. We may accept documentation that was not specifically prepared for us or commissioned by us. This creates a greater risk of the information contained therein being out of date or incorrect. Generally, we will spend less time than conventional lenders assessing the character and credit history of our borrowers and the property that secures our loans. Due to the accelerated nature of our loan approval process, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to the borrower and the security. There may be a greater risk of default by our borrowers, which may impair our ability to make timely distributions to you and which may reduce the amount we have available to distribute to you.

 
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Loan repayments are less likely in a volatile market environment.

In a market in which liquidity is essential to our business, loan repayments have been a significant source of liquidity for us. However, many financial institutions have curtailed new lending activity and real estate owners are having difficulty refinancing their loans at maturity. If borrowers are not able to refinance our loans at their maturity, the loans could go into default and the liquidity that we would receive from such repayments will not be available. Furthermore, without a properly functioning commercial real estate finance market, borrowers that are performing on their loans may be forced to extend such loans if allowed, which will further delay our ability to access liquidity through repayments.

We depend upon real estate security to secure our real estate loans, and we may suffer a loss if the value of the underlying property declines.

We depend upon the value of real estate security to protect us on the loans that we make. We utilize the services of independent appraisers to value the security underlying our loans. However, notwithstanding the experience of the appraisers, mistakes can be made, or the value of the real estate may decrease due to subsequent events. Our appraisals are generally dated within 12 months of the date of loan origination and may have been commissioned by the borrower. Therefore, the appraisals may not reflect a decrease in the value of the real estate due to events subsequent to the date of the appraisals. For a construction loan most of the appraisals will be prepared on an as-if developed basis. If the loan goes into default prior to completion of the project, the market value of the property may be substantially less than the appraised value. Additional capital may be required to complete a project in order to realize the full value of the property.  If a default occurs and we do not have the capital to complete a project, we may not recover the full amount of our loan.

Foreclosures create additional ownership risks.

When we acquire property by foreclosure, we have 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 loans;
     
 
• 
not being able to realize sufficient amounts from sales of the properties to avoid losses;
 
 
• 
properties being acquired with one or more co-owners (called tenants-in-common) where development or sale requires written agreement or consent by all; without timely agreement or consent, we could suffer a loss from being unable to develop or sell the property;
     
 
• 
maintaining occupancy of the properties;
 
 
• 
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;
 
 
• 
 
•
possible liability for injury to persons and property; and
 
possible liability for environmental remediation.
     
 
During the years ended December 31, 2014 and 2013, we recorded impairment losses on one and two of our real estate properties held for sale and investment in the aggregate amount of approximately $179,000 and $666,000, respectively.

Development on properties we acquire creates risks of ownership we do not have as a lender.

When we acquire property by foreclosure or otherwise as a lender, we 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 OFG 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;
 
 
13
 
 
 
• 
Inability to obtain governmental permits;
 
 
• 
Delays in construction of improvements;
 
 
• 
Increased costs during development and the need to obtain additional financing to pay for the development; and
 
 
• 
Economic and other factors affecting sale or leasing of developed property.

Larger loans result in less diversity and may increase risk.

As of December 31, 2014, we were invested in a total of 34 loans, with an aggregate book value of approximately $68,034,000. The average book value of those loans was approximately $2,001,000, and the median book value was $1,138,000. Nine of such loans had a book value each of 3% or more of the aggregate book value of all loans, and the largest loan relationship had a total book value of 17% of all loans.

As a general rule, we can decrease risk of loss from delinquent loans by investing in a greater total number of loans. Investing in fewer, larger loans generally decreases diversification of the portfolio and increases risk of loss and possible reduction of return to investors in the case of a delinquency of such a loan.

Incorrect original collateral assessment (valuation) could result in losses and decreased distributions to you.

Appraisals are obtained from qualified, independent appraisers on all properties securing trust deeds, which may have been commissioned by the borrower and may precede the placement of the loan with us. 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.

Completed, written appraisals are not always obtained on our loans prior to original funding, due to the quick underwriting and funding required on the majority of our loans. Although the loan officers often discuss value with the appraisers and perform other due diligence and calculations to determine property value prior to funding, there is a risk that we may make a loan on a property where the appraised value is less than estimated, which could increase the loan’s loan-to-value, or LTV, ratio and subject us to additional risk.

We may make a loan secured by a property on which the borrower previously commissioned an appraisal. Although we generally require such appraisal to have been made within one year of funding the loan, there is a risk that the appraised value is less than the actual value, increasing the loan’s LTV ratio and subjecting us to additional risk.

Geographical concentration of loans may result in additional delinquencies.

Northern California real estate secured approximately 78 % of the total loans held by us as of December 31, 2014. Northern California consists of Monterey, Kings, Fresno, Tulare and Inyo counties and all counties north of those. In addition, 13%, 3%, 2%, 2% and 2% of total loans were secured by Arizona, Washington, Southern California, Hawaii and Oregon real estate, respectively. These concentrations may increase the risk of delinquencies on our loans when the real estate or economic conditions of one or more of those areas are weaker than elsewhere, for reasons such as:

 
• 
economic recession in that area;
 
 
• 
overbuilding of commercial or residential properties; and
 
 
• 
relocations of businesses outside the area due to factors such as costs, taxes and the regulatory environment.
 
These factors also tend to make more commercial or residential real estate available on the market and reduce values, making suitable loans less available to us. In addition, such factors could tend to increase defaults on existing loans.

 
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Investments in construction and rehabilitation loans may be riskier than loans secured by operating properties.

Our loan portfolio contains eleven construction or rehabilitation loans with principal balances aggregating $15,288,000 as of December 31, 2014 (including two fully funded loans in the aggregate amount of $3,535,000) and we have commitments to fund an additional $5,935,000 on such loans in the future (including interest reserves on these and other loans) as of December 31, 2014. We may make additional construction and rehabilitation loan commitments in the future. Construction and rehabilitation loans may be riskier than loans secured by properties with an operating history, because:

 
• 
the application of the loan proceeds to the construction or rehabilitation project must be assured;
 
 
• 
the completion of planned construction or rehabilitation may require additional financing by the borrower; and
 
 
• 
permanent financing of the property may be required in addition to the construction or rehabilitation loan.

Investments in loans secured by leasehold interests may be riskier than loans secured by fee interests in properties.

Although our loan portfolio does not contain any loans secured by leasehold interests as of December 31, 2014, we have made such loans in the past, and we may resume leasehold-secured lending in the future. 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, and our rights in the event the borrower defaults are limited to stepping into the position of the borrower under the lease, subject to its requirements of rents and other obligations and period of the lease.

Investments in second, third and wraparound mortgage and deed of trust loans may be riskier than loans secured by first deeds of trust.

Second, third and wraparound mortgage and deed of trust loans (those under which we generally make the payments to the holders of the prior liens) are riskier than first mortgage and deed of trust loans because:

 
• 
their position is subordinate in the event of default; and
 
 
•
there could be a requirement to cure liens of a senior loan holder, and, if this is not done, we would lose our entire interest in the loan.
 
As of December 31, 2014, our loan portfolio contained 4 % in second mortgage and deed of trust loans and 0 % in third mortgage and deed of trust loans. The second deed of trust loan in our portfolio as of December 31, 2014 is junior to an existing first deed of trust held by us and is secured by the same collateral. As of December 31, 2014, we were not invested in any wraparound mortgage or deed of trust loans.

We typically make “balloon payment” loans, which are riskier than loans with payments of principal over an extended period of time.

The loans we invest in or purchase generally require the borrower to make a “balloon payment” on the principal amount upon maturity of the loan. A balloon payment is a large principal balance that is payable after a period of time during which the borrower has repaid none or only a small portion of the principal balance. As of December 31, 2014 , 99.6% of our loans required balloon payments at the end of their terms. Loans with balloon payments are riskier than loans with even payments of principal over an extended time period like 15 or 30 years because the borrower’s repayment depends on its ability to sell the property profitably, obtain suitable refinancing or otherwise raise a substantial amount of cash when the loan comes due. There are no specific criteria used in evaluating the credit quality of borrowers for loans requiring balloon payments. Furthermore, a substantial period of time may elapse between the review of the financial statements of the borrower and the date when the balloon payment is due. As a result, there is no assurance that a borrower will have sufficient resources to make a balloon payment when due.

Our loans are not insured or guaranteed by any governmental agency.

Our loans are not insured or guaranteed by a federally-owned or -guaranteed mortgage agency. Consequently, our recourse if there is a default may only be to foreclose upon the real property securing a loan. The value of the foreclosed property may have decreased and may not be equal to the amount outstanding under the corresponding loan, resulting in a decrease of the amount available to distribute to you.

 
15
 
Our loans permit prepayment, which may lower returns.

The majority of our loans do not include prepayment penalties for a borrower paying off a loan prior to maturity. The absence of a prepayment penalty in our loans may lead borrowers to refinance higher interest rate loans in a market of falling interest rates. This would then require us to reinvest the prepayment proceeds in loans or alternative short-term investments with lower interest rates and a corresponding lower return to you.

Equity or cash flow participation in loans could result in loss of our secured position in loans.

We may obtain participation in the appreciation in value or in 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, we might lose our secured position as lender in the property. Other creditors of the borrower might then wipe out or substantially reduce our investment. We could also be exposed to the risks associated with being an owner of real property. We are not presently involved in any such arrangements.

If a third party were to assert successfully that one of our loans was actually a joint venture with the borrower, there might be a risk that we could be liable as joint venturer for the wrongful acts of the borrower toward the third party.

We may be unable to invest capital into new loans on acceptable terms or at all, which would adversely affect our operating results.

We may not be able to identify loan opportunities that meet our investment criteria, and we may not be successful in closing the loans we identify, which would adversely affect our results of operations.

Some losses that might occur to borrowers may not be insured and may result in defaults.

Our loans require that borrowers carry adequate hazard insurance for our benefit. Some events, however, are uninsurable, or insurance coverage for them is economically not practicable. Losses from earthquakes, floods or mudslides, for example, which occur in California, may be uninsured and cause losses to us on entire loans. Since December 31, 2014, no such loan loss has occurred.

While we are named loss payee in all cases and will receive notification in event of a loss, if a borrower allows insurance to lapse, an event of loss could occur before we know of the lapse and have time to obtain insurance ourselves.

Insurance coverage may be inadequate to cover property losses, even though OFG imposes insurance requirements on borrowers that it believes are adequate.

If any of our insurance carriers become insolvent, we could be adversely affected.

We carry several different lines of insurance, placed with several large insurance carriers. If any one of these large insurance carriers were to become insolvent, we would be forced to replace the existing insurance coverage with another suitable carrier, and any outstanding claims would be at risk for collection. In such an event, we cannot be certain that we would be able to replace the coverage at similar or otherwise favorable terms. Replacing insurance coverage at unfavorable rates and the potential of uncollectible claims due to carrier insolvency could adversely affect our results of operations and cash flows.

The impact of any future terrorist attacks exposes us to certain risks.

Any future terrorist attacks, the anticipation of any such attacks, and the consequences of any military or other response by the United States and its allies may have an adverse impact on the U.S. financial markets and the economy in general. We cannot predict the severity of the effect that any such future events would have on the U.S. financial markets, including the real estate capital markets, the economy or our business. Any future terrorist attacks could adversely affect the credit quality of some of our loans and investments. Some of our loans and investments will be more susceptible to such adverse effects than others. We may suffer losses as a result of the adverse impact of any future terrorist attacks, and these losses may adversely impact our results of operations.

 
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In 2014, we entered into new Credit Facilities and other borrowing arrangements. Additional borrowings by us will increase your risk and may reduce the amount we have available to distribute to you.

In 2014, we entered into five credit agreements with four different lenders, which agreements provide us with two revolving lines of credit and three term loans (the “Credit Facilities”).

We may borrow funds under the Credit Facilities or from additional sources to expand our capacity to invest in real estate loans, make improvements to our real estate assets, or for other business purposes. Such borrowings will require us to carefully manage our cost of funds. No assurance can be given that we will be successful in this effort. Should we be unable to repay the indebtedness and make the interest payments on the Credit Facilities or any other loans, the lenders will likely declare us in default and require that we repay all amounts owing under the applicable loan facility. Even if we are repaying the indebtedness in a timely manner, interest payments owing on the borrowed funds may reduce our income and the distributions you receive.

We may borrow funds from several sources in addition to the Credit Facilities, and the terms of any indebtedness we incur may vary. However, some lenders may require as a condition of making a loan to us that the lender will receive a priority on loan repayments received by us. As a result, if we do not collect 100% on our investments, the first dollars may go to our lenders and we may incur a loss which will result in a decrease of the amount available for distribution to you. In addition, we may enter into securitization arrangements in order to raise additional funds. Such arrangements could increase our leverage and adversely affect our cash flow and our ability to make distributions to you.

If the market value of the collateral pledged by us to a funding source declines, our financial condition could deteriorate rapidly.

The loans and real estate assets that we pledge as collateral could have a rapid decrease in market value. If the value of the collateral we pledge were to decline, we may be required by the lending institution we borrow from to provide additional collateral or pay down a portion of the funds advanced. We may not have the funds available to pay down such debt, which could result in defaults. Providing additional collateral, if available, to support these potential credit facilities would reduce our liquidity and limit our ability to leverage our assets. In the event we do not have sufficient liquidity to meet such requirements, lending institutions can accelerate the indebtedness, increase interest rates and terminate our ability to borrow. Furthermore, facility providers may require us to maintain a certain amount of uninvested cash or set aside unlevered assets to maintain a specified liquidity position which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on assets. In the event that we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly.

W e may utilize a significant amount of additional debt to finance our operations, which may compound losses and reduce cash available for distributions to you.

We may further leverage our portfolio through the use of securitizations, additional bank credit facilities, repurchase agreements, and other borrowings. The leverage we may deploy will vary depending on our availability of funds, ability to obtain credit facilities, the loan-to-value and debt service coverage ratios of our assets, the yield on our assets and our financial performance. Substantially all of our assets are pledged as collateral for our borrowings. Our return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that we can derive from our real estate assets.

Our use of leverage may create a mismatch with the duration and index of the investments that we are financing.

We attempt to structure our leverage such that we minimize the difference between the term of our investments and the leverage we use to finance such an investment. In the event that our leverage is for a shorter term then the financed investment, we may not be able to extend or find appropriate replacement leverage, and that would have an adverse impact on our liquidity and our returns. In the event that our leverage is for a longer term than the financed investment, we may not be able to repay such leverage or replace the financed investment with an optimal substitute or at all, which will negatively impact our returns. In addition, we generally originate fixed rate loan investments and partially finance those investments with floating rate liabilities. Our investments in fixed rate assets are generally exposed to changes in value due to interest rate fluctuations; however, the short maturity and low debt to investments of our loan portfolio partially offset that risk.

 
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If interest rates rise, our debt service costs will increase and the value of our loans and properties may decrease.

Our Credit Facilities and certain other borrowings bear interest at variable rates, and we may incur additional debt in the future. Increases in market interest rates would increase our interest expense under these debt obligations and would increase the costs of refinancing existing indebtedness or obtaining new debt. Additionally, increases in market interest rates may result in a decrease in the liquidity and value of our loans, most of which are made at a fixed rate, our real estate holdings and decrease the market price of our Common Stock. Accordingly, these increases could adversely affect our financial position and our ability to make distributions to our stockholders.

The covenants in our Credit Facilities might adversely affect us.

Our Credit Facilities requires us to satisfy certain affirmative and negative covenants and to meet numerous financial tests, and also contain certain default and cross-default provisions. If any future failure to comply with one or more of these covenants resulted in the loss of one or more of these Credit Facilities and/or required the immediate repayment of Advances under the Credit Facilities and we were unable to obtain suitable replacement financing, such loss could have a material, adverse impact on our financial position and results of operations and ability to make distributions to our stockholders.

We may not be able to access the debt or equity capital markets on favorable terms, or at all, which would adversely affect our operating results.

Additional liquidity, future equity or debt financing may not be available on terms that are favorable to us, or at all. Our ability to access additional debt and equity capital depends on various conditions in these markets, which are beyond our control. Our inability to obtain adequate capital could have a material adverse effect on our business, financial condition, liquidity, and operating results.

We may not be able to obtain leverage at the level or at the cost of funds necessary to optimize our return on investment.

Our future return on investment may depend, in part, upon our ability to grow our portfolio of invested assets through the use of leverage at a cost of debt that is lower than the yield earned on our investments. We may obtain leverage through credit agreements and other borrowings. Our future ability to obtain the necessary leverage on beneficial terms ultimately depends upon, among other things, global and regional market conditions and the quality of the portfolio assets that collateralize our indebtedness. Our failure to obtain and/or maintain leverage at desired levels, or to obtain leverage on attractive terms, would have a material adverse effect on our performance. Moreover, we may be dependent upon a few lenders to provide financing under credit agreements for our origination of loans, and there can be no assurance that these agreements will be renewed or extended at expiration.

Prolonged disruptions in the financial markets could affect our ability to obtain financing on reasonable terms and have other adverse effects on us and the market price of our Common Stock.

Commercial real estate is particularly adversely affected by a prolonged economic downturn and liquidity crisis. These circumstances may materially impact liquidity in the financial markets and result in the scarcity of certain types of financing and make certain financing terms less attractive. Our profitability will be adversely affected if we are unable to obtain cost-effective financing for our investments. A prolonged downturn in the stock or credit markets may cause us to seek alternative sources of potentially less attractive financing. In addition, these factors may make it more difficult for our borrowers to repay our loans as they may experience difficulties in selling assets, increased costs of financing or obtaining financing at all. These events in the stock and credit markets may also make it difficult or unlikely for us to raise capital through the issuance of our Common Stock or preferred stock. These disruptions in the financial markets may also have a material adverse effect on the market value of our Common Stock and other adverse effects on us or the economy in general.

 
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Changes in market conditions could adversely affect the market price of our Common Stock.

As with other publicly traded equity securities, the value of our Common Stock depends on various market conditions which may change from time to time. Among the market conditions that may affect the value of our Common Stock are the following:

·  
the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate related companies;

·  
our financial performance; and

·  
general stock and credit market conditions.

Management believes that the market value of our Common Stock is based primarily upon the market’s perception of our growth potential and our current and potential future earnings dividends. Consequently, our Common Stock may trade at prices that are higher or lower than our book value per share of Common Stock. If our future earnings or dividends are less than expected, it is likely that the market price of our Common Stock will diminish.

We expect our real estate loans will not be marketable, and we expect no secondary market to develop.

We do not expect our real estate loans to be marketable, and we do not expect a secondary market to develop for them. As a result, we will generally bear all the risk of our investment until the loans mature. This will limit our ability to hedge our risk in changing real estate markets and may result in reduced returns to our investors.

We may have difficulty protecting our rights as a secured lender.

We believe that our loan documents will enable us to enforce our commercial arrangements with borrowers. However, the rights of borrowers and other secured lenders may limit our practical realization of those benefits. For example:

 
• 
Judicial foreclosure is subject to the delays of protracted litigation. Although we expect non-judicial foreclosure to be quicker, our collateral may deteriorate and decrease in value during any delay in foreclosing on it;
     
 
• 
The borrower’s right of redemption during foreclosure proceedings can deter the sale of our collateral and can for practical purposes require us to manage the property;
     
 
• 
Unforeseen environmental hazards may subject us to unexpected liability and procedural delays in exercising our rights;
     
 
• 
The rights of senior or junior secured parties in the same property can create procedural hurdles for us when we foreclose on collateral;
     
 
• 
We may not be able to pursue deficiency judgments after we foreclose on collateral; and
 
 
• 
State and federal bankruptcy laws can prevent us from pursuing any actions, regardless of the progress in any of these suits or proceedings.

By becoming the owner of property, we may incur additional obligations, which may reduce the amount of funds available for distribution.

We intend to own real property only if we foreclose on a defaulted loan and purchase the property at the foreclosure sale. Acquiring a property at a foreclosure sale may involve significant costs. If we foreclose on a security property, we expect to obtain the services of a real estate broker and pay the broker’s commission in connection with the sale of the property. We may incur substantial legal fees and court costs in acquiring a property through contested foreclosure and/or bankruptcy proceedings. In addition, significant expenditures, including property taxes, maintenance costs, renovation expenses, mortgage payments, insurance costs and related charges, must be made on any property we own, regardless of whether the property is producing any income.
 
 
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Under applicable environmental laws, any owner of real property may be fully liable for the costs involved in cleaning up any contamination by materials hazardous to the environment. Even though we might be entitled to indemnification from the person that caused the contamination, there is no assurance that the responsible person would be able to indemnify us to the full extent of our liability. Furthermore, we would still have court and administrative expenses for which we may not be entitled to indemnification.

A prolonged economic slowdown or severe recession could harm our business.

The risks associated with our business are more acute during periods of economic slowdown or recession because these periods can be accompanied by decreased demand for consumer credit and declining real estate values. Because we are a non-conventional lender willing to invest in riskier loans, rates of delinquencies, foreclosures and losses on our loans could be higher than those generally experienced in the mortgage lending industry during periods of economic slowdown or recession. Any sustained period of increased delinquencies, foreclosures or losses could adversely affect our ability to originate, purchase and securitize loans, which could significantly harm our financial condition, liquidity and results of operations.

Our results are subject to fluctuations in interest rates and other economic conditions and a significant increase in interest rates could harm our business.

      As of December 31, 2014, most of our loans do not have a prepayment penalty or exit fee. Based on our Manager’s historical experience, we expect that at least 90% of our loans will continue to not have a prepayment penalty. Should interest rates decrease, our borrowers may prepay their outstanding loans with us in order to receive a more favorable rate. This may reduce the amount of income we have available to distribute to you.

      Our results of operations will vary with changes in interest rates and with the performance of the relevant real estate markets. If the economy is healthy, we expect that more investors will borrow money to acquire, develop or renovate real property. However, if the economy grows too fast, interest rates may increase too quickly and the cost of borrowing may cause real estate values to decline. Alternatively, if the economy enters a recession, real estate development may slow. A slowdown in real estate activity may reduce the opportunities for real estate lending and we may have fewer loans to make or acquire, thus reducing our revenues and the distributions you receive.

      If, at a time of relatively low interest rates, a borrower should prepay obligations that have a higher interest rate from an earlier period, we will likely not be able to reinvest the funds in loans earning that higher rate of interest. In the absence of a prepayment fee, we will receive neither the anticipated revenue stream at the higher rate nor any compensation for its loss. This is a risk if the loans we invest in do not have prepayment penalties or exit fees.
 
 
Furthermore, if interest rates were to increase significantly, the costs of borrowing may become too expensive, which may negatively impact new loan originations by reducing demand for real estate lending and could adversely affect our financial condition, liquidity and results of operations and adversely affect the market value of our Common Stock.

We face competition for real estate loans that may reduce available returns and fees available.

Our competitors consist primarily of other mortgage REIT’s, conventional real estate lenders and real estate loan investors, including commercial banks, insurance companies, mortgage brokers, pension funds and other institutional lenders. Many of the companies against which we and OFG compete have substantially greater financial, technical and other resources than us or OFG. If our competition decreases interest rates on their loans or makes funds more easily accessible, we may be required to reduce our interest rates, which would reduce our revenues and the distributions you receive.

Our Manager serves pursuant to a long-term Management Agreement that may be difficult to terminate and may not reflect arm’s-length negotiations.

We entered into a long-term Management Agreement with OFG.  The Management Agreement was negotiated by related parties and may not reflect terms as favorable as those subject to arm’s-length bargaining. The Management Agreement will continue in force for the duration of the existence of Owens Realty Mortgage, Inc., unless terminated earlier pursuant to the terms of the Management Agreement. The Management Agreement may be terminated prior to the termination of our existence: (a) upon the affirmative vote of the holders of a majority of the outstanding shares of Common Stock; (b) by OFG pursuant to certain procedures set forth in the Management Agreement relating to
 
 
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changes in compensation; (c) automatically in the event of an assignment of the Management Agreement by OFG (with certain exceptions), unless consented to by the Company with the approval of the Board of Directors and holders of a majority of the outstanding shares of Common Stock entitled to vote on the matter; (d) by us upon certain conditions set forth in the Management Agreement, including a breach thereof by OFG; or (e) by OFG upon certain conditions set forth in the Management Agreement, including a breach thereof by the Company. Consequently, it may be difficult to terminate our Management Agreement and replace OFG in the event that its performance does not meet our expectations or for other reasons, unless the conditions for termination of the Management Agreement are satisfied.

Our Manager will face conflicts of interest concerning the allocation of its personnel’s time.

Our Manager and William C. Owens, who owns 64.3889% of the outstanding shares of stock of OFG as of December 31, 2014, although unlikely, may also sponsor other real estate programs having investment objectives and policies similar to ours. As a result, OFG and William C. Owens may have conflicts of interest in allocating their time and resources between our business and other activities. During times of intense activity in other programs and ventures, OFG and its key people may devote less time and resources to our business than they ordinarily would. Our Management Agreement with OFG does not specify a minimum amount of time and attention that OFG and its key people are required to devote to the Company. Thus, OFG may not spend sufficient time managing our operations, which could result in our not meeting our investment objectives.   Currently, OFG does not sponsor other real estate programs or any other programs that have an objective and policies similar to those of the Company.

Our Manager will face conflicts of interest arising from our fee structure.

OFG will receive fees from borrowers that would otherwise increase our returns. Because OFG receives all of these fees, our interests will diverge from those of OFG and William C. Owens when OFG decides whether we should charge the borrower higher interest rates or OFG should receive higher fees from borrowers.

OFG earned a total of approximately $1,884,000, $1,816,000 and $1,926,000 for the fiscal years ended December 31, 2014, 2013 and 2012, respectively, for managing the Company. In addition, OFG earned a total of approximately $1,245,000, $664,000 and $61,000 in fees from borrowers for the fiscal years ended December 31, 2014, 2013 and 2012, respectively. The total amount earned by OFG that is paid by borrowers represents fees on loans originated or extended for the Company (including loans fees, late payment charges and miscellaneous fees).

With respect to properties we acquire through foreclosure, we may be unable to renew leases or re-lease space as leases expire on favorable terms or at all, which could have a material adverse effect on our financial condition, results of operations, cash flow, cash available for distribution to you, per share trading price of our Common Stock and our ability to satisfy our debt service obligations.

Because we compete with a number of real estate operators in connection with the leasing of our properties, the possibility exists that one or more of our tenants will extend or renew its lease with us when the lease term expires on terms that are less favorable to us than the terms of the then-expiring lease, or that such tenant or tenants will not renew at all. Because we depend, in large part, on rental payments from our tenants, if one or more tenants renews its lease on terms less favorable to us or does not renew its lease, or if we do not re-lease a significant portion of the space made available, our financial condition, results of operations, cash flow, cash available for distribution, per-share trading price of our Common Stock and ability to satisfy our debt service obligations could be materially adversely affected.

If any of our foreclosed properties incurs a vacancy, it could be difficult to sell or re-lease.

One or more of our properties may incur a vacancy by either the continued default of a tenant under its lease or the expiration of one of our leases. Certain of our properties may be specifically suited to the particular needs of a tenant ( e.g. , a retail bank branch or distribution warehouse), and major renovations and expenditures may be required in order for us to re-lease vacant space for other uses. We may have difficulty obtaining a new tenant for any vacant space we have in our properties. If the vacancy continues for a long period of time, we may suffer reduced revenues, resulting in less cash available to be distributed to you. In addition, the resale value of a property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.

 
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Our properties may be subject to impairment charges.

We periodically evaluate our real estate investments for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions, tenant performance and legal structure. For example, the early termination of, or default under, a lease by a tenant may lead to an impairment charge. If we determine that an impairment has occurred, we would be required to make an adjustment to the net carrying value of the property, which could have a material adverse effect on our results of operations in the period in which the impairment charge is recorded.

Operating expenses of our properties acquired through foreclosure will reduce our cash flow and funds available for future distributions.

For certain of our properties acquired through foreclosure, we are responsible for operating costs of the property. In some of these instances, our leases require the tenant to reimburse us for all or a portion of these costs, in the form of either an expense reimbursement or increased rent. Our reimbursement may be limited to a fixed amount or a specified percentage annually. To the extent operating costs exceed our reimbursement, our returns and net cash flows from the property and hence our overall operating results and cash flows could be materially adversely affected.

We would face potential adverse effects from tenant defaults, bankruptcies or insolvencies.

The bankruptcy of our tenants may adversely affect the income generated by our properties. If our tenant files for bankruptcy, we generally cannot evict the tenant solely because of such bankruptcy. In addition, a bankruptcy court could authorize a bankrupt tenant to reject and terminate its lease with us. In such a case, our claim against the tenant for unpaid and future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and it is unlikely that a bankrupt tenant would pay in full amounts it owes us under the lease. Any shortfall resulting from the bankruptcy of one or more of our tenants could adversely affect our cash flow and results of operations.

We face intense competition, which may decrease or prevent increases in the occupancy and rental rates of our properties.

We compete with numerous developers, owners and operators of retail, industrial and office real estate, many of which own properties similar to ours in the same markets in which our properties are located. If one of our properties becomes vacant and our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer substantial rent abatements. As a result, our financial condition, results of operations, cash flow, per share trading price of our Common Stock and ability to satisfy our debt service obligations and to make distributions to you may be adversely affected.

We may be required to make significant capital expenditures to improve our foreclosed properties in order to retain and attract tenants, causing a decline in operating revenue and reducing cash available for debt service and distributions to you.

If adverse economic conditions continue in the real estate market, we expect that, upon expiration of leases at our properties, we will be required to make rent or other concessions to tenants, and/or accommodate requests for renovations, build-to-suit remodeling and other improvements. As a result, we may have to make significant capital or other expenditures in order to retain tenants whose leases expire and to attract new tenants. Additionally, we may need to raise capital to make such expenditures. If we are unable to do so or capital is otherwise unavailable, we may be unable to make the required expenditures. This could result in non-renewals by tenants upon expiration of their leases, which would result in declines in revenue from operations and reduce cash available for debt service and distributions to you.

United States Federal Income Tax Risks Relating to Our REIT Qualification

Our failure to qualify as a REIT would subject us to U.S. federal income tax, which would reduce amounts available for distribution to our stockholders.

We are taxed as a REIT under the Code. Our qualification as a REIT requires us to satisfy numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within our control. We intend that our organization and method of operation will qualify us as a REIT, but we may not be able to remain so qualified in the future. Future legislation, new regulations, administrative interpretations or court decisions could adversely affect our ability to qualify as a REIT or adversely affect our stockholders.

 
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We intend to hold certain property foreclosed upon by OMIF prior to the REIT conversion through one or more wholly-owned corporate taxable REIT subsidiaries.  Under the Code, no more than 25% of the value of the assets of a REIT may be represented by securities of one or more taxable REIT subsidiaries, and a taxable REIT subsidiary generally cannot operate a lodging or health care facility. These limitations may limit our ability to hold properties through taxable REIT subsidiaries. In the event that we determine that the foreclosed properties are held for investment and, therefore, are not subject to the 100% tax on prohibited transactions, there is no guarantee that the IRS will agree with our determination.  Finally, in the event that any of our foreclosed properties constitute lodging or health care facilities that cannot be operated by a taxable REIT subsidiary, such properties will be operated by an “eligible independent contractor,” as defined in Section 856(d)(9)(A) of the Code.

If we fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax (including any applicable alternative minimum tax) on our taxable income at corporate rates, and we would not be allowed to deduct distributions made to our stockholders in computing our taxable income. We may also be disqualified from treatment as a REIT for the four taxable years following the year in which we failed to qualify. The additional tax liability would reduce our net earnings available for investment or distribution to stockholders. In addition, we would no longer be required to make distributions to our stockholders. Even if we continue to qualify as a REIT, we will continue to be subject to certain U.S. federal, state and local taxes on our income and property.

We cannot assure you that we will have access to funds to meet our distribution and tax obligations.

In order to qualify as a REIT, we will be required each year to distribute to our stockholders at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding any net capital gain). Furthermore, we will be subject to corporate-level U.S. federal income taxation on our undistributed income and gain. We intend to make distributions to our stockholders of substantially all of our income and gain so as to comply with the 90% distribution requirement and limit corporate-level U.S. federal income taxation of the Company. Although we generally do not intend to make distributions in excess of our REIT taxable income and any net capital gain, we may do so from time to time. A distribution of REIT taxable income or net capital gain generally will be a taxable distribution to you and not represent a return of capital for U.S. federal income tax purposes. If we make distributions in excess of our REIT taxable income and any net capital gain, the excess portion of these distributions generally would represent a non-taxable return of capital for such purposes up to your tax basis in your Common Stock and then generally capital gain. The portion of any distribution treated as a return of capital for U.S. federal income tax purposes would reduce your tax basis in your Common Stock by a corresponding amount. Differences in timing between taxable income and cash available for distribution could require us to borrow funds or raise capital by selling assets to enable us to meet these distribution requirements. We also could be required to pay taxes and liabilities in the event we were to fail to qualify as a REIT. Our inability to retain earnings (resulting from these distribution requirements) generally may require us to refinance debt that matures with additional debt or equity. There can be no assurance that any of these sources of funds, if available at all, would be available to meet our distribution and tax obligations.

Changes in the tax laws could make investments in REITs less attractive and could reduce the tax benefits of our REIT conversion.

The U.S. federal income tax laws governing REITs and the administrative interpretations of those laws may be amended or changed at any time. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or you as a stockholder.

Taxable REIT subsidiaries are subject to corporate-level tax, which may devalue our Common Stock relative to other companies.

Taxable REIT subsidiaries are corporations subject to corporate-level tax. Our use of taxable REIT subsidiaries may cause the market to value our Common Stock lower than the stock of other publicly traded REITs which may not use taxable REIT subsidiaries and lower than the equity of mortgage pools taxable as non-publicly traded partnerships, which generally are not subject to any U.S. federal income taxation on their income and gain.

 
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Distributions from a REIT are currently taxed at a higher rate than corporate distributions.

The maximum U.S. federal income tax rate on both distributions from certain domestic and foreign corporations and net capital gain for individuals is 20%. However, this rate of tax on distributions generally will not apply to our distributions (except those distributions identified by the Company as “capital gain dividends” which are taxable as long-term capital gain), and therefore such distributions generally will be taxed as ordinary income. Ordinary income generally is subject to U.S. federal income tax at a maximum rate of 39.6% for individuals. The higher tax rate on the Company’s distributions may cause the market to devalue our Common Stock relative to stock of those corporations whose distributions qualify for the lower rate of taxation.

A portion of our business is potentially subject to prohibited transactions tax.

As a REIT, we are subject to a 100% tax on our net income from any “prohibited transactions.” In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including loans, held as inventory or primarily for sale to customers in the ordinary course of business. Sales by us of property in the ordinary course of our business will generally constitute prohibited transactions. The Company might be subject to this tax if it was to sell a property or loan in a manner that was treated as a sale of inventory for U.S. federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of properties or loans, other than through a taxable REIT subsidiary, and will attempt to comply with the terms of safe-harbor provisions in the U.S. federal income tax laws prescribing when a sale of real property or a loan will not be characterized as a prohibited transaction, even though the sales might otherwise be beneficial to us. We cannot assure you however, that we can comply with the safe-harbor provisions or that we will not be subject to the prohibited transactions tax on some earned income.

Our use of taxable REIT subsidiaries may have adverse U.S. federal income tax consequences.

We must comply with various tests to qualify and continue to qualify as a REIT for U.S. federal income tax purposes, and our income from and investments in taxable REIT subsidiaries do not constitute permissible income and investments for purposes of some of the REIT qualification tests. While we will attempt to ensure that our dealings with our taxable REIT subsidiaries will not adversely affect our REIT qualification, we cannot assure you that we will successfully achieve that result. Furthermore, we may be subject to a 100% penalty tax, or our taxable REIT subsidiaries may be denied deductions, to the extent our dealings with our taxable REIT subsidiaries are not deemed to be arm’s length in nature.

We may endanger our REIT status if the distributions we receive from our taxable REIT subsidiaries exceed applicable REIT gross income tests.

The annual gross income tests that must be satisfied to ensure REIT qualification may limit the amount of dividends that we can receive from our taxable REIT subsidiaries and still maintain our REIT status. Generally, not more than 25% of our gross income may be derived from non-real estate related sources, such as dividends from a taxable REIT subsidiary. If, for any taxable year, the dividends we receive from our taxable REIT subsidiaries, when added to our other items of non-real estate related income, represent more than 25% of our total gross income for the year, we could be denied REIT status, unless we were able to demonstrate, among other things, that our failure of the gross income test was due to reasonable cause and not willful neglect.

Risks of Ownership of Our Common Stock

The public market for our Common Stock may be limited.

There may be limited interest in investing in our Common Stock and, while we are listed on the NYSE MKT and our shares have been trading for a short period, we cannot assure you that an established or liquid trading market for the Common Stock will develop or that it will continue if it does develop. In the absence of a liquid public market with adequate investor demand, you may be unable to liquidate your investment in our Common Stock.

Sales of our Common Stock could have an adverse effect on our stock price.

Sales of a substantial number of shares of our Common Stock could adversely affect the market price for our Common Stock. Subject to the restrictions on ownership and transfer in our charter, all of the shares of Common Stock issued in the Merger, other than any shares issued to an “affiliate” under the Securities Act, are freely tradable without restriction or further registration under the Securities Act. In addition, none of our shares outstanding at the date of the Merger were subject to lock-up agreements. We cannot predict the effect that future sales of our Common Stock will have on the market price of our Common Stock.

 
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The market price and trading volume of our Common Stock may be volatile.

The market price of our Common Stock may be highly volatile and be subject to wide fluctuations. In addition, the trading volume in our Common Stock may fluctuate and cause significant price variations to occur. Given the level of redemption requests by limited partners prior to the Merger, there could be some continuing downward pressure on the market price of our Common Stock after the Merger as stockholders liquidate their investment in the Company. Additionally, the Company will be dissolved on December 31, 2034, unless our charter is amended. As we move closer to the dissolution date, we expect to stop making new loans, and we expect that our stock price will approach our book value per share though there can be no assurances that this will occur.

We cannot assure you that the market price of our Common Stock will not fluctuate or decline significantly in the future. Some of the factors, many of which are beyond our control, that could negatively affect our stock price or result in fluctuations in the price or trading volume of our Common Stock include:

 
• 
additional increases in loans defaulting or becoming non-performing or being written off;
 
 
• 
actual or anticipated variations in our operating results or our distributions to stockholders;
 
 
•
sales of significant real estate properties;
 
 
• 
publication of research reports about us or the real estate industry, or changes in recommendations or in estimated financial results by securities analysts who provide research to the marketplace on us, our competitors or our industry;
 
 
• 
changes in market valuations of similar companies;
 
 
• 
changes in tax laws affecting REITs;
 
 
• 
adverse market reaction to any increased indebtedness we incur; and
 
 
• 
general market and economic conditions, including, among other things, actual and projected interest rates and the market for the types of assets that we hold or invest in.
 
Market interest rates could have an adverse effect on our stock price.

One of the factors that will influence the price of our Common Stock will be the distribution return on our Common Stock (as a percentage of the price of our Common Stock) relative to market interest rates. Thus, an increase in market interest rates may lead prospective purchasers of our Common Stock to expect a higher distribution yield, which would adversely affect the market price of our Common Stock.

We may continue to incur increased costs as a result of being a listed company.

Our Common Stock is listed on the NYSE MKT. As a listed company, we have incurred additional legal, accounting and other expenses that we did not incur as a non-listed company. We have also incurred costs associated with corporate governance requirements, as well as new accounting pronouncements and new rules implemented by the SEC, NYSE MKT, or any other applicable national securities exchange . Any expenses required to comply with evolving standards may result in increased general and administrative expenses and a diversion of management time and attention from our business. In addition, these laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially greater costs to obtain the same or similar coverage. We are currently evaluating and monitoring developments with respect to these laws and regulations and cannot predict or estimate the amount or timing of additional costs we may incur in responding to their requirements.

 
25
 
Risks Related to Our Organization and Structure

Our charter restricts the ownership and transfer of our outstanding stock, which may have the effect of delaying, deferring or preventing a transaction or change of control of the Company

In order for us to qualify as a REIT, no more than 50% of the value of outstanding shares of our stock may be owned, beneficially or constructively, by five or fewer individuals at any time during the last half of each taxable year other than the year for which we elect to be taxed as a REIT.  Subject to certain exceptions, our charter prohibits any stockholder from owning actually or constructively more than 9.8%, in value or in number of shares, whichever is more restrictive, of the outstanding shares of our Common Stock, and 9.8% in value of the outstanding shares of all classes or series of our stock.  The constructive ownership rules under the Code are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity.  As a result, the acquisition of less than 9.8% of our outstanding Common Stock or the outstanding shares of all classes or series of our stock by an individual or entity could cause that individual or entity to own constructively in excess of the relevant ownership limits.  Our charter also prohibits any person from owning shares of our stock that would result in our being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT.  Any attempt to own or transfer shares of our Common Stock in violation of these restrictions may result in the shares being automatically transferred to a charitable trust or may be void.

Certain provisions of Maryland law may limit the ability of a third party to acquire control of the Company

The charter and bylaws of the Company and Maryland corporate law contain provisions that could delay, defer or prevent a transaction or a change in control of us that might involve a premium price for holders of our Common Stock or otherwise be in their best interests.

Subject to certain limitations, provisions of the MGCL prohibit certain business combinations between the Company and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of us who beneficially owned 10% or more of the voting power of our then outstanding stock at any time during the two-year period immediately prior to the date in question) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder became an interested stockholder.  After the five-year period, business combinations between us and an interested stockholder or an affiliate of an interested stockholder must generally either provide a minimum price (as defined in the MGCL) to our stockholders in cash or other consideration in the same form as previously paid by the interested stockholder or be recommended by our Board of Directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of our outstanding shares of voting stock and at least two-thirds of the votes entitled to be cast by stockholders other than the interested stockholder and its affiliates and associates.  These provisions of the MGCL relating to business combinations do not apply, however, to business combinations that are approved or exempted by our Board of Directors prior to the time that the interested stockholder becomes an interested stockholder.  As permitted by the MGCL, our Board of Directors has adopted a resolution exempting any business combination between us and any other person, provided that the business combination is approved by our Board of Directors (including a majority of directors who are not affiliates or associates of such persons), and between us and OFG and its affiliates and associates.  However, our Board of Directors may repeal or modify this resolution at any time in the future, in which case the applicable provisions of this statute will become applicable to business combinations between us and interested stockholders.

The “control share” provisions of the MGCL provide that a holder of “control shares” of a Maryland corporation (defined as shares which, when aggregated with other shares controlled by the stockholder (except solely by virtue of a revocable proxy), entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) has no voting rights with respect to such shares except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquiror of control shares, our officers and our employees who are also our directors.  Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock.  There can be no assurance that this provision will not be amended or eliminated at any time in the future.

The Company has elected to implement a classified Board of Directors, require a two-thirds vote to remove a director and to implement other provisions of Title 3, Subtitle 8 of the MGCL that may have the effect of delaying, deferring or preventing a transaction or a change of control of the Company.
 
 
26
 
On November 12, 2013, our Board of Directors elected to be subject to all of the provisions of Sections 3-803, 3-804 and 3-805 of Title 3, Subtitle 8 of the MGCL (“Subtitle 8”). As a result of this election, without stockholder approval and regardless of any provision in our charter or bylaws, our Board caused the following provisions of Subtitle 8 relating to our Board and the calling of stockholder meetings to be implemented, and these provisions may have the effect of delaying, deferring or preventing a transaction or a change of control of the Company that might be in our stockholders’ best interests:

·  
Board Classification.  As a result of the election under Subtitle 8, the Board is classified into three separate classes of directors. At each annual meeting of the stockholders of the Company, the successors to the class of directors whose term expires at that meeting will be elected to hold office for a term continuing until the annual meeting of stockholders held in the third year following the year of their election and until their successors are elected and qualified.

·  
Removal of Directors.  As a result of the election to be subject to Section 3-804 of the MGCL, the removal of directors will require the affirmative vote of at least two-thirds of all of the votes entitled to be cast by the stockholders generally in the election of directors.

·  
Board Size.  The election to be subject to Section 3-804 of the MGCL also provides that the Board has the exclusive right to set the number of directors on the Board.  This election did not result in substantive change to the requirements already provided in the Company’s charter and bylaws.

·  
Vacancies on the Board.  As a result of the election to be subject to Section 3-804 of the MGCL, the Board has the exclusive right, by the affirmative vote of a majority of the remaining directors, even if the remaining directors do not constitute a quorum, to fill vacancies on the Board, and any director elected by the Board to fill a vacancy will hold office for the remainder of the full term of the class of directors in which the vacancy occurred and until his or her successor is elected and qualified.

·  
Special Meetings Called at the Request of Stockholders.  As a result of the election to be subject to Section 3-805 of the MGCL, special meetings of stockholders called at the request of stockholders may now be called by the Secretary of the Company only on the written request of the stockholders entitled to cast at least a majority of all the votes entitled to be cast at the meeting.

Our Board of Directors has the power to cause us to issue additional shares of our stock without stockholder approval.

Our charter authorizes us to issue additional authorized but unissued shares of common or preferred stock.  In addition, our Board of Directors may, without stockholder approval, amend our charter to increase the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares.  As a result, our Board of Directors may establish a series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our shares of Common Stock or otherwise be in the best interests of our stockholders.

Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interests.

Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. As permitted by the MGCL, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

 
• 
actual receipt of an improper benefit or profit in money, property or services; or
 
 
• 
a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.
 
 
27
 
Our charter authorizes us to obligate ourselves to indemnify our present and former directors and officers for actions taken by them in those and other capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify, to the maximum extent permitted by Maryland law, each present or former director or officer who is made, or threatened to be made, a party to any proceeding because of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers.

Item 1B. UNRESOLVED STAFF COMMENTS

None

Item 2. PROPERTIES

The Manager operates from its executive offices at 2221 Olympic Boulevard, Walnut Creek, CA 94595 (the “Executive Office”). The lessor is Olympic Blvd. Partners, a California Limited Partnership (“OBP”), of which the Manager is a 50% general partner. The Executive Office is the sole asset of OBP. The Executive Office is subject to a loan with a principal balance of $700,697 as of December 31, 2014 with monthly payments of interest and principal of $4,566 and a balloon payment of $617,013 due on February 28, 2018. The loan is subject to a prepayment penalty equal to 1% of any unscheduled principal payments made in the twelve month period prior to January 31, 2016. The Company does not have separate offices.

As of December 31, 2014, we hold title to thirty-one real estate properties that were acquired through foreclosure including properties held within twelve majority- or wholly-owned limited liability companies and one within a wholly-owned corporation (see below). As of December 31, 2014, the total carrying amount of these properties was $163,017,000. Twenty-four of the properties are being held for long-term investment and the remaining seven properties are currently being marketed for sale. We also have a 50% ownership interest in a limited liability company accounted for under the equity method that owns property located in Santa Clara, California with a carrying amount of $2,143,000 as of December 31, 2014.

·  
The Company’s (or related entities) title to all properties is held as fee simple.
 
·  
There are mortgages or encumbrances to third parties on three of our real estate properties (see below for 720 University, LLC, Tahoe Stateline Venture, LLC and TOTB Miami, LLC).
 
·  
Of the thirty-one properties held, seventeen of the properties are income-producing. Only minor renovations and repairs to the properties are currently being made or planned (other than continued tenant improvements on real estate held for investment, development of the land held within Tahoe Stateline Venture, LLC, development of the North Building within TOTB North, LLC and improvements to the property and bridge accessing the marina within Brannan Island, LLC).
 
·  
The Manager believes that all properties owned by the Company are adequately covered by customary casualty insurance.

Real estate acquired through foreclosure may be held for a number of years before ultimate disposition primarily because we have 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, we may earn less income on these properties than could be earned on loans and may have negative cash flow on these properties.

Some of the properties we acquire, primarily through foreclosure proceedings, may face competition from newer, more updated properties. In order to remain competitive and increase occupancy at these properties and/or make them attractive to potential purchasers, we may have to make significant capital improvements and/or incur costs associated with correcting deferred maintenance with respect to these properties. The cost of these improvements and deferred maintenance items may impair our financial performance and liquidity.  Additionally, we compete with any entity seeking to acquire or dispose of similar properties, including REITs, banks, pension funds, hedge funds, real estate developers and private real estate investors. Competition is primarily dependent on price, location, physical condition of the property, financial condition and operating results of current and prospective tenants, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and trends in the national and local economies .

For purposes of assessing potential impairment of value during 2014 and 2013, we obtained updated appraisals or other valuation support on certain of our real estate properties held for sale and investment, which resulted in additional impairment losses on one and two properties, respectively, in the aggregate amount of approximately $179,000 and $666,000, respectively, recorded in the consolidated statements of operations.
 
 
28
 
Real estate properties held for sale as of December 31, 2014 and 2013 consisted of the following properties acquired through foreclosure:
   
2014
 
2013
Retail complex, Greeley, Colorado (held within 720 University, LLC) – transferred from held for investment in 2014
 
$
11,547,472
 
$
—
Undeveloped, industrial land, San Jose, California – transferred to held for investment in 2014
   
—
   
1,958,400
Undeveloped, commercial land, Half Moon Bay, California – sold in 2014
   
—
   
1,468,800
Medical office condominium complex, Gilbert, Arizona (held within AMFU, LLC) – transferred from held for investment in 2014
   
4,716,159
   
—
Commercial buildings, Sacramento, California – transferred from held for investment in 2014
   
3,890,968
   
—
Unimproved, residential and commercial land, Gypsum, Colorado – transferred from held for investment in 2014
   
5,813,434
   
—
Commercial and residential land under development, South Lake Tahoe, California (held within Tahoe Stateline Venture, LLC) – transferred from held for investment in 2014
   
30,449,896
   
—
Marina with 30 boat slips and 11 RV spaces, Oakley, California (held within The Last Resort and Marina, LLC) – transferred to held for investment in 2014
   
—
   
408,000
Golf course, Auburn, California (held within Lone Star Golf, Inc.)
   
2,020,410
   
1,961,284
1/7 th interest in single family home, Lincoln City, Oregon – transferred to held for investment in 2014
   
—
   
93,647
Retail buildings, San Jose, California – obtained via foreclosure in 2014
   
1,056,000
   
—
   
$
59,494,339
 
$
5,890,131


 
29
 
 
Real estate held for investment, net of accumulated depreciation, is comprised of the following properties as of December 31, 2014 and 2013:

   
2014
 
2013
 
Light industrial building, Paso Robles, California
 
$
1,459,063
 
$
1,489,120
 
Commercial buildings, Roseville, California
   
731,905
   
767,077
 
Retail complex, Greeley, Colorado (held within 720 University, LLC) – transferred to held for sale in 2014
   
—
   
11,697,485
 
Undeveloped, residential land, Madera County, California
   
726,580
   
726,580
 
Undeveloped, residential land, Marysville, California
   
403,200
   
403,200
 
Undeveloped land, Auburn, California (formerly part of golf course owned by DarkHorse Golf Club, LLC)
   
103,198
   
103,198
 
75 improved, residential lots, Auburn, California (held within Baldwin Ranch Subdivision, LLC)
   
3,878,544
   
3,878,544
 
Undeveloped, industrial land, San Jose, California – transferred from held for sale in 2014
   
1,958,400
   
—
 
Storage facility/business, Stockton, California
   
3,847,884
   
3,943,780
 
One and two improved residential lots, West Sacramento, California – one lot sold in 2014
   
58,560
   
117,120
 
Undeveloped, residential land, Coolidge, Arizona
   
1,017,600
   
1,017,600
 
Marina with 30 boat slips and 11 RV spaces, Oakley, California (held within The Last Resort and Marina, LLC) – transferred from held for sale in 2014
   
236,500
   
—
 
Office condominium complex (15 units), Roseville, California
   
3,684,203
   
3,810,020
 
Industrial building, Sunnyvale, California (held within Wolfe Central, LLC)
   
3,027,734
   
3,116,791
 
133 condominium units, Phoenix, Arizona (held within 54 th Street Condos, LLC)
   
6,933,229
   
7,097,056
 
Medical office condominium complex, Gilbert, Arizona (held within AMFU, LLC) – transferred to held for sale in 2014
   
—
   
4,771,234
 
61 condominium units, Lakewood, Washington (held within Phillips Road, LLC)
   
4,364,743
   
4,509,828
 
Commercial buildings, Sacramento, California – transferred to held for sale in 2014
   
—
   
3,890,968
 
169 condominium units and 160 unit unoccupied apartment building under renovation, Miami, Florida (held within TOTB Miami, LLC)
   
34,353,958
   
33,017,315
 
1/7 th interest in single family home, Lincoln City, Oregon – transferred from held for sale in 2014
   
93,647
   
—
 
12 condominium and 3 commercial units, Tacoma, Washington (held within Broadway & Commerce, LLC)
   
2,408,681
   
2,413,170
 
6 improved residential lots, Coeur D’Alene, Idaho
   
316,800
   
316,800
 
Unimproved, residential and commercial land, Gypsum, Colorado – transferred to held for sale in 2014
   
—
   
5,814,418
 
Retail Complex, South Lake Tahoe, California (held within Tahoe Stateline Venture, LLC) (1)
   
23,211,896
   
34,495,674
 
Marina and yacht club with 179 boat slips, Isleton, California (held within Brannan Island, LLC)
   
2,220,448
   
2,028,855
 
Unimproved, residential and commercial land, Bethel Island, California (held within Sandmound Marina, LLC)
   
2,334,773
   
—
 
Marina with 52 boat slips and campground, Bethel Island, California (held within Sandmound Marina, LLC)
   
1,145,919
   
—
 
Assisted living facility, Bensalem, Pennsylvania – obtained via foreclosure in 2014
   
5,005,000
   
—
 
   
$
103,522,466
 
$
129,425,833
 
(1) As of December 31, 2013 balance includes all TSV land under development.
             


 
30
 

We presently have no plans to significantly improve any of our unimproved or undeveloped properties (land), other than the property held within Tahoe Stateline Venture, LLC (“TSV”).  During 2015, we also plan to improve the bridge accessing the marina held within Brannan Island, LLC and plan to renovate the units within the North Building held within TOTB North, LLC (“TOTB North”), which is wholly owned by TOTB Miami, LLC (“TOTB”).

The only real estate properties with book values in excess of 10% of our total assets or with gross revenue in excess of 10% of our total revenue are the properties located in Miami, Florida (held within TOTB), the property located in Greeley, Colorado (held within 720 University, LLC or “720 University”) and the properties located in South Lake Tahoe, California (held within TSV). TOTB is a residential condominium complex and none of the individual leases are for greater than 10% of the rentable square footage of the buildings. The TSV commercial and residential second phase property is currently under development and has no operating activity as of December 31, 2014.

Other operating data related to TOTB is as follows:
   
2014
 
2013
 
2012
Average Annual Rental per Square Foot (1)
$
$18.07
 
$
17.16
 
$
16.42
Federal Tax Basis of Depreciable Assets (all
Residential Buildings and Improvements) (2)
$
14,856,727
 
$
14,856,727
 
$
16,235,274
 
Depreciation Rate
 
                3.64%
   
                3.64%
   
3.64%
Depreciation Method
 
MACRS
Straight Line
   
MACRS
Straight Line
   
MACRS
Straight Line
Depreciable Life
 
27.5 Years
   
  27.5 Years
   
27.5 Years
Realty Tax Rate (3)
$
              23.057
 
$
                 23.197
 
$
22.598
Annual Realty Taxes (4)
$
         694,310
 
$
            607,319
 
$
539,468
       
     
(1) 2013 and 2012 adjusted to reflect changes in total square footage in 2014 from 167,963 to 180,792 (not including the North Building under renovation).
(2) Does not include the North building which is currently under renovation.
(3) Millage rate per $1,000 of Taxable Value.
(4) Including property taxes of the North Building under renovation.

The following table shows information regarding rental rates and lease expirations over the next two years for TOTB and assumes that none of the tenants exercise renewal options or termination rights, if any, at or prior to scheduled expirations:

Year of
Lease
Expiration
December 31,
 
Number of
Leases
Expiring
Within the
Year
 
Rentable
Square
Footage
Subject to
Expiring
Leases
 
Final
Annualized
Base Rent
Under
Expiring
Leases (1)
 
Percentage of Gross Annual Rental Represented by Such Leases
 
2015
 
151
 
160,900
$
3,193,236
 
94.6%
 
2016
 
1
 
925
 
17,100
 
0.5%
 
   
152
 
161,825
$
3,210,336
 
95.1%
 
 
(1)
“Final Annualized Base Rent” for each lease scheduled to expire represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to expiration multiplied by 12. Tenant reimbursements generally include payment of a portion of real estate taxes, operating expenses and common area maintenance and utility charges.


 
31
 
 
Other operating data related to 720 University is as follows:

   
2014
 
2013
 
2012
Average Annual Rental per Square Foot (1)
$
6.09
 
$
5.99
 
$
6.03
Federal Tax Basis of Depreciable Assets (all
Commercial Buildings and Improvements)
$
8,343,954
 
$
8,209,827
 
$
11,185,203
 
Depreciation Rate
 
Various
   
Various
   
 Various
Depreciation Method
 
MACRS
Straight Line
   
MACRS
Straight Line
   
MACRS
Straight Line
Depreciable Life
 
5-39 Years
   
5-39 Years
   
5-39 Years
Realty Tax Rate (2)
$
               75.554
 
$
               76.819
 
$
76.769
Annual Realty Taxes
$
            261,256
 
$
            265,630
 
$
261,441
     
(1) Includes only base and percentage rents for years presented.
     
(2) Millage rate per $1,000 of Taxable Value.

The following table shows information regarding rental rates and lease expirations over the next ten years and thereafter for 720 University and assumes that none of the tenants exercise renewal options or termination rights, if any, at or prior to scheduled expirations:
Year of
Lease
Expiration
December 31,
 
Number of
Leases
Expiring
Within the
Year
 
Rentable
Square
Footage
Subject to
Expiring
Leases
 
Final
Annualized
Base Rent
Under
Expiring
Leases (1)
 
Percentage of Gross Annual Rental Represented by Such Leases
 
2015
 
3
 
31,895
$
208,985
 
14.0%
 
2016
 
4
 
14,239
 
100,303
 
6.7%
 
2017
 
9
 
30,196
 
294,994
 
19.7%
 
2018
 
3
 
7,320
 
101,976
 
6.8%
 
2019
 
4
 
7,470
 
135,843
 
9.1%
 
2020
 
3
 
38,945
 
214,628
 
14.3%
 
2022
 
1
 
2,880
 
20,844
 
1.4%
 
2024
 
1
 
17,376
 
156,384
 
10.5%
 
Thereafter (to 2026)
 
1
 
46,966
 
178,200
 
11.9%
 
   
29
 
197,287
$
1,412,157
 
94.4%
 
     
 
(1)
“Final Annualized Base Rent” for each lease scheduled to expire represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to expiration multiplied by 12. Tenant reimbursements generally include payment of a portion of real estate taxes, operating expenses and common area maintenance and utility charges.

Other operating data related to the TSV retail complex completed in 2014 is as follows (below does not include the second phase retail and residential project under development):

   
2014
 
 
2013 (1)
 
2012 (1)
Average Annual Rental per Square Foot (1)
$
41.61
 
$
N/A
 
$
N/A
Federal Tax Basis of Depreciable Assets (all Commercial Buildings and Improvements)
$
16,946,786
 
$
N/A
 
$
N/A
Depreciation Rate
 
Various
   
                   N/A
   
N/A
Depreciation Method
 
MACRS
Straight Line
   
N/A
   
N/A
Depreciable Life
 
5-39 Years
   
N/A
   
N/A
Realty Tax Rate (2)
$
               1.0667
 
$
               N/A
 
$
N/A
Annual Realty Taxes
$
129,459
 
$
            N/A
 
$
N/A
     
(1) Property was acquired via purchases and foreclosures in 2012 and 2013 and development of the retail phase was completed in the 4 th quarter of 2014. Thus, this data is not applicable in 2012 and 2013.
     
(2) Millage rate per Taxable Value.
 
 
 
32
 
The following table shows information regarding rental rates and lease expirations over the next ten years for TSV and assumes that none of the tenants exercise renewal options or termination rights, if any, at or prior to scheduled expirations:
Year of
Lease
Expiration
December 31,
 
Number of
Leases
Expiring
Within the
Year
 
Rentable
Square
Footage
Subject to
Expiring
Leases
 
Final
Annualized
Base Rent
Under
Expiring
Leases (1)
 
Percentage of Gross Annual Rental Represented by Such Leases
 
2019
 
5
 
11,497
$
789,458
 
69.9%
 
2024
 
2
 
5,777
 
339,595
 
30.1%
 
   
7
 
17,274
$
1,129,053
 
100.0%
 
     
 
(1)
“Final Annualized Base Rent” for each lease scheduled to expire represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to expiration multiplied by 12. Tenant reimbursements generally include payment of a portion of real estate taxes, operating expenses and common area maintenance and utility charges.

The following table presents occupancy data of our leased real estate properties held for investment as of December 31, 2014, 2013, 2012 and 2011 (where applicable):
 
   
Occupancy % (1)
Property Description/Location
Year Foreclosed
 
2014
 
2013
 
2012
 
2011
 
2010
Light industrial building, Paso Robles, California
1997
67.4%
60.1%
58.7%
58.7%
63.7%
Commercial buildings, Roseville, California
2001
81.2%
88.6%
100.0%
81.2%
45.9%
Retail complex, Greeley, Colorado (720 University, LLC)
2001
95.3%
92.7%
94.1%
93.8%
91.9%
Storage facility/business, Stockton, California
2008
91.5%
85.8%
89.0%
82.3%
83.0%
Office condominium complex (15 units), Roseville, California
2008
70.5%
45.3%
58.9%
49.2%
11.7%
Industrial building, Sunnyvale, California
2009
100.0%
100.0%
100.0%
100.0%
100.0%
133 condominium units, Phoenix, Arizona  (2)
2009
98.0%
94.7%
66.9%
31.6%
31.6%
Medical office condominium complex, Gilbert, Arizona
2010
43.1%
43.1%
40.4%
39.9%
50.5%
60 condominium units, Lakewood, Washington
2010
97.9%
97.1%
95.1%
95.8%
93.0%
169 condominium units, Miami, Florida (TOTB Miami, LLC) (3)
2011
95.2%
99.5%
97.5%
99.5%
N/A
12 condominium and 3 commercial units, Tacoma, Washington
2011
75.8%
37.9%
61.9%
54.3%
N/A
Retail complex, South Lake Tahoe, California
2013
75.0%
N/A
N/A
N/A
N/A
Industrial building/land, Santa Clara, California (1850 De La Cruz, LLC)
2005
100.0%
100.0%
100.0%
100.0%
100.0%
Notes :
           
(1)  Calculated by dividing net rentable square feet included in leases signed on or before December 31, 2014 at the property by the aggregate net rentable square feet of the property.
(2)   As of December 31, 2011 and prior, we were in the process of completing renovations to 78 of the 133 units at this property. Therefore those units were not available for lease as of those dates.
(3)   We also own a 160 unit apartment building in the same complex as these condominium units in Miami, Florida. The apartment building owned directly by TOTB North is currently under renovation and is inhabitable in its present condition and, thus, no occupancy statistics are presented.

As of December 31, 2014, virtually all of our leases on residential rental properties are either month-to-month leases or will expire in 2015. These leases currently represent approximately $5,300,000 in annual rental revenue to the Company.
 
 
33
 
 
The following table shows information regarding rental rates and lease expirations over the next ten years and thereafter for our commercial and industrial rental properties at December 31, 2014 and assumes that none of the tenants exercise renewal options or termination rights, if any, at or prior to scheduled expirations:

Year of
Lease
Expiration
December 31,
 
Number of
Leases
Expiring
Within the
Year
 
Rentable
Square
Footage
Subject to
Expiring
Leases
 
Final
Annualized
Base Rent
Under
Expiring
Leases (1)
 
2015
 
14
   
99,617
 
$
1,046,213
   
2016
 
16
   
60,675
   
720,655
   
2017
 
14
   
43,660
   
433,705
   
2018
 
6
   
58,522
   
472,368
   
2019
 
12
   
55,367
   
1,575,029
   
2020
 
3
   
38,945
   
214,628
   
2021
 
—
   
—
   
—
   
2022
 
1
   
2,880
   
20,844
   
2023
 
—
 
 
—
 
 
—
   
2024
 
2
   
23,153
   
495,979
   
2025 and thereafter
 
1
   
46,966
   
178,200
   
   
69
   
429,785
 
$
5,157,621      
 

(1)
“Final Annualized Base Rent” for each lease scheduled to expire represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to expiration multiplied by 12. Tenant reimbursements generally include payment of a portion of real estate taxes, operating expenses and common area maintenance and utility charges.
 
At December 31, 2014, our properties were leased to tenants that are engaged in a variety of businesses. The following table sets forth information regarding leases with the twelve tenants with the largest amounts leased based upon Annualized Base Rent as of December 31, 2014:
 
 
Leased
Square Feet
 
Annualized
Base Rent (1)
Expiration
Date
Renewal
Options
Tenant Name
 
King Soopers (720 University)
49,846
$
       198,045
3/31/2026
6-5 yr. Options
Big Lots (720 University)
34,440
 
       154,980
1/31/2020
2-5 yr. Options
Conditioning Spa (720 University)
28,022
 
       166,488
10/31/2015
1-6.5 yr. Option
Ace Hardware (720 University)
17,376
 
       139,008
8/31/2024
None
Jo-Ann Stores (720 University)
12,080
 
         72,480
1/31/2017
None
Petco Animal Supplies (Wolfe Central)
26,400
 
       570,240
9/20/2019
2-5 yr. Options
CIGNA Health Care of AZ (AMFU)
14,746
 
       258,055
9/30/2016
1-5 yr. Option
JKB Financial (Roseville, CA office)
5,954
 
               89,310
2/28/2018
None
Avis Rent A Car (1850 De La Cruz) (2) (3)
40,000
 
164,977
7/15/2018
2-5 yr. Options
Up Shirt Creek (Tahoe Stateline Venture) (3)
4,689
 
281,340
9/30/2019
2-5 yr. Options
Powder House (Tahoe Stateline Venture) (3)
5,778
 
346,680
9/30/2019
2-5 yr. Options
McP’s Pub Tahoe (Tahoe Stateline Venture)
5,777
 
262,896
10/31/2024
2-5 yr. Options

(1)
Annualized Base Rent represents the current monthly Base Rent, excluding tenant reimbursements, for each lease in effect at December 31, 2014 multiplied by 12. Tenant reimbursements generally include payment of a portion of real estate taxes, operating expenses and common area maintenance and utility charges.
 
(2)  Amount of annualized base rent reported reflects ORM’s 50% membership interest in 1850 De La Cruz, LLC.
 
(3)  There are two leases for two separate and distinct parcels/units to this tenant with the same terms (leased square feet and annualized base rent combined).
 
 
 
34
 
Item 3. LEGAL PROCEEDINGS

In the normal course of business, we may become involved in various types of legal proceedings such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc., to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes, or to protect, or recoup its investment from the real property secured by the deeds of trust.  None of these actions would typically be of any material importance.  As of December 31, 2014, we are not involved in any legal proceedings other than those that would be considered part of the normal course of business.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information for Common Stock

Our Common Stock has been traded on the NYSE MKT under the ticker symbol “ORM” since July 1, 2013. The following table sets forth, for the indicated periods, the high and low sales prices for our Common Stock, as reported on the NYSE MKT.
   
Sales Price
 
   
High
 
Low
 
2013
             
Third Quarter
 
$
12.97
 
$
8.20
 
Fourth Quarter
 
$
12.99
 
$
11.33
 
2014
             
First Quarter
 
$
15.28
 
$
12.40
 
Second Quarter
 
$
19.85
 
$
14.88
 
Third Quarter
 
$
19.40
 
$
14.25
 
Fourth Quarter
 
$
15.45
 
$
13.96
 
 
The closing sale price for our Common Stock, as reported on the NYSE MKT on March 9, 2015 was $13.30 per share.

Holders

As of March 9, 2015, we had 10,768,001 shares of our Common Stock outstanding held by approximately 810 record holders. The number of record holders does not necessarily bear any relationship to the number of beneficial owners of our Common Stock.

Dividends

We have elected to be taxed as a REIT for federal income tax purposes and, as such, anticipate that we will distribute annually at least 90% of our REIT taxable income. Through the calendar year ended December 31, 2014, we have paid dividends quarterly (monthly during 2013) and made distributions of approximately $2,907,000 and $2,747,000 during 2014 and 2013, respectively (including amounts accrued as of December 31, 2014 and 2013).

Dividends are declared and paid at the discretion of our Board of Directors and depend on our taxable net income, cash available for distribution, financial condition, ability to maintain our qualification as a REIT and such other factors that our Board of Directors may deem relevant. No assurance can be given as to the amounts or timing of future distributions as such distributions are subject to our taxable earnings, financial condition, capital requirements and such other factors as our Board of Directors deems relevant. F or a discussion of factors which may adversely affect our ability to pay dividends and for information regarding the sources of funds used for dividends, see “Item 1A – Risk Factors” and “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 
35
 
The following table sets forth the dividends declared and paid per share of Common Stock during 2013 and 2014:

   
2014
 
2013
Dividends Declared:
           
First Quarter
 
$
0.05
 
$
—
Second Quarter
 
$
0.05
 
$
0.15
Third Quarter
 
$
0.05
 
$
0.05
Fourth Quarter
 
$
0.12
 
$
0.05
             


Securities Authorized for Issuance under Equity Compensation Plans

None

Recent Sales of Unregistered Securities

None

Repurchases of Common Stock

The Company’s Common Stock Repurchase Plan was authorized on August 9, 2013 and expired on May 19, 2014, and no repurchases of its shares were made during the fourth quarter of 2014.

Item 6. SELECTED FINANCIAL DATA

Not applicable.

 
36
 

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Some of the information in this Form 10-K may contain forward-looking statements that involve a number of risks and uncertainties. Words such as “may,” “will,” “should,”  “expect,” “anticipate,” “intend,” “believe,” “plan,” “estimate,” “continue” and variations of  such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events, strategies or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in “Risk Factors” in Part I, Item 1A of this Form 10-K.  All forward-looking statements and reasons why results may differ included in this Form 10-K are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results may differ.

Overview and Background

We are a specialty finance company that focuses on the origination, investment and management of commercial real estate loans primarily in the Western U.S.  We provide customized, short-term capital to small and middle-market investors and developers who require speed and flexibility. We are organized and conduct our operations to qualify as a REIT for U.S. federal income tax purposes. We are externally managed and advised by OFG, a specialized commercial real estate management company that has originated, serviced and managed alternative commercial real estate investments since 1951.

The Company is a Maryland corporation formed to reorganize the business of its predecessor, OMIF, into a publicly traded REIT. Beginning in 2009, OMIF experienced liquidity issues as its borrowers were unable to access credit sources to pay off its loans.  OMIF eventually foreclosed on a substantial portion of its loan portfolio, repositioning many of the properties for investment or eventual sale.  OMIF also experienced a significant increase in capital withdrawal requests that it was unable to honor due to insufficient cash, net of reserves, and restrictions under the terms of its bank line of credit. In addition, OMIF was restricted by provisions within the partnership agreement from making additional investments in loans while qualified redemption requests remained pending and unpaid. In addition to increasing investor liquidity through public listing of its stock, the Company was created to provide the opportunity for resuming mortgage lending activities, with the goal of increasing income to stockholders.

On May 20, 2013, OMIF merged with and into the Company with the Company as the surviving corporation, succeeding to and continuing the business and operations of OMIF. The Company now, by virtue of the Merger, directly or indirectly owns all of the assets and business formerly owned by OMIF. The Company is a deemed successor issuer to OMIF pursuant to Rule 12g-3(a) under the Exchange Act, and on July 1, 2013, the Company’s Common Stock was listed on the NYSE MKT exchange. For accounting purposes, the Merger has been treated as a transfer of assets and exchange of shares between entities under common control. The accounting basis used to initially record the assets and liabilities in the Company is the carryover basis of OMIF. OMIF was a California Limited Partnership registered with the Securities and Exchange Commission (“SEC”) that was formed in 1983 for the purposes of funding and servicing short-term commercial real estate loans.
 
 
Our primary sources of revenue are interest income earned on our loan investment portfolio and revenues we generate from our operating real estate assets. We have resumed originating loans and, between May and December 2013, we originated $30.2 million of commercial real estate loans (including $11.9 million in carryback financing from the sales of real estate properties). We originated an additional $44.5 million in loans during 2014, including the rewrite of three loans in the aggregate amount of $3.5 million. While we believe the Company is well positioned to capitalize on lending opportunities as the economy continues to recover, there can be no assurances that we will be able to identify and make loans to suitable commercial real estate borrowers.

Our operating results are affected primarily by:

·  
the level of foreclosures and related loan and real estate losses experienced;
·  
the income or losses from foreclosed properties prior to the time of disposal;
·  
the amount of cash available to invest in loans;
·  
the amount of borrowing to finance loan investments and our cost of funds on such borrowing;
 
 
37
 
 
·  
the level of real estate lending activity in the markets serviced;
·  
the ability to identify and lend to suitable borrowers;
·  
the interest rates we are able to charge on loans; and
·  
the level of delinquencies on loans.

Over the past seven years, we have experienced increased delinquent loans and foreclosures which have created substantial losses. In addition, we now own significantly more real estate than in the past, which has reduced cash flow and net income. As of December 31, 2014, approximately 34% of our loans are impaired and/or past maturity, down from 56% as of December 31, 2013. As of December 31, 2014, we own approximately $163 million of real estate held for sale or investment, which is approximately 67% of total assets, an increase of $28 million or 13% of total assets as compared to December 31, 2013. During 2014, we foreclosed on three loans and obtained the four securing properties with estimated net fair market values totaling $9,572,000.  We sold two real estate properties and an easement during the year ended December 31, 2014 for aggregate net sales proceeds of $1,821,000 and gains totaling $292,000 We also recognized an additional $2,951,000 in deferred gain under the installment method due to full and partial repayments received on carryback loans from the sale of three real estate properties in late 2012 and 2013. We will continue to attempt to sell many of the remaining properties but may need to sell them for losses or wait until market values recover. In addition, under the REIT tax rules, we may be subject to a “prohibited transaction” penalty tax on tax gains from the sale of our properties in certain circumstances. In order to fit within a REIT “safe harbor” and avoid prohibited transaction tax, we expect to wait to sell any property that would result in tax gain until we have held such property for at least two years after the conversion (May 2015). In addition, we are also limited in the number and dollar amount of properties we can sell in a given year under the REIT tax rules.

Although currently management believes that only two of our delinquent loans will result in loss to the Company (and has caused the Company to record specific allowances for loan losses on such loans real estate values could decrease further. Management continues to perform frequent evaluations of collateral values for our loans using internal and external sources, including the use of updated independent appraisals.  As a result of these evaluations, the allowance for loan losses and our investments in real estate could increase or decrease in the near term, and such changes could be material.

Business Strategy

Our primary business objective is to provide our stockholders with attractive risk-adjusted returns by producing consistent and predictable dividends while maintaining a strong balance sheet. We believe we have positioned the Company for future growth and seek to increase funds from operations, or FFO, and distributions to stockholders through active portfolio management and execution of our business plan which is outlined below:

·  
Capitalize on market lending opportunity by leveraging existing origination network to expand our commercial real estate loan portfolio.
·  
Enhance and reposition our commercial real estate assets through the investment of capital and strategic management.
·  
Increase liquidity available for lending activities by focusing on opportunities to remove real estate assets from our balance sheet.
·  
Manage leverage to marginally expand sources of liquidity while maintaining a conservative balance sheet.

Current Market Conditions, Risks and Recent Trends

During 2013 and 2014, the global capital and credit markets continued to slowly recover from the economic downturn which began in 2007. Real estate markets also continued to recover, slowly on a national basis and more significantly in major metropolitan areas, and we expect this trend to continue through 2014 and beyond. Accordingly, as our real estate assets are carried at the lower of carrying value or fair value less costs to sell, it is possible that we have substantial imbedded gains in certain of our real estate properties held for sale and investment that are not reflected in our financial statements or in the value of our stock. However, despite these improvements, the overall market recovery remains uncertain. Should the economy regress, the commercial real estate sector may experience additional losses and operating challenges.

Critical Accounting Policies

In preparing the consolidated financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet dates and revenues and expenses for the reporting periods. Such estimates relate principally to the determination of (1) the allowance for loan losses including the accrued interest and advances that are estimated to be unrecoverable based on estimates of amounts to be collected plus estimates of the fair value of the property as collateral; (2) the valuation of real estate held for sale and investment (at acquisition and subsequently); and (3) the estimate of environmental remediation liabilities.  At December 31, 2014, we owned thirty-one real estate properties, including properties held within twelve majority- or wholly-owned limited liability companies and one within a wholly-owned corporation. The limited liability companies not wholly owned by us are held as follows: a 80.74% ownership interest in a limited liability company that owns property located in Miami, Florida (OFG holds the remaining ownership interests) and a 65% ownership interest in a limited liability company that owns property located in Greeley, Colorado (a third party holds the remaining ownership interests). We also have a 50% ownership interest in a limited liability company accounted for under the equity method that owns property located in Santa Clara, California (a third party holds the remaining ownership interest).
 
 
38
 

Loans are stated at the principal amount outstanding. Our portfolio consists primarily of real estate loans generally collateralized by first, second and third deeds of trust.  Interest income on loans is accrued by the simple interest method. Loans are generally placed on nonaccrual status when the borrowers are past due greater than ninety days or when full payment of principal and interest is not expected. When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest remains accrued until the loan becomes current, is paid off or is foreclosed upon. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Cash receipts on nonaccrual loans are used to reduce any outstanding accrued interest, and then are recorded as interest income, except when such payments are specifically designated as principal reduction or when management does not believe our investment in the loan is fully recoverable. We do not incur origination costs and do not earn or collect origination fees from borrowers as OFG it entitled to all such fees.

Loans and related accrued interest and advances are analyzed by management on a periodic basis for ultimate recovery. Delinquencies are identified and followed as part of the loan system. Provisions are made to adjust the allowance for loan losses to an amount considered by management to be adequate, with consideration to original collateral values at loan inception and to provide for unrecoverable accounts receivable, including impaired and other loans, accrued interest, and advances on loans.

Recent trends in the economy have been taken into consideration in the aforementioned process of arriving at the allowance for loan losses and real estate. Actual results could vary from the aforementioned provisions for losses. If the probable ultimate recovery of the carrying amount of a loan is less than amounts due according to the contractual terms of the loan agreement, the carrying amount of the loan is reduced to the present value of future cash flows discounted at the loan’s effective interest rate. If a loan is collateral dependent, it is valued by management at the estimated fair value of the related collateral, less estimated selling costs. Estimated collateral fair values are determined based on third party appraisals, opinions of fair value from third party real estate brokers and/or comparable third party sales.

If events and/or changes in circumstances cause management to have serious doubts about the collectability of the contractual payments or when monthly payments are delinquent greater than ninety days, a loan is categorized as impaired and interest is no longer accrued. Any subsequent payments received on impaired loans are first applied to reduce any outstanding accrued interest, and then are recognized as interest income, except when such payments are specifically designated principal reduction or when management does not believe our investment in the loan is fully recoverable.

We lease multifamily rental units under operating leases with terms of generally one year or less. Rental revenue is recognized, net of rental concessions, on a straight-line method over the related lease term. Rental income on commercial property is recognized on a straight-line basis over the term of each operating lease. Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale including potential seller financing.

Real estate held for sale includes real estate acquired in full or partial settlement of loan obligations, generally through foreclosure, that is being marketed for sale. Real estate held for sale is recorded at acquisition at the property’s estimated fair value, less estimated costs to sell.  After acquisition, real estate held for sale is analyzed periodically for changes in fair values.

Real estate held for investment includes real estate purchased or acquired in full or partial settlement of loan obligations, generally through foreclosure, that is not being marketed for sale and is either being operated, such as rental properties; is being managed through the development process, including obtaining appropriate and necessary entitlements and permits and construction; or are idle properties awaiting more favorable market conditions or properties we cannot sell without placing our REIT status at risk or become subject to prohibited transactions penalty tax. Real estate held for investment is recorded at acquisition at the property’s estimated fair value, less estimated costs to sell.  Depreciation of buildings and improvements is provided on the straight-line method over the estimated remaining useful lives of buildings and improvements.  Depreciation of tenant improvements is provided on the straight-line method over the shorter of their estimated useful lives or the lease terms.  Costs related to the improvement of real estate held for sale and investment are capitalized, whereas those related to holding the property are expensed.
 
 
39
 

Management periodically compares the carrying value of real estate held for investment to expected undiscounted future cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated fair value.

Our environmental remediation liability related to a property located in Santa Clara, California was estimated based on a third party consultant’s estimate of the costs required to remediate and monitor the contamination.

Results of Operations

Net income attributable to our common stockholders decreased approximately $803,000 during the year ended December 31, 2014 as compared to the same period in 2013. The decrease was primarily a result of the 2013 reversal of the provision for loan losses in the amount of approximately $7,822,000 which primarily related to three delinquent loans securing the same property (the Chateau at Lake Tahoe project) that were foreclosed on by TSV during 2013 based on an appraisal obtained in June 2013, which reflected a significant increase in value from the previous appraisal and decreases in the general loan loss allowance during 2013. The reversal of the provision for loan losses during 2014 was approximately $1,870,000. This decrease was partially offset by the following:

·  
An increase in interest income on loans of $2,361,000 during the year ended December 31, 2014, as compared to 2013, due primarily to an increase in the average balance of performing loans in our portfolio and an increase in interest collected on impaired loans;
 
·  
An increase in operating income from real estate properties (excluding amounts from our investment in 1850) and a decrease in impairment losses on real estate totaling $1,771,000 during the year ended December 31, 2014, as compared to 2013, as a result of increased rental rates and/or occupancy on certain of our real estate properties held for investment, the sale of certain operating properties during 2013 which had operating losses during the year ended December 31, 2013 and impairment losses on real estate of $666,000 during 2013 compared to $179,000 during 2014; and
 
·  
A net increase in gain on sale of real estate (after the net effect of gain attributable to noncontrolling interests during 2013) of $2,473,000 during the year ended December 31, 2014, as compared to 2013, primarily as a result of deferred gains recognized in the total amount of $2,951,000 on three properties sold in 2012 or 2013 due to full or partial principal repayments received on the carry back loans during the year ended December 31, 2014.
 
 
40
 
Summary of Financial Results
 
   
Year Ended December 31,
 
   
2014
 
2013
 
               
Total revenues
 
$
18,285,005
 
$
15,361,712
 
Total expenses
   
15,123,983
   
14,642,841
 
Operating income
   
3,161,022
   
718,871
 
Gain on sale of real estate, net
   
3,243,359
   
2,942,861
 
Reversal of provision for loan losses
   
1,869,733
   
7,822,112
 
Losses on real estate properties
   
(179,040
)
 
(666,240
)
Net income
   
8,095,074
   
10,817,604
 
Less: Net income attributable to non-controlling interests
   
(165,445
)
 
(2,084,707
)
Net income attributable to common stockholders
 
$
7,929,629
 
$
8,732,897
 
Net income per common share (basic and diluted)
 
$
0.74
 
$
0.78
 
Weighted average number of common shares outstanding
   
10,768,370
   
11,127,820
 
Dividends declared per share of Common Stock
 
$
0.27
 
$
0.25
 

2014 Compared to 2013

Total Revenues

Interest income on loans increased $2,361,000 (78.2% increase) to $5,382,000 for the year ended December 31, 2014, as compared to $3,021,000 for the year ended December 31, 2013. The increase was primarily due to an increase in the average balance of performing loans of approximately 29% and an increase in interest income collected on delinquent/impaired loans of approximately $1,470,000 during the year ended December 31, 2014, as compared to 2013.

Rental and other income from real estate properties increased $1,045,000 (9.31% increase) to $12,268,000 for the year ended December 31, 2014, as compared to $11,223,000 for the year ended December 31, 2013, primarily due to increased rental rates and/or occupancy on certain of our properties during the latter part of 2013 and 2014 and increased income from properties obtained via foreclosure in 2013 and 2014, net of reduced revenue as a result of the sale of three operating properties during 2013.

Total Expenses

Management fees amounted to approximately $1,727,000 and $1,664,000 for the year ended December 31, 2014 and 2013, respectively. Servicing fees amounted to approximately $157,000 and $152,000 for the year ended December 31, 2014 and 2013, respectively.

The maximum servicing fees were paid to the Manager during years ended December 31, 2014 and 2013. The maximum management fees were paid to the Manager during the year ended December 31, 2014. If the maximum management fees had been paid to the Manager during the year ended December 31, 2013, the management fees would have been $1,668,000 (increase of $4,000), which would have decreased net income by approximately 0.05%.
 
The maximum management fee permitted under the Company’s charter is 2.75% per year of the average unpaid balance of loans. For the years 2014, 2013, 2012, 2011 and 2010, the management fees were 2.75%, 2.74%, 2.67%, 2.19% and 1.00% of the average unpaid balance of loans, respectively. Although management fees as a percentage of loans have increased substantially between 2010 and 2014, the total dollar amount of management fees paid to the Manager has decreased because the weighted balance of the loan portfolio has decreased by approximately 57% between 2010 and 2014.
 
In determining whether to take the maximum management fees permitted, the Manager may consider a number of factors, including current market yields, delinquency experience, un-invested cash and real estate activities. The Manager expects that the management fees it receives from us will vary in amount and percentage from period to period. However, due to reduced levels of loans held by us during 2014, the Manager chose to take the maximum compensation that it is able to take pursuant to the charter and will likely continue to take the maximum compensation for the foreseeable future.

 
41
 
Depreciation and amortization expense decreased $230,000 (9.3% decrease) during the year ended December 31, 2014, as compared to 2013, primarily due to recording catch-up depreciation on the property held within TOTB Miami, LLC in June 2013 when the property was transferred from “Held for sale” to “Held for investment” resulting in a decrease in depreciation of $299,000 during 2014 and a decrease in depreciation of $102,000 on the property within 720 University as depreciation was discontinued during the fourth quarter of 2014 when the property was transferred to “Held for sale”. This decrease was partially offset by an increase in depreciation recorded of approximately $178,000 as a result of two new properties obtained via foreclosure during 2014 and depreciation commencing on the retail property held within TSV during the fourth quarter of 2014.

Interest expense increased $648,000 (126.2% increase) during the year ended December 31, 2014 as compared to 2013, due to interest incurred on our new lines of credit, one new loan payable within TOTB and one new loan payable within TSV and the amortization of deferred financing costs on the lines of credit and new loans payable to interest expense during the year ended December 31, 2014.

The reversal of the provision for loan losses of $1,870,000 during the year ended December 31, 2014 was the result of an analysis performed on the loan portfolio. The general loan loss allowance decreased  $634,000 during the year ended December 31, 2014 primarily due to an increase in performing commercial loans during 2014 and due to refinements in the loss and delinquency factors applied by management to performing loans reflecting the positive trends in the economy from increasing property values over the year. The specific loan loss allowance decreased $1,236,000 during the year ended December 31, 2014, primarily because a new appraisal obtained on a $7,535,000 impaired loan reflected an increase in the value of the underlying collateral during 2014, thus, resulting in a decrease in the specific allowance on this loan of $1,248,000.

The reversal of the provision for loan losses of $7,822,000 during the year ended December 31, 2013 was the result of analyses performed on the loan portfolio throughout the year. The general loan loss allowance decreased $690,000 during 2013 due to a decrease in the historical loss rate utilized during the second quarter of 2013 and a decrease in the balance of non-delinquent loans during the year. The loss rate applied to non-delinquent loans was lowered as a supplemental loss factor utilized over the past five years for the concentration of loans was no longer applicable given our current loan portfolio and favorable economic and market conditions. The specific loan loss allowance decreased $7,132,000 (net) during the year ended December 31, 2013, as reserves were adjusted on five impaired loans, the largest of which was adjusted during the second quarter of 2013 due to a new appraisal obtained near the time of foreclosure.

The impairment losses on real estate properties of $179,000 and $666,000, respectively, during the years ended December 31, 2014 and 2013 were the result of updated appraisals or other valuation information obtained on certain of our real estate properties during those years.

Gain on Sales of Real Estate

Gain on sales of real estate (excluding gain attributable to a noncontrolling interest in 2013) increased $2,473,000 during the year ended December 31, 2014, as compared 2013. The increase during the year ended December 31, 2014 was a result of the recording of deferred gains under the installment method in the total amount of $2,951,000 related to the sale of the condominiums located in Santa Barbara, California in 2012 (and held within Anacapa Villas, LLC), the condominiums located in Oakland, California in 2013 (and held within 1401 on Jackson, LLC) and the parcel of land located in Lake Charles, Louisiana in 2013 (and held within Dation, LLC) due to full or partial principal repayments received on the carry back loans during 2014. During 2014, we also sold one of the improved, residential lots located in West Sacramento, California for $175,000, resulting in a gain of approximately $105,000 and the undeveloped, commercial land located in Half Moon Bay, California for $1,700,000, resulting in a gain of $178,000.  During the year ended December 31 2013, we sold five real estate properties and recognized gains of $2,943,000. The gain from the sale of one of these properties was offset by net income attributable to a noncontrolling interest of approximately $2,174,000, as the gain on sale of the property held within 1875 was all attributable to the noncontrolling interest.
 
 
42
 

Net Income Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests decreased $1,919,000 during the year ended December 31, 2014, as compared to 2013, due primarily to the sale of the land owned by 1875 W. Mission Blvd., LLC during 2013 resulting in gain on sale of approximately $2,174,000. As we only received our basis in 1875 of $5,078,000 upon sale, the full gain was attributable to the non-controlling interest. Non-controlling interest income from TOTB increased approximately $182,000 during 2014, as compared to 2013, due to increased net income in TOTB in 2014 of $947,000 (OFG’s portion is 19.26%).

Financial Condition

December 31, 2014 and 2013

Loan Portfolio

Our portfolio of loan investments increased from 22 as of December 31, 2013 to 34 as of December 31, 2014, and the average loan balance decreased from $2,673,000 to $2,001,000 between December 31, 2013 and December 31, 2014, respectively.

As of December 31, 2014 and 2013, we had six and ten impaired loans, respectively, totaling approximately $22,316,000 (32.8%) and $31,738,000 (54.0%), respectively. This included two and five matured loans totaling $8,614,000 and $16,908,000, respectively. In addition, one and three loan(s) totaling approximately $862,000 (1.3%) and $1,290,000 (2.2%), respectively, were past maturity but less than ninety days delinquent in monthly payments as of December 31, 2014 and 2013 (combined total of $23,178,000 (34.1%) and $33,028,000 (56.2%), respectively, that are past maturity and impaired). Of the impaired and past maturity loans, approximately $0 (0%) and $6,981,000 (11.9%), respectively, were in the process of foreclosure and none involved loans to borrowers who were in bankruptcy.  We foreclosed on three and six loans during the years ended December 31, 2014 and 2013, respectively, with aggregate principal balances totaling approximately $7,671,000 and $26,187,000, respectively, and obtained the properties via the trustee’s sales.

Of the $31,738,000 in loans that were impaired as of December 31, 2013, $22,316,000 remained impaired as of December 31, 2014, $6,981,000 of such loans were foreclosed and became real estate owned by the Company during 2014, and $2,441,000 of such loans were paid off by the borrowers.

As of December 31, 2014 and 2013, approximately $67,780,000 (99.6%) and $58,527,000 (99.5%) of our loans are interest-only and/or 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 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. Borrowers occasionally are not able to pay the full amount due at the maturity date.  We may allow these borrowers to continue making the regularly scheduled monthly payments for certain periods of time to assist the borrower in meeting the balloon payment obligation without formally filing a notice of default.  These loans for which the principal and any accrued interest is due and payable, but the borrower has failed to make such payment of principal and/or accrued interest are referred to as “past maturity loans”. As of December 31, 2014 and 2013, we had three and eight past maturity loans totaling approximately $9,476,000 and $18,198,000, respectively.
 
During the year ended December 31, 2014, the terms of one impaired loan were modified as a troubled debt restructuring. The loan was rewritten as the borrower had paid the principal balance down partially from sale proceeds. The maturity date was extended by six months to April 2015. All other terms of the loan remained the same. Management believes that no specific loan loss allowance is needed on this modified loan given the estimated underlying collateral value.

During the year ended December 31, 2013, the terms of two impaired loans were modified as troubled debt restructurings. One such impaired loan was modified to combine all principal, delinquent interest and advances into principal and provide for amortizing payments at a reduced interest rate over an extended maturity of 15 years. The borrower is now delinquent in making payments on this modified loan. The other impaired loan was rewritten by the Company during the year whereby we repaid the first deed of trust on the subject property of approximately $5,899,000 and refinanced its second deed of trust by combining them into one first deed of trust in the amount of $9,625,000 with interest at
 
 
43
 
10% per annum due in five years. As part of the modification, approximately $659,000 of past due interest on our original note was paid from the proceeds of the rewritten loan, which was recorded as a discount against the principal balance of the new loan because the loan was impaired (net principal balance of $8,966,000). In addition, we loaned the borrower an additional $2,500,000 to fund certain improvements to the property (aggregate principal balance of $11,466,000). Management believes that no specific loan loss allowance is needed on either of these modified loans given the estimated underlying collateral values.

As of December 31, 2014 and 2013, we held the following types of loan investments:
   
December 31,
2014
   
December 31,
2013
 
By Property Type:
           
Commercial
 
$
52,531,537
   
$
26,158,878
 
Residential
   
13,491,906
     
27,461,913
 
Land
   
2,010,068
     
5,175,502
 
   
$
68,033,511
   
$
58,796,293
 
By Position:
               
Senior loans
 
$
65,533,511
   
$
52,876,293
 
Junior loans*
   
2,500,000
     
5,920,000
 
   
$
68,033,511
   
$
58,796,293
 
* The junior loans in our portfolio at December 31, 2014 and 2013 are junior to existing senior loans held by us and are secured by the same collateral.

The types of property securing our commercial real estate loans are as follows as of December 31, 2014 and 2013:

   
December 31,
2014
 
December 31,
2013
 
Commercial Real Estate Loans:
             
Retail
 
$
7,591,592
 
$
4,140,000
 
Assisted care
   
—
   
4,021,946
 
Office
   
25,742,246
   
15,484,932
 
Apartment
   
9,622,580
   
—
 
Industrial
   
3,080,000
   
1,245,000
 
Marina
   
3,200,000
   
—
 
Church
   
1,175,000
   
—
 
Restaurant
   
1,058,567
   
—
 
Golf course
   
1,061,552
   
1,267,000
 
   
$
52,531,537
 
$
26,158,878
 

Scheduled maturities of loan investments as of December 31, 2014 and the interest rate sensitivity of such loans are as follows:
   
Fixed
Interest
Rate
   
Variable
Interest
Rate
   
Total
 
Year ending December 31:
                       
2014 (past maturity)
 
$
8,613,752
   
$
862,329
   
$
9,476,081
 
2015
   
7,521,620
     
—
     
7,521,620
 
2016
   
28,192,388
     
3,453,000
     
31,645,388
 
2017
   
7,548,492
     
—
     
7,548,492
 
2018
   
11,588,183
     
—
     
11,588,183
 
2019
   
—
     
—
     
—
 
Thereafter (through 2028)
   
253,747
     
—
     
253,747
 
   
$
63,718,182
   
$
4,315,329
   
$
68,033,511
 

Variable rate loans may use as indices the one-year, five-year and 10-year Treasury Constant Maturity Index (0.25%, 1.65% and 2.17%, respectively, as of December 31, 2014), the prime rate (3.25% as of December 31, 2014) or the weighted average cost of funds index for Eleventh District savings institutions (0.69% as of December 31, 2014) or include terms whereby the interest rate is increased at a later date. Premiums over these indices have varied from 2.0% to 6.5% depending upon market conditions at the time the loan is made.
 
 
44
 
The following is a schedule by geographic location of loan investments as of December 31, 2014 and 2013:

   
December 31, 2014
Balance
 
Portfolio
Percentage
 
December 31, 2013
Balance
 
Portfolio
Percentage
 
Arizona
 
$
8,788,098
 
12.92%
 
$
7,535,000
 
12.81%
 
California
   
54,685,345
 
80.38%
   
39,862,058
 
67.80%
 
Hawaii
   
1,450,000
 
2.13%
   
1,450,000
 
2.47%
 
Louisiana
   
—
 
0.00%
   
1,520,000
 
2.58%
 
Oregon
   
1,250,000
 
1.84%
   
—
 
0.00%
 
Pennsylvania
   
—
 
0.00%
   
4,021,946
 
6.84%
 
Utah
   
—
 
0.00%
   
2,391,286
 
4.07%
 
Washington
   
1,860,068
 
2.73%
   
2,016,003
 
3.43%
 
   
$
68,033,511
 
100.00%
 
$
58,796,293
 
100.00%
 

As of December 31, 2014 and 2013, our loans secured by real property collateral located in Northern California totaled approximately 78% ($53,073,000) and 55% ($32,362,000), respectively, of the loan portfolio. The Northern California region (which includes Monterey, Fresno, Kings, Tulare and Inyo counties and all counties north) 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.

Our investment in loans increased by $9,237,000 (15.7%) during the year ended December 31, 2014 as a result of new loan originations during the year, net of loan payoffs and foreclosures.

The allowance for loan losses decreased by approximately $1,870,000 and $19,679,000 (reversal of provision and charge-offs) during the years ended December 31, 2014 and 2013, respectiely.  The Manager believes that the allowance for loan losses is sufficient given the estimated underlying collateral values of impaired loans.   There is no precise method used by the Manager to predict delinquency rates or losses on specific loans.  The Manager has considered the number and amount of delinquent loans, loans subject to workout agreements and loans in bankruptcy in determining allowances for loan losses, but there can be no absolute assurance that the allowance is sufficient.  Because any decision regarding the allowance for loan losses reflects judgment about the probability of future events, there is an inherent risk that such judgments will prove incorrect.  In such event, actual losses may exceed (or be less than) the amount of any reserve.  To the extent that we experience losses greater than the amount of its reserves, we may incur a charge to earnings that will adversely affect operating results and the amount of any dividends paid.

Changes in the allowance for loan losses for the years ended December 31, 2014 and 2013 were as follows:
   
2014
 
2013
 
Balance, beginning of period
 
$
4,739,088
 
$
24,417,897
 
Reversal of loan losses
   
(1,869,733
)
 
(7,822,112
)
Charge-offs
   
—
   
(11,856,697
)
Balance, end of period
 
$
2,869,355
 
$
4,739,088
 

As of December 31, 2014 and 2013, there was a general allowance for loan losses of $480,000 and $1,114,000, respectively, and a specific allowance for loan losses on two loans in the total amount of $2,389,355 and $3,625,088, respectively.
 
 
45
 

Real Estate Properties Held for Sale and Investment

As of December 31, 2014, we held title to thirty-one properties that were acquired through foreclosure, with a total carrying amount of approximately $163,017,000 (including properties held in twelve limited liability companies and one corporation), net of accumulated depreciation of $6,075,000. As of December 31, 2014, properties held for sale total $59,494,000 and properties held for investment total $103,523,000. We foreclosed on three and six loans during the years ended December 31, 2014 and 2013, respectively, with aggregate principal balances totaling $7,671,000 and $26,187,000, respectively, and obtained the underlying properties via the trustee’s sales (see below). When we acquire property by foreclosure, we typically earn less income on those properties than could be earned on loans and we may not be able to sell the properties in a timely manner.

Real estate properties held for sale as of December 31, 2014 and 2013 consists of the following properties acquired through foreclosure:

   
2014
 
2013
Retail complex, Greeley, Colorado (held within 720 University, LLC) – transferred from held for investment in 2014
 
$
11,547,472
 
$
—
Undeveloped, industrial land, San Jose, California – transferred to held for investment in 2014
   
—
   
1,958,400
Undeveloped, commercial land, Half Moon Bay, California – sold in 2014
   
—
   
1,468,800
Medical office condominium complex, Gilbert, Arizona (held within AMFU, LLC) – transferred from held for investment in 2014
   
4,716,159
   
—
Commercial buildings, Sacramento, California – transferred from held for investment in 2014
   
3,890,968
   
—
Unimproved, residential and commercial land, Gypsum, Colorado – transferred from held for investment in 2014
   
5,813,434
   
—
Commercial and residential land under development, South Lake Tahoe, California (held within Tahoe Stateline Venture, LLC) – transferred from held for investment in 2014
   
30,449,896
   
—
Marina with 30 boat slips and 11 RV spaces, Oakley, California (held within The Last Resort and Marina, LLC) – transferred to held for investment in 2014
   
—
   
408,000
Golf course, Auburn, California (held within Lone Star Golf, Inc.)
   
2,020,410
   
1,961,284
1/7 th interest in single family home, Lincoln City, Oregon – transferred to held for investment in 2014
   
—
   
93,647
Retail buildings, San Jose, California – obtained via foreclosure in 2014
   
1,056,000
   
—
   
$
59,494,339
 
$
5,890,131


 
46
 
 
Real estate held for investment is comprised of the following properties as of December 31, 2014 and 2013:

   
2014
 
2013
 
Light industrial building, Paso Robles, California
 
$
1,459,063
 
$
1,489,120
 
Commercial buildings, Roseville, California
   
731,905
   
767,077
 
Retail complex, Greeley, Colorado (held within 720 University, LLC) – transferred to held for sale in 2014
   
—
   
11,697,485
 
Undeveloped, residential land, Madera County, California
   
726,580
   
726,580
 
Undeveloped, residential land, Marysville, California
   
403,200
   
403,200
 
Undeveloped land, Auburn, California (formerly part of golf course owned by DarkHorse Golf Club, LLC)
   
103,198
   
103,198
 
75 improved, residential lots, Auburn, California (held within Baldwin Ranch Subdivision, LLC)
   
3,878,544
   
3,878,544
 
Undeveloped, industrial land, San Jose, California – transferred from held for sale in 2014
   
1,958,400
   
—
 
Storage facility/business, Stockton, California
   
3,847,884
   
3,943,780
 
One and two improved residential lots, West Sacramento, California – one lot sold in 2014
   
58,560
   
117,120
 
Undeveloped, residential land, Coolidge, Arizona
   
1,017,600
   
1,017,600
 
Marina with 30 boat slips and 11 RV spaces, Oakley, California (held within The Last Resort and Marina, LLC) – transferred from held for sale in 2014
   
236,500
   
—
 
Office condominium complex (15 units), Roseville, California
   
3,684,203
   
3,810,020
 
Industrial building, Sunnyvale, California (held within Wolfe Central, LLC)
   
3,027,734
   
3,116,791
 
133 condominium units, Phoenix, Arizona (held within 54 th Street Condos, LLC)
   
6,933,229
   
7,097,056
 
Medical office condominium complex, Gilbert, Arizona (held within AMFU, LLC) – transferred to held for sale in 2014
   
—
   
4,771,234
 
61 condominium units, Lakewood, Washington (held within Phillips Road, LLC)
   
4,364,743
   
4,509,828
 
Commercial buildings, Sacramento, California – transferred to held for sale in 2014
   
—
   
3,890,968
 
169 condominium units and 160 unit unoccupied apartment building under renovation, Miami, Florida (held within TOTB Miami, LLC)
   
34,353,958
   
33,017,315
 
1/7 th interest in single family home, Lincoln City, Oregon – transferred from held for sale in 2014
   
93,647
   
—
 
12 condominium and 3 commercial units, Tacoma, Washington (held within Broadway & Commerce, LLC)
   
2,408,681
   
2,413,170
 
6 improved residential lots, Coeur D’Alene, Idaho
   
316,800
   
316,800
 
Unimproved, residential and commercial land, Gypsum, Colorado – transferred to held for sale in 2014
   
—
   
5,814,418
 
Retail Complex, South Lake Tahoe, California (held within Tahoe Stateline Venture, LLC) (1)
   
23,211,896
   
34,495,674
 
Marina and yacht club with 179 boat slips, Isleton, California (held within Brannan Island, LLC)
   
2,220,448
   
2,028,855
 
Unimproved, residential and commercial land, Bethel Island, California (held within Sandmound Marina, LLC)
   
2,334,773
   
—
 
Marina with 52 boat slips and campground, Bethel Island, California (held within Sandmound Marina, LLC)
   
1,145,919
   
—
 
Assisted living facility, Bensalem, Pennsylvania – obtained via foreclosure in 2014
   
5,005,000
   
—
 
   
$
103,522,466
 
$
129,425,833
 
(1) As of December 31, 2013, balance includes all TSV land under development.
             


 
47
 
 
Changes in real estate held for sale and investment during the years ended December 31, 2014 and 2013 were as follows:

   
2014
 
2013
 
Balance, beginning of period
 
$
135,315,964
 
$
127,773,349
 
Real estate acquired through foreclosure
   
9,572,406
   
19,602,478
 
Investments in real estate properties
   
21,987,250
   
9,017,330
 
Sales of real estate properties
   
(1,529,227
)
 
(18,023,870
)
Impairment losses on real estate properties
   
(179,040
)
 
(666,240
)
Depreciation of properties held for investment
   
(2,150,548
)
 
(2,387,086
)
Balance, end of period
 
$
163,016,805
 
$
135,315,964
 

Fourteen of our thirty-one properties do not currently generate revenue. Expenses from real estate properties (not including depreciation) have decreased from approximately $8,170,000 to $8,161,000 (0.1%) for the years ended December 31, 2013 and 2014, respectively, and revenues associated with these properties have increased from $11,223,000 to $12,268,000 (9.3%), thus generating net income from real estate properties of $4,107,000 during the year ended December 31, 2014 (compared to net income of $3,053,000 during 2013).

For purposes of assessing potential impairment of value during 2014 and 2013, we obtained updated appraisals or other valuation support on several of our real estate properties held for sale and investment, which resulted in additional impairment losses on one and two properties, respectively, in the aggregate amount of approximately $179,000 and $666,000, respectively, recorded in the consolidated statements of operations.

During the year ended December 31, 2014, gains totaling approximately $2,951,000 were recognized that had previously been deferred related to the sales of real estate properties in 2012 and 2013. The gains on the sales of the properties are being recognized under the installment method.

2014 Sales Activity

During the year ended December 31, 2014, we sold one of the improved, residential lots located in West Sacramento, California for net sales proceeds of approximately $164,000, resulting in a gain of approximately $105,000.

During the year ended December 31, 2014, we sold the parcel of unimproved land located in Half Moon Bay, California for net sales proceeds of approximately $1,647,000, resulting in a gain of approximately $178,000.

2013 Sales Activity

During the year ended December 31, 2013, we sold the 45 residential and 2 commercial units located in Oakland, California and held within 1401 on Jackson, LLC via a land sales contract for $11,000,000 ($1,000,000 down with interest only payments of 4.5% interest due monthly with all remaining principal and interest due in one year), resulting in a gain to the Company of approximately $207,000 and deferred gain of approximately $2,073,000. During the fourth quarter of 2013, the land sale contract was converted to a deed of trust and the borrower paid down the principal balance by $1,554,000, which resulted in the recognition of additional gain of $233,000 (net of additional closing costs of $89,000).

During the year ended December 31, 2013, we sold the retail complex located in Hilo, Hawaii for $1,950,000 with a $250,000 cash down payment and a $1,700,000 carryback note due in three years with monthly payments of interest only at a starting rate of 5% per annum. The note called for principal pay downs of $125,000 each within 30 and 60 days of issuance of the title policy on the property, both of which were paid by the borrower during 2013. The sale resulted in a gain to the Company of approximately $36,000 and deferred gain of approximately $246,000. An additional gain on sale of approximately $36,000 was recorded during 2013 as a result of the principal pay downs.

During the year ended December 31, 2013, we sold ten lots (one including a manufactured home) in the manufactured home subdivision development located in Ione, California for aggregate net sales proceeds of approximately $106,000 resulting in an aggregate net gain to the Company of approximately $28,000.

 
48
 
During the year ended December 31, 2013, we sold the remaining parcel of land held within Dation, LLC for $300,000 with a $100,000 down payment and a $200,000 carryback note with interest only payments at 6% per annum due in one year. The sale resulted in a gain to the Company of approximately $13,000 and deferred gain of approximately $25,000.

1875 West Mission Blvd., LLC (“1875”) is a California limited liability company formed for the purpose of owning 22.41 acres of industrial land located in Pomona, California which was acquired by the Company and PNL (who were co-lenders in the subject loan) via foreclosure in August 2011. Pursuant to the Operating Agreement, we have a 60% membership interest in 1875 and are entitled to collect approximately $5,078,000 upon the sale of the property after PNL collects any unreimbursed LLC expenses it has paid and $1,019,000 in its default interest at the time of foreclosure. The land was sold during the year ended December 31, 2013 for net sales proceeds of approximately $9,489,000 resulting in gain on sale of $2,174,000. As we received our basis in 1875 of $5,078,000 upon sale, after noncontrolling interest expense to PNL, there was no net income or loss to the Company.

During the year ended December 31, 2013, we sold one unit in the office condominium complex located in Roseville, California that is held for investment for net sales proceeds of approximately $409,000 resulting in a net gain to the Company of approximately $216,000.

2014 Foreclosure Activity

During the year ended December 31, 2014, Sandmound Marina, LLC (“Sandmound”) (wholly owned by the Company) foreclosed on a first mortgage loan secured by unimproved land and a marina and campground located in Bethel Island, California with a principal balance of approximately $2,960,000 and obtained the properties via the trustee’s sale. In addition, advances made on the loan or incurred as part of the foreclosure in the total amount of approximately $282,000 were capitalized to the basis of the properties. The fair market values of the properties acquired were estimated to be higher than Sandmound’s recorded investment in the subject loan, and, thus, a gain on foreclosure in the amount of approximately $257,000 was recorded. The properties have been classified as held for investment as sales are not expected within one year.

During the year ended December 31, 2014, the Company foreclosed on a first mortgage loan secured by two adjacent, vacant buildings located in San Jose, California with a principal balance of approximately $690,000 and obtained the properties via the trustee’s sale. In addition, accrued interest and advances made on the loan or incurred as part of the foreclosure in the total amount of approximately $158,000 were capitalized to the basis of the properties. The fair market values of the properties acquired were estimated to be higher than the Company’s recorded investment in the subject loan, and, thus, a gain on foreclosure in the amount of approximately $208,000 was recorded. The properties have been classified as held for sale as a sale is expected to occur within one year.

During the year ended December 31, 2014, the Company foreclosed on a second mortgage loan secured by an assisted living facility located in Bensalem, Pennsylvania with a principal balance of approximately $3,420,000 and obtained the property via the trustee’s sale. In addition, advances made on the loan or incurred as part of the foreclosure in the total amount of approximately $519,000 were capitalized to the basis of the property. In 2012, the Company had purchased the first mortgage loan on this property which it became subject to at the time of foreclosure. Thus, the Company’s investment in this loan of approximately $1,079,000 was added to the basis of the property. The fair market value of the property acquired was estimated to approximate the Company’s recorded investments in the subject loans. The properties have been classified as held for investment as a sale is not expected within one year.

2013 Foreclosure Activity

During the year ended December 31, 2013, Brannan Island, LLC (wholly owned by the Company) foreclosed on two loans secured by a marina with 179 boat slips located in Isleton, California with an aggregate principal balance of $1,863,000 and obtained the property via the trustee’s sale. In addition, advances made on the loans or incurred as part of the foreclosures (such as legal fees and delinquent property taxes) in the total amount of approximately $140,000 were capitalized to the basis of the property. The amount capitalized at the time of foreclosure approximated the net fair market value of the property.  

During the year ended December 31, 2013, Tahoe Stateline Venture, LLC (“TSV”) (wholly owned by the Company) foreclosed on a loan secured by two undeveloped parcels of land located in South Lake Tahoe, California that was purchased at a discount during the same period with a principal balance of approximately $1,401,000 and obtained the property via the trustee’s sale. In addition, advances made on the loan or incurred as part of the foreclosure (including delinquent property taxes) in the total amount of approximately $335,000 were capitalized to the basis of the property. The fair market value of the land acquired was estimated to be higher than TSV’s basis in the subject loan, and, thus, a gain on foreclosure in the amount of approximately $952,000 was recorded. See below under “Tahoe Stateline Venture, LLC”.

 
49
 
During the year ended December 31 , 2013, TSV also foreclosed on three loans secured by first, second and third deeds of trust secured by ten undeveloped parcels of land located in South Lake Tahoe, California with principal balances totaling approximately $22,923,000 (total investment of $25,109,000 including advances made on the loans) and obtained the property via the trustee’s sale. Based on an appraisal dated June 30, 2013, it was determined that the fair value of the property was higher than our total investment in the loans (including a previously established loan loss allowance of $18,333,000), and a reversal to the provision for loan losses of approximately $6,476,000 was recorded at the time of foreclosure (for a net charge-off of $11,857,000). See below under “Tahoe Stateline Venture, LLC”.

Majority and Wholly-Owned Limited Liability Companies

720 University, LLC

We have an investment in a limited liability company, 720 University, LLC (720 University), which owns a commercial retail property located in Greeley, Colorado. We receive 65% of the profits and losses in 720 University after priority return on partner contributions is allocated at the rate of 10% per annum. The assets, liabilities, income and expenses of 720 University have been consolidated into the accompanying consolidated balance sheets and statements of operations of the Company.
 
The net income to the Company from 720 University was approximately $355,000 and $203,000 during the years ended December 31, 2014 and 2013, respectively. The non-controlling interest of the joint venture partner of approximately $5,000 and $(15,000) as of December 31, 2014 and 2013, respectively, is reported in the accompanying consolidated balance sheets. The book value of 720 University’s real property was approximately $11,547,000 and $11,697,000 as of December 31, 2014 and 2013, respectively.

The Company had a note payable with a bank with a principal balance of $9,741,463 and $9,917,585 of December 31, 2014 and 2013, respectively, through its investment in 720 University, which note was secured by the commercial retail property. The note required monthly interest and principal payments until the maturity date of March 1, 2015. The interest rate on the loan was fixed at 5.07% per annum.

In November 2014, 720 University entered into a Real Estate Sale Agreement pursuant to which 720 University agreed to sell the property for $21,000,000 (subsequently reduced to $20,750,000). The buyer deposited $500,000 upon execution and deposited an additional $500,000 once the due diligence period expired in January 2015 and these deposits are non-refundable. On January 30, 2015, an initial closing was held for the purpose of refinancing the 720 University note payable, and the buyer extended a new loan to 720 University to repay the existing note payable to the bank. The principal amount of the new loan is $9,771,263 and will accrue interest at 6.0% per annum until paid off upon the closing of the sale of the property to the buyer which is expected to occur on or about May 28, 2015. The closing of the sale of the property is subject to typical conditions and there can be no assurance that the closing will occur.
 
TOTB Miami, LLC

During the year ended December 31, 2011, the Company and two co-lenders (which included OFG and PRC Treasures, LLC, or PRC) foreclosed on a participated, first mortgage loan secured by a condominium complex located in Miami, Florida with a principal balance to the Company of approximately $26,257,000 and obtained an undivided interest in the properties via the trustee’s sale. The Company and the other lenders formed a Florida limited liability company, TOTB Miami, LLC (“TOTB”), to own and operate the complex. The complex consists of three buildings, two of which have been renovated and are being leased, and in which 169 units remain unsold and one which has been contributed to a wholly-owned subsidiary of TOTB, TOTB North, and contains 160 vacant units that are currently being renovated. Based on an appraisal, it was determined that the fair value of the property was lower than our total investment in the loan (including a previously established loan loss allowance of $10,188,000) and an additional charge to provision for loan losses of approximately $450,000 was recorded at the time of foreclosure during the first quarter of 2011 (total charge-off of $10,638,000).
 
In March 2012, we made a priority capital contribution to TOTB in the amount of $7,200,000. TOTB then purchased PRC’s member interest in TOTB for $7,200,000. Thus, the remaining members in TOTB are now the Company and OFG.  On the same date, the Company and OFG executed an amendment to the TOTB operating agreement to set the percentage of capital held by each at 80.74% for the Company and 19.26% for OFG based on the dollar amount of capital invested in TOTB (excluding the Preferred Class A Units discussed below). Income and loss allocations have been made based on these percentages after a 15% preferred return to the Company based on its $2,583,000 contribution to
TOTB in 2011 (represented by its Preferred Class A Units). The change in capital as a result of the PRC buyout and the amended agreement resulted in an increase to our capital of approximately $2,760,000. The preferred capital of $2,583,000 was returned to the Company as of December 31, 2013 with excess cash held by TOTB and capital contributions of approximately $1,520,000 and $363,000 made by the Company and OFG, respectively.

 
 
50
 
 
During the year ended December 31, 2014, TOTB contributed the vacant and unimproved 160 unit apartment building to a new wholly-owned entity, TOTB North. TOTB North then entered into a construction loan agreement which will provide up to $21,304,000 for the purpose of renovating and improving the apartment building. As of December 31, 2014, approximately $1,008,000 had been drawn from the a new construction loan to fund debt issuance costs and pre-construction costs to date. In addition, TOTB North has entered into various contracts for the design, engineering, first phase demolition and concrete remediation and second phase construction for the renovation project in the aggregate amount of approximately $21,786,000 of which approximately $1,557,000 had been incurred as of December 31, 2014. In addition, another $580,000 in renovation-related costs, interest, property taxes, and amortization of deferred financing costs have been capitalized (total of $2,137,000) as of December 31, 2014. During the year ended December 31, 2014, the Company and OFG contributed approximately $453,000 and $108,000, respectively, to TOTB to fund the initial $1,000,000 deposit required pursuant to the construction loan agreement.

During 2014, TOTB entered into a new loan agreement whereby it borrowed $13,000,000 secured by the 169 renovated and leased condominium units. The outstanding balance as of December 31, 2014 was approximately $12,975,000. The loan bears interest at the floating daily three month LIBOR rate of interest plus 4.0% per annum, but in no event will the rate be lower than 4.25%. The interest rate as of December 31, 2014 was 4.26%. Principal and interest is payable monthly with principal amortizing over 300 months. The initial maturity date is November 16, 2017 which may be extended for two additional one year periods if all conditions in the loan agreement are met. The net cash proceeds from the new loan were distributed to the members of TOTB ($10,256,000 to ORM and $2,446,000 to OFG).

The noncontrolling interests of OFG totaled approximately $4,170,000 and $6,372,000 as of December 31, 2014 and 2013, respectively. The net income to the Company from TOTB was approximately $573,000 and $201,000 during the years ended December 31, 2014 and 2013, respectively.

  Tahoe Stateline Venture, LLC

We made a series of loans with aggregate principal balances totaling approximately $24,203,000 originally secured by first, second and third deeds of trust on 29 parcels of land with entitlements for a 502,267 square foot resort development located in South Lake Tahoe, California known as Chateau at Lake Tahoe (the “Project”). Through multiple foreclosures, 16 of the parcels within the Project were acquired by lenders who held senior positions to the Company. In December 2012, we acquired seven of those parcels, that were contiguous to parcels securing our loans, from the foreclosing lenders, for approximately $6,700,000,. The parcel purchases were made through TSV. The sellers of the parcels provided financing for the balance of the purchase prices which totaled $3,300,000 at 5% interest with interest only, semi-annual payments and principal due in December 2016. One of these loans with a principal balance of $400,000 was repaid in full in December 2014. While these parcels were originally part of the security for our loans, management had chosen not to advance the funds to acquire the parcels at the foreclosure sales in 2010 and 2011 due to the uncertainty surrounding the Project.

In addition to the seven parcels purchased in 2012, in February 2013, TSV acquired the senior note for $1,400,000 secured by two adjacent parcels on which it held junior loans. In March 2013, TSV acquired these two parcels via a trustee sale.

In February 2013, our beneficial interest in the delinquent loans discussed above was transferred to TSV. In May 2013, TSV foreclosed on all of the remaining deeds of trust secured by ten parcels (not including one parcel where it held a third deed of trust - see below) and gained ownership of the related land.

In July 2013, TSV advanced $660,000 to obtain a release of a second deed of trust that was senior to TSV’s loan on a single parcel of land located on South Lake Tahoe Blvd. and adjacent to the parcels TSV acquired in the May 2013 foreclosure. In July 2013, TSV foreclosed on this parcel, subject to the existing first loan with a principal balance of $1,000,000 plus accrued interest. In October 2013, the holders of this security agreed to restructure the note by waving the accrued interest in exchange for a $300,000 principal pay down. The restructured note (now with a principal balance of $500,000 after another $200,000 repayment made during 2014) is due on August 1, 2017 and requires interest only payments on a quarterly basis at an interest rate of 5%. The holders on this note also agreed to release from their security another parcel of land that TSV had acquired in the May 2013 foreclosure.

 
51
 
After the final trustee sale, TSV owned all of the parcels necessary to complete the first retail phase of the Project and began construction in the summer of 2013. In April 2014, TSV finalized the purchase of nine additional parcels of land (and certain related assets) that constitute the balance of parcels in the second phase of the Project and that border the other parcels owned by TSV for $6,000,000 in cash.  As a result of the purchase, TSV now owns 24 parcels encompassing the entire Project (after combining six parcels into one for the retail development and purchase of nine parcels in 2014).

TSV completed the construction of the first phase of the Project consisting of 30,255 square feet of retail space (of which 22,909 is currently leasable) during the fourth quarter of 2014 and the property is currently approximately 75% leased. The first phase retail building with a book value of approximately $23,212,000 as of December 31, 2014 remains as Held for Investment, and the second phase property (commercial and residential land under development), with a book value of approximately $30,450,000, has been transferred to Held for Sale as the property is listed and a sale is expected within one year.

1875 West Mission Blvd., LLC

1875 West Mission Blvd., LLC (“1875”) was a California limited liability company formed for the purpose of owning 22.41 acres of industrial land located in Pomona, California which was acquired by the Company and PNL (who were co-lenders in the subject loan) via foreclosure in August 2011. Pursuant to the Operating Agreement of 1875, we had a 60% membership interest in 1875 and were entitled to collect approximately $5,078,000 upon the sale of the property after PNL collects any unreimbursed LLC expenses it has paid and $1,019,000 in its default interest at the time of foreclosure. The assets, liabilities, income and expenses of 1875 have been consolidated into the accompanying consolidated balance sheet and statement of operations of the Company. The land was sold during the year ended December 31, 2013 for net sales proceeds of approximately $9,489,000 resulting in gain on sale of $2,174,000. As we received our basis in 1875 of $5,078,000 upon sale, after non-controlling interest expense to PNL, there was no net gain or loss to the Company. The noncontrolling interest of PNL was approximately $(4,000) as of December 31, 2013.

There was no net income or loss to the Company from 1875 for the years ended December 31, 2014 and 2013.

Equity Method Investment in Limited Liability Company

1850 De La Cruz, LLC

During 2008, we entered into an Operating Agreement of 1850 De La Cruz LLC, a California limited liability company (“1850”), with Nanook Ventures LLC (“Nanook”), an unrelated party.  The purpose of the joint venture is to acquire, own and operate certain industrial land and buildings located in Santa Clara, California that were owned by the Company. The property was subject to a Purchase and Sale Agreement dated July 24, 2007 (the “Sale Agreement”), as amended, between the Company, as seller, and Nanook, as buyer.  During the course of due diligence under the Sale Agreement, it was discovered that the property is contaminated and that remediation and monitoring may be required.  The parties agreed to enter into the Operating Agreement to restructure the arrangement as a joint venture.  At the time of closing in July 2008, the two properties were separately contributed to two new limited liability companies, Nanook Ventures One LLC and Nanook Ventures Two LLC that are wholly owned by 1850. The Company and Nanook are the Members of 1850 and NV Manager, LLC is the manager.

During the years ended December 31, 2014 and 2013, we received capital distributions from 1850 in the total amount of $170,000 and $160,000, respectively. The net income to the Company from its investment in 1850 De La Cruz was approximately $170,000 and $161,000 for the years ended December 31, 2014 and 2013, respectively.

 
52
 
The approximate net income (loss) from our real estate properties held within wholly-owned limited liability companies and a wholly owned corporation and other investment properties with significant operating results (including gains/losses from sales and impairment losses), for the years ended December 31, 2014 and 2013 not already discussed above are included in the table below. The information presented includes only the revenues and expenses directly related to the properties and no allocations have been made for overhead and other expenses the Company incurs that are not directly related to an individual property.

   
2014
 
2013
 
DarkHorse Golf Club, LLC (golf course sold in 2012)
 
$
—
 
$
(166,000
)
Lone Star Golf, Inc.
   
9,000
   
(99,000
)
Baldwin Ranch Subdivision, LLC
   
(108,000
)
 
(92,000
)
The Last Resort and Marina, LLC
   
(189,000
)
 
(22,000
)
54 th Street Condos, LLC
   
35,000
   
(43,000
)
Wolfe Central, LLC
   
397,000
   
397,000
 
AMFU, LLC
   
(14,000
)
 
65,000
 
Phillips Road, LLC
   
138,000
   
108,000
 
Broadway & Commerce, LLC
   
48,000
   
47,000
 
Brannan Island, LLC
   
3,000
   
(55,000
)
Piper Point Marina- held in Sandmound Marina, LLC (foreclosed in 2014)
   
(57,000
)
 
—
 
Light industrial building, Paso Robles, California
   
179,000
   
146,000
 
Undeveloped industrial land, San Jose, California
   
(122,000
)
 
(114,000
)
Office buildings, Roseville, California
   
6,000
   
7,000
 
Office condominium complex, Roseville, California
   
(14,000
)
 
128,000
 
Storage facility/business, Stockton, California
   
311,000
   
292,000
 
Undeveloped land, Gypsum, Colorado
   
(188,000
)
 
(156,000
)

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents and restricted cash decreased from approximately $12,254,000 as of December 31, 2013 to approximately $7,662,000 as of December 31, 2014 ($4,592,000 or 37.5% decrease) primarily due to construction costs on the retail project owned by TSV, other capital expenditures on real estate and investments in new loans, net of repayments of loans, net advances from the new lines of credit and proceeds from new debt obtained on the TSV and TOTB properties during 2014.

Interest and Other Receivables

Interest and other receivables decreased from approximately $1,674,000 as of December 31, 2013 to $1,482,000 as of December 31, 2014 ($192,000 or 11.5% decrease) due primarily to the foreclosure of three loans during 2014 that had outstanding advances that were ultimately reclassified to the basis of the real estate obtained. This was partially offset by an increase in interest income receivable on loans as the balance of performing loans in the portfolio increased between December 31, 2013 and 2014.

Deferred Financing Costs

Deferred financing costs increased from approximately $95,000 as of December 31, 2013 to $1,318,000 as of December 31, 2014 ($1,223,000 increase) due primarily to additional debt issuance costs paid or incurred related to our new lines of credit with CB&T and Opus executed during 2014, for a new construction loan executed by TOTB North, for a new loan secured by the renovated and leased condominium units in TOTB and for a new loan securing the retail complex owned by TSV in the aggregate amount of $1,476,000, net of amortization of deferred financing costs of approximately $254,000 during the year.

 
53
 

Dividends Payable

Dividends payable increased from approximately $180,000 as of December 31, 2013 to $1,292,000 as of
December 31, 2014 because the Board of Directors approved the payment of dividends on a quarterly basis rather than on a monthly basis in their January 2014 meeting. The Board of Directors declared a quarterly dividend on December 20, 2014 of $0.12 per share or approximately $1,292,000 that was paid on January 14, 2015 to stockholders of record at the close of business on December 31, 2014.

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities decreased from approximately $2,711,000 as of December 31, 2013 to $2,220,000 as of December 31, 2014 ($491,000 or 18.1% decrease), due primarily to decreased payables related to the construction activities on the property owned by TSV as the project was completed in the fourth quarter of 2014 and due to a decrease in accrued property taxes payable on our real estate properties as of December 31, 2014.

Deferred Gains

Deferred gains decreased from approximately $3,313,000 as of December 31, 2013 to approximately $362,000 as of December 31, 2014 ($2,951,000 or 89.1% decrease) due to partial and full principal repayments received on three carryback loans during the year ended December 31, 2014, resulting in the recognition of additional gain under the installment method of $2,951,000.

Lines of Credit Payable

Lines of credit payable increased from $0 as of December 31, 2013 to $11,450,000 as of December 31 2014. We executed two new line of credit agreements with two banks during 2014 and began to borrow from the lines during 2014 to provide funds for new loan originations.

Notes and Loans Payable on Real Estate

Notes and loans payable increased from approximately $13,918,000 as of December 31, 2013 to approximately $37,570,000 as of December 31, 2014 ($23,652,000 increase) due primarily to the new construction loan obtained by TOTB North and advances from the loan totaling $1,008,000 to fund deferred financing and pre-construction costs, the new loan payable obtained by TOTB secured by the renovated and leased condominium units with  a principal balance of $12,975,000 and the new loan payable obtained by TSV secured by the recently completed retail complex with a principal balance of $10,445,000 as of December 31, 2014.

Noncontrolling Interests

Noncontrolling interests decreased from approximately $6,352,000 as of December 31, 2013 to approximately $4,175,000 as of December 31, 2014 ($2,177,000 or 34.3% decrease), due primarily to a cash distribution made to OFG of $2,446,000 during 2014 as a result of the new loan obtained on the renovated and leased condominium units owned by TOTB.

Non-GAAP Financial Measures

Funds from Operations

We utilize supplemental non-GAAP measures of operating performance, including funds from operations (“FFO”), an industry-wide standard measure of REIT operating performance. We believe FFO provides investors with additional information concerning our operating performance and a basis to compare our performance with those of other REITs. We determine FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts ("NAREIT"), as net income (loss) attributable to common stockholders (computed in accordance with GAAP), plus depreciation and amortization of real estate and other assets, amortization of deferred financing costs, impairments of real estate assets, provisions for loan losses and losses from sales of real estate, reduced by gains from sales of real estate and foreclosures of loans, accretion of discounts on loans and extraordinary items, and after adjustments for unconsolidated ventures.
 
 
54
 
Our calculation of FFO may not be comparable to similar measures reported by other REITs. This non ‐ GAAP financial measure should not be considered as an alternative to net income as a measure of our operating performance or to cash flows computed in accordance with GAAP as a measure of liquidity, nor is it indicative of cash flows from operating and financial activities.

We urge investors to carefully review the GAAP financial information included as part of the Annual Report on Form 10-K, as well as in the Company’s Quarterly Reports on Form 10-Q and quarterly earnings releases.
The following table reconciles FFO to comparable GAAP financial measures:

   
For the Year Ended
 
   
December 31,
2014
 
December 31,
2013
 
Funds from Operations
         
    Net income attributable to common stockholders
 
$        7,929,629   
 
$       8,732,897   
 
    Adjustments:
         
         Depreciation and amortization of real estate and other assets
 
             2,255,577   
 
             2,485,587   
 
         Depreciation allocated to non-controlling interests
 
              (125,921   
)
              (180,771   
 
)
         Amortization of deferred financing costs to interest expense
 
132,723   
 
—   
 
         Accretion of discount on loan to interest income
 
(122,004   
)
—   
 
         Impairment losses on real estate properties
 
                            179,040   
 
                            666,240   
 
         Reversal of provision for loan losses
 
           (1,869,733   
)
           (7,822,112   
)
         Gain on sales of real estate, net
 
           (3,243,359   
)
           (2,942,861   
 
)
         Gain on foreclosures of loans
 
(464,754   
)
(952,357   
)
         Adjustments for unconsolidated ventures
 
—   
 
                (1,000   
 
)
    FFO attributable to common stockholders
 
 $        4,671,198 
 
 $           (14,377   
)
    Basic and diluted FFO per common share
 
 $                 0.43   
 
 $                0.00   
 
           

Asset Quality

A consequence of lending activities is that losses will be experienced and that the amount of such losses will vary from time to time, depending on the risk characteristics of the loan portfolio as affected by economic conditions and the financial experiences of borrowers.  Many of these factors are beyond the control of the Company or its management. There is no precise method of predicting specific losses or amounts that ultimately may be charged off on specific loans or on segments of the loan portfolio.

The conclusion that a Company loan may become uncollectible, in whole or in part, is a matter of judgment. Although institutional lenders are subject to regulations that, among other things, require them to perform ongoing analyses of their loan portfolios (including analyses of loan-to-value ratios, reserves, etc.), and to obtain current information regarding their borrowers and the securing properties, we are not subject to these regulations and have not adopted these practices. Rather, management, in connection with the quarterly closing of our accounting records and the preparation of the financial statements, evaluates our loan portfolio. The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in our loan portfolio and current economic conditions. Such evaluation, which includes a review of all loans on which management determines that full collectability may not be reasonably assured, considers among other matters:
 
 
55
 
 
·  
prevailing economic conditions;
 
·  
our historical loss experience;
 
·  
the types and dollar amounts of loans in the portfolio;
 
·  
borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay;
 
·  
evaluation of industry trends;
 
·  
review and evaluation of loans identified as having loss potential; and
 
·  
estimated net realizable value or fair value of the underlying collateral.

Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover probable losses of the Company. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Loan losses deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged off amounts are credited to the allowance for loan losses. As of December 31, 2014, management believes that the allowance for loan losses of $2,869,000 is adequate in amount to cover probable incurred credit losses. Because of the number of variables involved, the magnitude of the swings possible and management’s inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by management. As of December 31, 2014, six loans totaling $22,316,000 were impaired and four of these loans totaling $10,728,000 are not accruing interest. Two of these loans totaling $8,614,000 were past maturity as of December 31, 2014. In addition, one loan totaling $862,000 was also past maturity but less than ninety days delinquent in monthly payments as of December 31, 2014 (combined total of $23,178,000 in loans that are past maturity and impaired). During the year ended December 31, 2014, we recorded a decrease in the allowance for loan losses of $1,870,000 (net decrease in the specific loan loss allowance of $1,236,000 and decrease in the general allowance of $634,000).  Management believes that the allowance for loan losses is sufficient given the estimated fair value of the collateral underlying impaired and past maturity loans and based on historical loss and delinquency factors applied to performing loans by class.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business needs.

We believe our available cash and restricted cash balances, other financing arrangements, and cash flows from operations will be sufficient to fund our liquidity requirements for the next 12 months.

We require liquidity to:
 
 
•
fund future loan investments;
 
•
to develop, improve and maintain real estate properties;
 
•
to repay principal and interest on our borrowings;
 
•
to pay our expenses, including compensation to our Manager;
 
•
to pay U.S. federal, state, and local taxes of our TRSs; and
 
•
to distribute annually a minimum of 90% of our REIT taxable income and to make investments in a manner that enables us to maintain our qualification as a REIT.

We intend to meet these liquidity requirements primarily through the following:
 
 
•
the use of our cash and cash equivalent balances of $1,414,000 as of December 31, 2014;
 
•
cash generated from operating activities, including interest income from our loan portfolio and income generated from our real estate properties;
 
•
proceeds from the sales of real estate properties;
 
•
proceeds from our new revolving lines of credit;
 
•
proceeds from future borrowings including additional lines of credit;
 
•
proceeds from the new construction loan obtained by TOTB North for renovation of the vacant apartment building; and
 
•
proceeds from potential future offerings of our equity securities.
 
 
56
 
The following table summarizes our cash flow activity for the periods presented:
 
                 
   
Year Ended December 31,
   
2014
 
2013
Net cash provided by (used in) operating activities
$
2,967,167
 
$
      (607,672
)
Net cash (used in) provided by investing activities
 
(38,875,451
)
 
    1,352,099
 
Net cash provided by (used) in financing activities
 
29,163,095
   
(13,717,198
)

During the year ended December 31, 2014, our cash and cash equivalents decreased approximately $6,745,000 primarily due to investments in new loans and capitalized costs related to construction on the retail portion of the land owned by TSV. Although cash has decreased, we now have two new lines of credit, which together may currently provide an additional $34,076,000 available to us (or $40,000,000 when fully collateralized). As of December 31, 2014, $11,450,000 had been drawn on the lines of credit. These lines of credit will require us to potentially maintain up to $7,000,000 of restricted cash with the applicable banks, which is approximately $1,000,000 more than our current restricted cash balance held with such banks.

Operating Activities

Cash flows from operating activities are primarily rental and other income from real estate properties, net of real estate expenses, and interest received from our investments in loans, partially offset by payment of operating expenses. For the year ended December 31, 2014, cash flows from operating activities increased $3,575,000, compared to the year ended December 31, 2013. The increase reflects increased cash flow from rental properties as a result of increased occupancy and rental rates, completion and leasing of the TSV retail complex during the fourth quarter of 2014 and increased interest income on performing loans and collected on impaired loans during 2014.

Investing Activities

Net cash used in investing activities for both periods presented reflect our investing activity. For the year ended December 31, 2014, cash flows from investing activities decreased $40,228,000. Approximately $38,875,000 was used in investing activities during 2014 as $68,564,000 was used for investments in loans, improvements to real estate properties and transfers to restricted cash, which was partially offset by approximately $29,711,000 received from the payoff of loans, proceeds from the sale of a real estate property and distribution from an equity method investment during the period.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2014 reflects net advances on our new lines of credit from CB&T and Opus Bank of $11,450,000 (advances net of repayments), $23,331,000 in aggregate borrowings from the new TOTB North construction loan, the new TOTB loan payable and the new TSV loan payable and a $113,000 contribution from noncontrolling interest, net of dividends paid to stockholders of approximately $1,795,000, distribution of non-controlling interest of $2,455,000, purchase of treasury stock pursuant to the Repurchase Program of $325,000, payment of deferred financing costs of $355,000 and repayments of notes payable of $801,000.

Dividends

We intend to make regular quarterly distributions to holders of our Common Stock. U.S. federal income tax law generally requires that a REIT annually distribute at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, and to the extent that it annually distributes less than 100% of its net taxable income in any taxable year, and that it pay tax at regular corporate rates on that undistributed portion. We intend to make regular quarterly distributions to our stockholders in an amount equal to or greater than our net taxable income, if and to the extent authorized by our Board of Directors. Before we make any distributions, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our debt payable. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

 
57
 
Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, special purpose entities or VIEs, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities.

Contractual Obligations and Commitments
 
The table below summarizes our known contractual obligations as of December 31, 2014 and in future periods in which we expect to settle such obligations. The table does not reflect the effect of actual repayments or draws on the obligations or any new financing obtained subsequent to year end.
 
                                         
 
  
Payment due by Period
 
Contractual Obligations
  
Total
 
  
Less Than
1 Year
 
  
1-3
Years
 
  
3-5
Years
 
  
More Than
5 Years
 
Recourse indebtedness:
  
     
  
     
  
     
  
     
  
     
Lines of credit payable (1)
  
$
11,450,000
  
  
$
—
  
  
$
11,450,000
  
  
$
—
  
  
$
—
  
Loans payable on real estate
  
 
23,420,167
  
  
 
—
  
  
 
12,975,167
  
  
 
—
  
  
 
10,445,000
  
Construction loan payable (2)
  
 
1,007,919
     
—
     
1,007,919
     
—
     
—
  
 
  
     
  
     
  
     
  
     
  
     
Total recourse indebtedness
  
 
35,878,086
     
—
     
25,433,086
     
—
     
10,445,000
  
Non-recourse indebtedness:
  
                                     
Notes payable on real estate
  
 
13,141,463
     
9,741,463
     
3,400,000
     
—
     
—
  
 
  
     
  
     
  
     
  
     
  
     
Total non-recourse indebtedness
  
 
13,141,463
     
9,741,463
     
3,400,000
     
—
     
—
  
 
  
     
  
     
  
     
  
     
  
     
Total indebtedness
  
 
49,019,549
     
9,741,463
     
28,833,086
     
—
     
10,445,000
  
Interest payable (3)
  
 
4,641,455
  
  
 
1,720,452
  
  
 
2,294,852
  
  
 
626,151
  
  
 
—
  
Real estate construction/renovation contracts
   
21,295,173
     
18,405,215
     
2,889,958
     
—
     
—
 
Commitments to reimburse tenant improvements
   
226,044
     
226,044
     
—
     
—
     
—
 
Funding commitments to borrowers (4)
  
 
5,934,708
  
  
 
5,934,708
  
  
 
—
  
  
 
—
 
  
 
—
 
 
  
     
  
     
  
     
  
     
  
     
Total
  
$
81,116,929
  
  
$
36,027,882
  
  
$
34,017,896
  
  
$
626,151
  
  
$
10,445,000
  
 
  
     
  
     
  
     
  
     
  
     

(1)
As of December 31, 2014, the Company has the ability to borrow a total of $34,076,000 on its two lines of credit.
(2)
Total available to advance for construction is $21,304,000 and management expects that this amount will be advanced monthly to arrive at that balance by March 2016.
(3)
Variable-rate indebtedness assumes a 3 month LIBOR rate of 0.26%, a 6 month LIBOR rate of 0.36% and a prime rate of 3.25% (actual rates at December 31, 2014) through the original maturity date of the financing.  Interest payable is based on balances outstanding as of December 31, 2014.
(4)
Amounts represent the commitments we have made to fund borrowers in our existing lending arrangements as of December 31, 2014.

The table above does not reflect amounts due to the Manager pursuant to our charter, as described below, as the charter does not provide for a fixed and determinable payment.

Management Agreement and Charter
 
The Manager provides services to the Company pursuant to the Management Agreement with the Manager dated May 20, 2013, and is entitled to receive a management fee, servicing fee, late fees, other miscellaneous fees, and the reimbursement of certain expenses as described in the Company’s charter. In consideration of the management services rendered to the Company, OFG is entitled to receive from the Company a management fee payable monthly, subject to a maximum of 2.75% per annum of the average unpaid balance of the mortgage loans at the end of each month in the calendar year. In addition, OFG in is also entitled to a monthly loan 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 paid in the community where the loan is placed for the provision of such services on that type of loan, or up to 0.25% per annum of the unpaid principle balance of the loans. Pursuant to the charter, OFG also receives all late payment charges from borrowers on loans owned by the Company, as well as, other miscellaneous fees which are collected from loan payments, loan payoffs or advances from loan principal, payable in cash on a monthly basis following the end of each month.
 
 
58
 
 
In addition, OFG is reimbursed by the Company for the actual cost of goods, services and materials used for or by the Company and paid by OFG and the salary and related salary expense of OFG’s non-management and non-supervisory personnel performing services for the Company which could be performed by independent parties, including tax, accounting, and legal expenses (subject to certain limitations in the Management Agreement). Expense reimbursements to OFG are made in cash on a monthly basis following the end of each month. The Company’s reimbursement obligation is not subject to any dollar limitation.
 
 
The Management Agreement and the terms of the charter compensation and expense reimbursement  shall remain in effect for the duration of the existence of the Company, unless earlier terminated by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock, automatically, or by OFG, or by the Company in accordance with the Agreement.
 
Company Debt

CB&T Line of Credit

On February 10, 2014, we entered into a credit agreement and related documents with California Bank & Trust (“CB&T”) which provides us with a new secured revolving line of credit (the “CB&T Credit Facility”).  Subject to various conditions, borrowings under the CB&T Credit Facility will be used for general corporate purposes and to finance the origination of new commercial real estate loans.  The maximum borrowings under the CB&T Credit Facility is the lesser of $20,000,000 or the amount determined pursuant to a borrowing base calculation based on a percentage of the appraised value of eligible loan and real estate assets we pledge as collateral to secure the loan. As of December 31, 2014, the total amount available to borrow under the CB&T Credit Facility was $17,355,000 and the balance outstanding was $11,450,000 (leaving $5,905,000 available). As of the date of this filing, the total amount available to borrow is $18,855,000 and the balance outstanding is $17,228,000.

Borrowings under the CB&T Credit Facility mature on February 5, 2016 and advances may be made up to that date.  Such borrowings bear interest payable monthly at the prime rate of interest established by CB&T from time-to-time plus one quarter percent (.25%) per annum (3.5% at December 31, 2014). Upon a default such interest rate increases by 2.00%.   The CB&T Credit Facility required the payment of an origination fee of $100,000 and other issuance costs and is subject to certain ongoing administrative fees and expenses. As of December 31, 2014, $177,000 of these costs had been paid and capitalized to deferred financing costs. Interest expense on the CB&T Credit Facility was approximately $468,000 during the year ended December 31, 2014 (including $69,000 in amortization of deferred financing costs).

The CB&T Credit Facility agreements contain customary events of default and affirmative, negative and financial covenants for a loan of this type.

Opus Line of Credit

On April 22, 2014, we entered into a credit agreement and related documents with Opus Bank (“Opus”) which provides us with a new secured revolving line of credit (the “Opus Credit Facility”).  Subject to various conditions, borrowings under the Opus Credit Facility will be used by us for general corporate purposes and to finance the origination of new commercial real estate loans.  The maximum borrowings under the Opus Credit Facility is the lesser of $20,000,000 or the amount determined pursuant to a borrowing base calculation based on a percentage of the appraised valued of eligible loan and real estate assets we pledge as collateral to secure the   loan. As of December 31, 2014, the total amount available to borrow under the Opus Credit Facility was $16,721,000 and there was no balance outstanding (leaving $16,721,000 available). As of the date of this filing, the total amount available to borrow is approximately $16,721,000 and there is no balance outstanding.  Advances under the Opus Credit Facility may be made by Opus until April 1, 2016.

All borrowings under the Opus Credit Facility bear interest payable monthly as follows: (i) continuing through October 1, 2014 the rate of interest will be 4.5%; (ii) commencing October 1, 2014, and on each successive six month anniversary during the term (the “Rate Change Date”), the rate of interest will be reset to the Six Month LIBOR rate of interest (currently .36%) as reported on such Rate Change Date plus four percent (4.0%) per annum but in no event will the interest rate be lower than 4.5% per annum. As of December 31, 2014, the interest rate was 4.5%. Upon a default such interest rate increases by an additional 5.00%. Commencing on May 1, 2016, in addition to the required interest payments, we are also required to make mandatory monthly principal payments and all amounts under the Opus Credit Facility are to be repaid not later than April 1, 2017.
 
 
59
 
The Opus Credit Facility required the payment of an origination fee of $100,000 and other issuance costs and is subject to certain administrative fees and expenses. As of December 31, 2014, $231,000 of these costs were paid and capitalized to deferred financing costs. Interest expense on the Opus Credit Facility was approximately $112,000 during the year ended December 31, 2014 (including $51,000 in amortization of deferred financing costs).

The Opus Credit Facility agreements contain customary events of default and affirmative, negative and financial covenants for a loan of this type.

TOTB North, LLC Construction Loan
 
On June 12, 2014, TOTB North entered into a construction loan agreement and related documents with Bank of the Ozarks (“Ozarks”) which provides TOTB North with a new secured construction loan (the “North Construction Loan”) of up to $21,304,000 to renovate the apartment building (together with the related parcel, the “Property”) owned by TOTB North (the “Project”).  The Company and the Manager have jointly and severally guaranteed completion of the Project and repayment of the loan, and have provided a carve-out guaranty with respect to standard “bad-boy” carve-out provisions.  The initial maturity date  of the loan is June 12, 2017, and may be extended at the option of TOTB North  for two additional one year periods if a number of conditions are met at the time of each extension including, among others, that there be no defaults, that the Property have a loan to value ratio at or below 60%, that the debt service coverage ratio (“DSCR”) of the Property equals or exceeds 1.25:1 at the time of each extension, that there be no material adverse change  relating to TOTB North or any guarantor and that certain additional fees are paid to Ozarks.

Borrowings under the North Construction Loan documents are subject to customary conditions, and   the balance of the North Construction Loan was approximately $1,008,000 as of December 31, 2014 and approximately $1,580,000 as of the date of this filing. Borrowings under the North Construction Loan bear interest at  the floating daily Three Month LIBOR rate plus four percent (4.0%) per annum (the “Note Rate”), with a floor rate of four and one-half percent (4.5%).  Upon default the Note Rate increases eight percent (8.00%). The Note Rate as of December 31, 2014 was 4.5% per annum. Monthly interest only payments are required until the earlier to occur of (i) December 12, 2015 or (ii) the first interest payment date occurring after the Project is completed and the Property achieves a DSCR of greater than 1.25:1 (the “Amortization Commencement Date”).  Commencing on the Amortization Commencement Date, monthly principal payments are also required with principal amortizing over 300 months and the balance of the loan is due on the maturity date. Additionally, TOTB North made a required deposit with Ozarks of $1.0 million (the “Bridge Equity”) in 2014 using a capital contribution by TOTB Miami (excess funds held and capital contributions of $453,000 from the Company and $108,000 from OFG).  The Bridge Equity was provided to fund Project costs pending satisfaction of additional post-closing conditions under the loan documents , and Ozarks reimbursed the Bridge Equity as part of the loan in February 2015.   All post-closing conditions were met in February 2015, and TOTB North was given access to the remaining balance of the North Construction Loan. In 2014, TOTB North paid Ozarks an origination fee and customary closing fees, disbursements and expenses totaling $622,000. The majority of these costs were paid from loan proceeds and capitalized to deferred financing costs. During 2014, approximately $121,000 of deferred financing costs were amortized to the Project. In addition, during 2014 approximately $22,000 of interest was incurred and capitalized to the Project.

The North Construction Loan documents contain customary events of default and affirmative, negative and financial covenants of TOTB North and the guarantors for a loan of this type, including, among others, a requirement that the Company in its capacity as a guarantor maintain a minimum of $5,000,000 in unencumbered cash balances and a minimum net worth of $35,000,000.

TOTB Miami, LLC Loan Payable
 
On November 17, 2014, TOTB Miami entered into a new loan agreement and related documents with Ozarks whereby TOTB Miami borrowed $13,000,000 (the “TOTB Miami Loan”). The loan is secured by the 154 leased condominium units owned in the Point building and the related parcel (the “TOTB Property”). The net cash proceeds from the loan were distributed to the members of TOTB Miami ($10,256,000 to ORM and $2,446,000 to OFG) in 2014. The Company and the Manager have jointly and severally guaranteed repayment of the loan, and have provided a carve-out guaranty with respect to standard “bad-boy” carve-out provisions.  Ozarks also required that the TOTB Miami Loan and the North Construction Loan be cross-collateralized and cross-defaulted, and that excess proceeds from any sale of collateral securing the North Construction Loan or the TOTB Miami Loan be used to reduce or pay off the other loan with Ozarks. The initial maturity date of the TOTB Miami Loan is November 16, 2017, and may be extended at the option of TOTB Miami for two additional one year periods if a number of conditions are met at the time of each extension, including among others, the conditions that there be no defaults, that the TOTB Property have a loan to value ratio at or below 65%, that the debt service coverage ratio (“DSCR”) of the TOTB Property equals or exceeds 1.35:1, that there be no material adverse change relating to TOTB Miami or any guarantor and that certain additional fees are paid to Lender.

 
60
 
The balance of the TOTB Miami Loan was approximately $12,975,000 as of December 31, 2014 and approximately $12,900,000 as of the date of this filing. Borrowings under the TOTB Miami Loan bear interest at the floating daily Three Month LIBOR rate plus four percent (4.0%) per annum (the “Note Rate”), with a floor rate of four and one-quarter percent (4.25%). Upon default the Note Rate increases by eight percent (8.00%). The Note Rate as of December 31, 2014 was 4.26 % per annum.  Principal and interest is payable monthly with principal amortizing over 300 months and the balance of the loan is due on the maturity date. TOTB Miami paid closing fees, disbursements and expenses, including an origination fee to Ozarks, which totaled approximately $323,000. The majority of these costs were paid out of proceeds from the loan and capitalized to deferred financing costs and are being amortized to interest expense using the effective interest method through the maturity date. During the year ended December 31, 2014, approximately $81,000 of interest expense was incurred (including approximately $12,000 of deferred financing costs amortized to interest expense).

The TOTB Miami Loan documents contain customary events of default and affirmative, negative and financial covenants of TOTB Miami and the guarantors for loans of this type, including among others a requirement that the Company in its capacity as a guarantor maintain: (i) a minimum of $5,000,000 in unencumbered cash balances and (ii) a minimum Net Worth of $35,000,000.

Tahoe Stateline Venture, LLC Loan Payable
 
TSV entered into a secured credit agreement and related documents, dated as of December 15, 2014, with RaboBank, N.A. (“RaboBank”) which provides TSV with a loan (the “TSV Loan”) of up to $14,500,000 to use primarily for new loan originations.   The maturity date of the loan is January 1, 2021. As of December 31, 2014 and the date of this filing   TSV has borrowed $10,445,000 under the TSV Loan documents, and up to an additional $4,055,000 will be available to TSV in one or more future advances, provided that no event of default has occurred under the TSV Loan documents and that such additional advances do not result in a pro forma Debt Service Coverage ratio (as defined in the agreements) of less than 1.25:1.00.

Borrowings under the TSV Loan documents bear interest initially at a rate of 3.47% per annum (the “Long Term Adjustable Rate”), provided that on January 1, 2018 the Long Term Adjustable Rate will be reset to RaboBank’s then current market rate for three year fixed rate loans from comparable commercial real estate secured transactions, as determined by RaboBank in its sole discretion. Upon a default the interest rate on the outstanding principal balance increases by an additional five percent (5.00%) per annum and the rate on any other outstanding obligations under the TSV Loan documents increases to ten percent (10.00%) per annum. During the term of the TSV Loan, TSV will make monthly payments of principal and accrued interest in an amount calculated to amortize the original principal amount over a period of 300 months, subject to certain adjustments, and the balance of the loan is due on the maturity date. The Credit Agreement required the payment of a closing fee of $108,750 and certain administrative fees which totaled approximately $218,000.   The majority of these costs were paid out of proceeds from the loan and capitalized to deferred financing costs and are being amortized to interest expense using the effective interest method through the maturity date. During the year ended December 31, 2014, approximately $1,000 of interest expense was incurred.
 
 
The TSV Loan documents contain customary events of default and affirmative, negative and financial covenants of TSV for loans of this type.

720 University, LLC Note Payable

We had a secured note payable with a bank through our investment in 720 University with a balance of $9,741,000 and $9,918,000 as of December 31, 2014 and 2013, respectively. The note required amortized monthly payments of $56,816 at a fixed rate of 5.07%, with the balance of unpaid principal due on March 1, 2015.  In November 2014, 720 University entered into an agreement to sell the property that collateralized this note and the buyer extended a new secured loan to 720 University to repay the existing note payable. The refinancing closed in January 2015. The principal amount of the new loan is $9,771,263 and accrues interest at 6.0% per annum. The principal is due and will be paid off upon the closing of the sale of the property to the buyer that is expected to occur on or about May 28, 2015.
 
Tahoe Stateline Venture, LLC Notes Payable

We had two and three secured notes payable in the aggregate amount of $3,400,000 and $4,000,000 as of December 31, 2014 and 2013, respectively, related to the foreclosure or purchase of nine parcels by TSV in 2013 and 2012. One note with a principal balance of $2,900,000 as of December 31, 2014 requires semi-annual interest-only payments of 5% per annum and is due in December 2016, and one note with a principal balance of $500,000 at December 31, 2014 requires quarterly interest-only payments of 5% per annum and is due in August 2017. We anticipate that the notes will be repaid from the proceeds of the eventual sale of the property, from line of credit advances or from cash reserves.
 
 
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Commitments and Contingencies

As of December 31, 2014, we have commitments to advance additional funds to borrowers of construction, rehabilitation and other loans (including interest reserves) in the total amount of approximately $5,935,000.
 
We have an obligation to pay all required costs to remediate and monitor contamination of the real properties owned by 1850 De La Cruz, LLC (“1850”). As part of the Operating Agreement executed by the Company and its joint venture partner in 1850, Nanook, we have indemnified Nanook against all obligations related to the expected costs to monitor and remediate the contamination. In 2008, we accrued an amount that a third party consultant had estimated will need to be paid to monitor and remediate the site. The majority of clean-up activities were completed during 2012 as part of the tenant’s construction of a new building on the site. Thus, approximately $460,000 was paid by us from the previously established liability, and an additional $100,000 was accrued during the year ended December 31, 2012 as a result of an updated estimate of future costs to be incurred. If additional amounts are required, it will be an obligation of the Company. As of December 31, 2014 and 2013, approximately $60,000 and $63,000, respectively, of this obligation remains accrued on our books. The Company expects that all costs for this remediation will be paid from cash reserves.

During the course of due diligence performed by a potential buyer of TOTB in 2012, a low level of arsenic was found in the ground water of a monitoring well located on the property owned by TOTB. While the level of arsenic exceeds the minimum level acceptable for drinking water standards, the water under this property is subject to tidal influence and is not used for domestic consumption.  TOTB has retained an environmental consultant to perform additional testing and analysis with the goal of petitioning the appropriate governmental agency to issue a no further action letter for this property due to the low level of contamination and the low quality of the ground water under the property.  At this time, the costs of any potential remediation and/or monitoring are unknown and cannot be estimated.  As of December 31, 2014 and 2013, approximately $79,000 and $55,000, respectively, had been accrued and/or paid for testing and analysis.

We have entered into various contracts for design, architectural and engineering for the potential phase II development of the land owned by TSV. The aggregate amount of these contracts as of the date of this filing is approximately $793,000 of which approximately $282,000 has been incurred as of December 31, 2014. The Company expects that all costs for this project will be paid from cash reserves and/or the lines of credit.

We have entered into contracts for the construction, demolition and concrete remediation, design, architectural and engineering services related to the renovation of the vacant apartment building owned by TOTB North in the aggregate amount of approximately $21,786,000 of which approximately $1,557,000 has been incurred to December 31, 2014 in addition to other capitalized costs related to the construction project of $580,000 (total of $2,137,000). The Company expects that all costs for this project will be paid from cash reserves or the recently obtained construction loan. It is possible that additional change orders will be submitted and construction costs may be higher than expected.

We have entered into contracts for new bathrooms and modular offices and improvements to the bridge that accesses the marina held within Brannan Island, LLC in the aggregate amount of approximately $785,000 of which approximately $230,000 has been incurred to December 31, 2014. The Company expects that all costs for the project will be paid from cash reserves or advances from the lines of credit.  It is possible that additional change orders will be submitted and construction costs may be higher than expected.

Contingency Reserves

We are required to maintain cash, cash equivalents and marketable securities as contingency reserves in an aggregate amount of at least 1.50% of Capital (as defined in our charter). Although the Manager believes the contingency reserves are adequate, it could become necessary for us to sell or otherwise liquidate certain of our investments or other assets to cover such contingencies on terms which might not be favorable to the Company. The contingency reserves held in restricted cash were approximately $3,876,000 and $3,895,000 as of December 31, 2014 and 2013, respectively.

 
62
 

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and real estate values. The primary market risks that we are exposed to are real estate risk and interest rate risk.

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary tax policies, domestic and international economic and political considerations and other factors beyond our control.

Our operating results are exposed to the risks related to interest rate fluctuations as the results depend to a significant extent on the differences between income from our loans and our borrowing costs. We generally originate fixed rate loan investments and partially finance those investments with floating rate liabilities.  Our investments in fixed rate assets are generally exposed to changes in value due to interest rate fluctuations; however, the short maturity and low debt to investments of our loan portfolio are intended to partially offset that risk. Our average weighted maturity of loans as of December 31, 2014 is less than 20 months though in the past we have extended the maturity date on certain loans which would increase our exposure to interest rate risk.  In addition, our outstanding variable rate debt to loan investments as of December 31, 2014 is 37%.

The following table projects the potential impact on our interest expense for a 12-month period assuming an instantaneous increase of 100 basis points in 3 Month LIBOR and one percent in the Prime Rate based on balances outstanding as of December 31, 2014:

   
As of December 31, 2014
 
 
   
Variable Rate Loans tied to
3 Mo. Libor
   
Variable Rate Loans tied to Prime Rate
   
Total
 
                   
Aggregate Principal Balance of Debt
$
13,983,086
 
$
11,450,000
 
$
25,433,086
 
                   
Effect of 100 basis point increase in 3 Mo. Libor (1)
$
137,311
 
$
—
 
$
137,311
 
Effect of one percent increase in the Prime Rate
 
—
   
114,500
   
114,500
 
Totals
$
137,311
 
$
114,500
 
$
251,811
 
                   
   
(1) $1,007,918 of debt has a floor higher than the applicable rate as of December 31, 2014.
 

In the event of a significant rising interest rate environment and/or economic downturn, default on our loan portfolio could increase and result in losses to us.  Such delinquencies or defaults could also have an adverse effect on the spreads between interest-earning assets and interest-bearing liabilities.

Credit Risks

Our loans and investments are also subject to credit risk. The performance and value of our loans and investments depend upon the borrowers’ ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us and the borrowers’ ability to refinance the loans or sell the underlying collateral upon maturity. To monitor this risk, our Manager’s asset management team reviews our investment portfolios and in certain instances is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.

In addition, we are exposed to the risks generally associated with the commercial real estate market, including variances in occupancy rates, capitalization rates, absorption rates, and other macroeconomic factors beyond our control. We seek to manage these risks through our underwriting and asset management processes.

 
63
 
Counterparty Risk

The nature of our business requires us to hold our cash and cash equivalents and obtain financing from various financial institutions. This exposes us to the risk that these financial institutions may not fulfill their obligations to us under these various contractual arrangements. We mitigate this exposure by depositing our cash and cash equivalents and entering into financing and agreements with high credit quality institutions.

The nature of our loans and investments also expose us to the risk that our counterparties do not make required interest and principal payments on scheduled due dates. We seek to manage this risk through our credit analysis prior to making an investment and actively monitoring the asset portfolios that serve as our collateral.

Real Estate Risk

        Commercial mortgage assets may be viewed as exposing an investor to greater risk of loss than residential mortgage assets since such assets are typically secured by larger loans to fewer obligors than residential mortgage assets. Multi-family and commercial property values and net operating income derived from such properties are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, events such as natural disasters including hurricanes and earthquakes, acts of war and/or terrorism and others that may cause unanticipated and uninsured performance declines and/or losses to us or the owners and operators of the real estate securing our investment; national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing, retail, industrial, office or other commercial space); changes or continued weakness in specific industry segments; construction quality, construction delays, construction cost, age and design; demographic factors; retroactive changes to building or similar codes; and increases in operating expenses (such as energy costs). In the event net operating income decreases, a borrower may have difficulty repaying our loans, which could result in losses to us. In addition, decreases in property values reducing the value of collateral, and a lack of liquidity in the market, could reduce the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses. Even when the net operating income is sufficient to cover the related property's debt service, there can be no assurance that this will continue to be the case in the future.

Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and supplementary data are indexed in Item 15 of this report.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Management of the Company carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2014, which is the end of the period covered by this Annual Report on Form 10-K, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting in the fiscal quarter ending December 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
64
 

Management’s Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, for the Company. Under the supervision and with the participation of Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the internal control over financial reporting was conducted based on the framework established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) . There are inherent limitations in any internal control system over financial reporting, which may not prevent or detect misstatements. The Company’s internal control system over financial reporting is designed to provide reasonable assurance of achieving its objectives and management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2014.

Crowe Horwath LLP, our independent registered public accounting firm, has audited our financial statements included in this Annual Report on Form 10-K and has issued an attestation report on the effectiveness of our internal control over financial reporting, which is included herein.

Item 9B. OTHER INFORMATION

There is no information required to be disclosed in a report on Form 8-K during the fourth quarter of the year ended December 31, 2014 that has not been so reported.

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information regarding the Company’s directors, executive officers and certain other governance matters required by this item is incorporated by reference to the Company’s definitive Proxy Statement for its 2015 Annual Stockholder Meeting, to be filed with the SEC within 120 days after December 31, 2014.

Item 11. EXECUTIVE COMPENSATION

The information regarding executive compensation and other compensation related matters required by this item is incorporated by reference to the Company’s definitive Proxy Statement for its 2015 Annual Stockholder Meeting, to be filed with the SEC within 120 days after December 31, 2014.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information regarding beneficial ownership of the Company and related matters required by this item is incorporated by reference to the Company’s definitive Proxy Statement for its 2015 Annual Stockholder Meeting, to be filed with the SEC within 120 days after December 31, 2014.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information regarding beneficial ownership of the Company and related matters required by this item is incorporated by reference to the Company’s definitive Proxy Statement for its 2015 Annual Stockholder Meeting, to be filed with the SEC within 120 days after December 31, 2014.

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
 
The information regarding beneficial ownership of the Company and related matters required by this item is incorporated by reference to the Company’s definitive Proxy Statement for its 2015 Annual Stockholder Meeting, to be filed with the SEC within 120 days after December 31, 2014.

 
65
 
 
PART IV

Item 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

(a)
   
(1)
List of Financial Statements:
 
 
Report of Independent Registered Public Accounting Firm
F-1
 
Consolidated Balance Sheets - December 31, 2014 and 2013
F-2
 
Consolidated Statements of Operations for the years ended December 31, 2014 and 2013
F-3
 
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014 and 2013
F-4
 
Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013
F-5
 
Notes to Consolidated Financial Statements
F-7
     
(2)
List of Financial Statement Schedules:
 
 
Schedule III - Real Estate and Accumulated Depreciation
F-37
 
Schedule IV - Mortgage Loans on Real Estate
F-40

(3)       List of Exhibits:
   
**     3.1
  Articles of Amendment and Restatement of Owens Realty Mortgage, Inc., dated January 23, 2013, and related Certificate of Correction, dated September 17, 2013
*     3.2
  Bylaws of Owens Realty Mortgage, Inc.,  incorporated herein by reference to Annex C to Proxy Statement/Prospectus on Form S-4 which was filed with the SEC on February 13, 2013
*     3.3
  Articles Supplementary, dated November 13, 2014, relating to the election to be subject to Subtitle 8 of Title 3 of the Maryland General Corporation Law, incorporated by reference to exhibit 3.1 of the current report on Form 8-K filed with the SEC on November 13, 2013
*     4.1
  Form of Common Stock Certificate, incorporated herein by reference to exhibit 4.1 to Proxy Statement/Prospectus on Form S-4 which was filed with the SEC on January 25, 2013
*   10.1
  Form of Management Agreement, dated May 20, 2013, by and between Owens Financial Group, Inc. and Owens Realty Mortgage, Inc., incorporated herein by reference to exhibit 10.1 to Current Report on Form 8-K which was filed with the SEC on May 20, 2013
*   10.2
  Credit Agreement, dated as of February 5, 2014, between California Bank & Trust and Owens Realty Mortgage, Inc., together with related Master Revolving Note, Advance Formula Agreement, and Security Agreement, incorporated by reference to exhibits 10.1, 10.2, 10.3 and 10.4 of the current report on Form 8-K filed with the SEC on  
    February 14, 2014
*   10.3
  Secured Revolving Credit Loan Agreement and Exhibits, dated as of April 22, 2014, between Owens Realty Mortgage, Inc. and Opus Bank, together with related Promissory Note and Carveout Payment Guaranty, incorporated by reference to exhibits 10.1, 10.2 and 10.3 of the current report on Form 8-K filed with the SEC on April 28, 2014
*   10.4
  Construction Loan Agreement and Exhibits, dated as of June 12, 2014, between TOTB North, LLC and Bank of the Ozarks, together with related Promissory Note, Mortgage, Security Agreement and Fixture Filing, Assignment of Rents and Revenues, Environmental Indemnity Agreement, Carveout Guaranty, Repayment Guaranty, Completion
    Guaranty, and Post-Closing Agreement, incorporated by reference to exhibits 10.1 through 10.9 of the current report on Form 8-K filed with the SEC on June 18, 2014
**   10.5
  Real Estate Sale Agreement, dated November 10, 2014, between 720 University, LLC and Alberta Development Partners, LLC
*   10.6
  Loan Agreement and Exhibits, dated as November 17, 2014, between TOTB Miami, LLC and Bank of the Ozarks, together with related Promissory Note, Mortgage, Security Agreement and Fixture Filing, Assignment of Rents and Revenues, Environmental Indemnity Agreement, Carveout Guaranty, Repayment Guaranty, Modification
    Agreement, Collateral Assignment and Declaration of Rights and Assignment and Subordination of Mortgage Agreement, incorporated by reference to exhibits 10.1 through 10.10 of the current report on Form 8-K filed with the SEC on November 18, 2014
 
 
66
 
 
*   10.7
  Credit Agreement, dated as of December 15, 2014, between Tahoe Stateline Venture, LLC and RaboBank, N.A., together with related Real Estate Term Loan Note, Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, Environmental Certificate and Indemnity Agreement, and Guaranty,  incorporated by reference to
    exhibits 10.1 through 10.5 of the current report on Form 8-K filed with the SEC on  December 30, 2014 and amended on Form 8-K/A filed with the SEC on January 8, 2015
**      21
  List of Subsidiaries of the Registrant
**      24
  Power of Attorney
**   31.1
  Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
**   31.2
  Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
**      32
  Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
***101.INS
  XBRL Instance Document
***101.SCH
  XBRL Taxonomy Extension Schema Document
***101.CAL
  XBRL Taxonomy Extension Calculation Linkbase Document
***101.LAB
  XBRL Taxonomy Extension Labels Linkbase Document
***101.PRE
  XBRL Taxonomy Extension Presentation Linkbase Document
***101.DEF
  XBRL Taxonomy Extension Definition Linkbase Document
*Previously filed.
** Filed herewith.
*** This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

 
67
 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Owens Realty Mortgage, Inc.
Walnut Creek, California

We have audited the accompanying consolidated balance sheets of Owens Realty Mortgage, Inc. (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules III and IV of the Company listed in the accompanying index (at Item 15). We also have audited the Company's internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedules and an opinion on the company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
/s/ Crowe Horwath LLP
San Francisco, California
March 16, 2015
 
 
F-1
 
OWENS REALTY MORTGAGE, INC.

Consolidated Balance Sheets
December 31,

Assets
2014
 
2013
 
Cash and cash equivalents
$
1,413,545
 
$
8,158,734
 
Restricted cash
 
6,248,746
   
4,095,435
 
Loans, net of allowance for losses of $2,869,355 in 2014 and $4,739,088 in 2013
 
65,164,156
   
54,057,205
 
Interest and other receivables
 
1,482,380
   
1,673,978
 
Other assets, net of accumulated depreciation and amortization of $1,065,172 in 2014 and $976,090 in 2013
 
1,138,123
   
1,102,683
 
Deferred financing costs, net of accumulated amortization of $253,675 in 2014
 
1,317,585
   
95,000
 
Investment in limited liability company
 
2,142,581
   
2,142,582
 
Real estate held for sale
 
59,494,339
   
5,890,131
 
Real estate held for investment, net of accumulated depreciation of $6,075,287 in 2014 and $9,599,719 in 2013
 
103,522,466
   
129,425,833
 
             
Total assets
$
241,923,921
 
$
206,641,581
 
Liabilities and Equity
           
Liabilities:
           
Dividends payable
$
1,292,160
 
$
180,000
 
Due to Manager
 
283,644
   
293,776
 
Accounts payable and accrued liabilities
 
2,219,674
   
2,710,745
 
Deferred gains
 
362,283
   
3,313,169
 
Lines of credit payable
 
11,450,000
   
—
 
Notes and loans payable on real estate
 
37,569,549
   
13,917,585
 
Total liabilities
 
53,177,310
   
20,415,275
 
Commitments and Contingencies (Note 14)
           
Equity:
           
Stockholders’ equity:
           
Preferred stock, $.01 par value per share, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2014 and 2013
 
—
   
—
 
Common stock, $.01 par value per share, 50,000,000 shares authorized, 11,198,119 shares issued, 10,768,001 and 10,794,209 shares outstanding at December 31, 2014 and 2013
 
111,981
   
111,981
 
Additional paid-in capital
 
182,437,522
   
182,437,522
 
Treasury stock, at cost – 430,118 and 403,910 shares at December 31, 2014 and 2013
 
(5,349,156
)
 
(5,023,668
)
Retained earnings
 
7,371,511
   
2,348,575
 
Total stockholders’ equity
 
184,571,858
   
179,874,410
 
Noncontrolling interests
 
4,174,753
   
6,351,896
 
Total equity
 
188,746,611
   
186,226,306
 
             
Total liabilities and equity
$
241,923,921
 
$
206,641,581
 

The accompanying notes are an integral part of these consolidated financial statements.

 
 
F-2
 

OWENS REALTY MORTGAGE, INC.

Consolidated Statements of Income
Years Ended December 31,

 
2014
 
2013
             
Revenues:
           
Interest income on loans secured by trust deeds
$
5,382,019
 
$
3,020,884
 
Gain on foreclosures of loans
 
464,754
   
952,357
 
Rental and other income from real estate properties
 
12,268,214
   
11,223,260
 
Income from investment in limited liability company
 
169,999
   
160,805
 
Other income
 
19
   
4,406
 
Total revenues
 
18,285,005
   
15,361,712
 
             
Expenses:
           
Management fees to Manager
 
1,726,945
   
1,664,076
 
Servicing fees to Manager
 
156,995
   
151,643
 
General and administrative expense
 
1,661,210
   
1,657,467
 
Rental and other expenses on real estate properties
 
8,161,434
   
8,170,318
 
Depreciation and amortization
 
2,255,577
   
2,485,587
 
Interest expense
 
1,161,822
   
513,750
 
Total expenses
 
15,123,983
   
14,642,841
 
             
Operating income
 
3,161,022
   
718,871
 
             
Gain on sales of real estate, net
 
3,243,359
   
2,942,861
 
Reversal of provision for loan losses
 
1,869,733
   
7,822,112
 
Impairment losses on real estate properties
 
(179,040
)
 
(666,240
)
             
Net income
 
8,095,074
   
10,817,604
 
Less: Net income attributable to noncontrolling interests
 
(165,445
)
 
(2,084,707
)
             
Net income attributable to common stockholders
$
7,929,629
 
$
8,732,897
 
             
Per common share data:
           
Basic and diluted earnings per common share
$
0.74
 
$
0.78
 
Basic and diluted weighted average number of common shares outstanding
 
10,768,370
   
11,127,820
 
Dividends declared per share of common stock
$
0.27
 
$
0.25
 
             

The accompanying notes are an integral part of these consolidated financial statements.

 
 
F-3
 
 
OWENS REALTY MORTGAGE, INC.

Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2014 and 2013

 
Common Stock
 
Additional
   
Treasury Stock
   
Retained Earnings
   
Total
   
Non-
     
 
Paid-in
       
(Accumulated
   
Stockholders’
   
controlling
 
Total
 
 
Shares
 
Amount
 
Capital
   
Shares
   
Amount
   
Deficit)
   
Equity
   
Interests
 
Equity
 
                                                       
Balances, January 1, 2013
 
11,198,119
 
$
111,981
 
$
182,985,281
   
——
 
$
              —
 
$
(3,637,331
)
$
179,459,931
 
$
8,049,300
 
$
 187,509,231
 
                                                       
Net income
 
—
   
—
   
—
   
——
   
              —
   
8,732,897
   
8,732,897
   
2,084,707
   
10,817,604
 
Offering costs incurred
 
—
   
—
   
(527,785
)
 
——
   
              —
   
—
   
               (527,785
)
 
—
   
(527,785
)
Distribution to stockholders for fractional shares upon conversion
 
—
   
—
   
(19,974
)
 
—
   
—
   
—
   
(19,974
)
 
—
   
(19,974
)
Dividends declared
 
—
   
—
   
—
   
——
   
              —
   
(2,746,991
)
 
    (2,746,991
)
 
—
   
(2,746,991
)
Purchase of treasury stock
 
—
   
—
   
—
   
(403,910
)
 
(5,023,668
)
       
(5,023,668
)
 
—
   
(5,023,668
)
Contribution from non-controlling interest
 
—
   
—
   
—
   
—
   
—
   
—
   
—
   
362,593
   
362,593
 
Distributions to non-controlling interests
 
—
   
—
   
—
   
——
   
              —
   
—
   
               —
   
(4,144,704
)
 
(4,144,704
)
Balances, December 31, 2013
 
11,198,119
 
$
111,981
 
$
182,437,522
   
(403,910
)
$
(5,023,668
)
$
2,348,575
 
$
179,874,410
 
$
6,351,896
 
$
186,226,306
 
                                                       
Net income
 
—
   
—
   
—
   
—
   
              —
   
7,929,629
   
7,929,629
   
165,445
   
8,095,074
 
Dividends declared
 
—
   
—
   
—
   
—
   
              —
   
(2,906,693
)
 
    (2,906,693
)
 
—
   
(2,906,693
)
Purchase of treasury stock
 
—
   
—
   
—
   
(26,208
)
 
(325,488
)
 
—
   
               (325,488
)
 
—
   
(325,488
)
Contribution from non-controlling interest
 
—
   
—
   
—
   
—
   
              —
   
—
   
               —
   
112,533
   
112,533
 
Distributions to non-controlling interests
 
—
   
—
   
—
   
—
   
              —
   
—
   
               —
   
(2,455,121
)
 
(2,455,121
)
Balances, December 31, 2014
 
11,198,119
 
  $
111,981
 
  $
182,437,522
   
(430,118
)
$
(5,349,156
)
$
7,371,511
 
$
184,571,858
 
$
4,174,753
 
$
188,746,611
 
                                                       


The accompanying notes are an integral part of these consolidated financial statements

 
 
F-4
 

OWENS REALTY MORTGAGE, INC.
Consolidated Statements of Cash Flows
Years ended December 31,
 
2014
 
2013
 
Cash flows from operating activities:
           
Net income
$
8,095,074
 
$
10,817,604
 
Adjustments to reconcile net loss to net cash used in operating activities:
           
Gain on sales of real estate, net
 
(3,243,359
)
 
(2,942,861
)
Gain on foreclosures of loans
 
(464,754
)
 
(952,357
)
Income from investment in limited liability company
 
(169,999
)
 
(160,805
)
Reversal of provision for loan losses
 
(1,869,733
)
 
(7,822,112
)
Impairment losses on real estate properties
 
179,040
   
666,240
 
Depreciation and amortization
 
2,255,577
   
2,485,587
 
Amortization of deferred financing costs
 
132,723
   
—
 
Accretion of discount on loans
 
(122,004
)
 
—
 
Changes in operating assets and liabilities:
           
Interest and other receivables
 
(944,608
)
 
407,894
 
Other assets
 
(118,577
)
 
             (42,934
)
Accounts payable and accrued liabilities
 
(752,081
)
 
(3,059,355
)
Due to Manager
 
(10,132
)
 
(4,573
)
Net cash provided by (used in) operating activities
 
2,967,167
   
(607,672
)
             
Cash flows from investing activities:
           
Principal collected on loans
 
27,718,917
   
15,641,192
 
Investments in loans
 
(44,805,577
)
 
(19,718,852
)
Investment in real estate properties
 
(21,605,288
)
 
(7,919,883
)
Net proceeds from disposition of real estate properties
 
1,822,020
   
11,052,494
 
Purchases of vehicles and equipment
 
(22,212
)
 
(31,527
)
Distribution received from investment in limited liability company
 
170,000
   
160,000
 
Transfer (to) from restricted cash, net
 
(2,153,311
)
 
2,168,675
 
Net cash (used in) provided by investing activities
 
(38,875,451
)
 
1,352,099
 
             
Cash flows from financing activities
           
Advances on notes payable
 
23,331,207
   
—
 
Repayments on notes payable
 
(800,954
)
 
(467,317
)
Advances on lines of credit
 
59,879,345
   
—
 
Repayments of lines of credit
 
(48,429,345
)
 
—
 
Payment of deferred financing costs
 
(354,549
)
 
(95,000
)
Distributions to noncontrolling interests
 
(2,455,121
)
 
(4,144,704
)
Contribution from noncontrolling interest
 
112,533
   
362,593
 
Offering costs incurred and paid
 
—
   
(527,785
)
Distributions to stockholders for fractional shares
 
—
   
(19,974
)
Purchase of treasury stock
 
(325,488
)
 
(5,023,668
)
Dividends paid
 
(1,794,533
)
 
(3,801,343
)
Net cash provided by (used in) financing activities
 
29,163,095
   
(13,717,198
)
             
Net decrease in cash and cash equivalents
 
(6,745,189
)
 
(12,972,771
)
             
Cash and cash equivalents at beginning of year
 
8,158,734
   
21,131,505
 
             
Cash and cash equivalents at end of year
$
1,413,545
 
$
8,158,734
 
 
Supplemental Disclosures of Cash Flow Information
           
Cash paid during the year for interest (excluding amounts capitalized)
$
915,117
 
$
514,480
 
Cash paid during the year for interest that was capitalized
 
213,934
   
163,625
 
 
 
F-5
 
 
Supplemental Disclosure of Non-Cash Activity
           
Increase in real estate from loan foreclosures
 
9,107,652
   
18,650,121
 
Increase in accounts payable and accrued liabilities from loan foreclosure
 
—
   
(660,000
)
Increase in notes payable from loan foreclosure
$
—
 
$
(1,000,000
)
Decrease in loans, net of allowance for loan losses, from loan foreclosures
 
(7,671,446
)
 
(15,609,812
)
Decrease in interest and other receivables from adding balances to loans
 
—
   
(22,880
)
Decrease in interest and other receivables from loan foreclosures
 
(1,436,206
)
 
(1,380,309
)
Increase in loans from sales of real estate
 
—
   
11,900,000
 
Increase in deferred gains from sales of real estate
 
—
   
(2,344,052
)
Deferred financing costs paid from notes payable proceeds
 
1,121,711
   
—
 
Amortization of deferred financing costs capitalized to construction project
 
(120,952
)
 
—
 
Capital expenditures financed through accounts payable
 
(261,010
)
 
(1,097,450
)

The accompanying notes are an integral part of these consolidated financial statements.

 
 
F-6
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


NOTE 1 – ORGANIZATION
 
Owens Realty Mortgage, Inc. (the “Company”) was incorporated on August 9, 2012, under the laws of the State of Maryland and was authorized to issue 1,000,000 shares of $0.01 par value common stock (the “Common Stock”) at the time of its incorporation. At the time of its incorporation, William C. Owens was issued 1,000 shares of Common Stock, $.01 par value per share, in exchange for cash consideration of $1.00 per share (for total consideration of $1,000). Per the Articles of Amendment and Restatement of the Company dated January 23, 2013, the authorized shares of Common Stock were increased to 50,000,000 shares, $0.01 par value per share. In addition, the Company is now authorized to issue 5,000,000 shares of preferred stock at $0.01 par value per share. The Company was created to effect the merger (the “Merger”) of Owens Mortgage Investment Fund, a California Limited Partnership (“OMIF”) with and into the Company as described in the Registration Statement on Form S-4, as amended, of the Company, declared effective on February 12, 2013 (File No. 333-184392).  The Merger was part of a plan to reorganize the business operations of OMIF so that it could elect to qualify as a real estate investment trust for Federal income tax purposes. The Merger was approved by OMIF limited partners on April 16, 2013 and was completed on May 20, 2013.

Upon effectiveness of the Merger, the outstanding 1,000 shares of Common Stock of the Company held by William C. Owens were cancelled in exchange for $1,000 and every 25 limited partner units of OMIF were converted into one share of Common Stock of the Company. Additionally, the units representing the general partner interests of Owens Financial Group, Inc. (“OFG”) were treated as follows: i) the 1,496,000 units representing the interest that was an expense of OMIF were cancelled, and ii) the 1,378,256 units representing the interest relating to cash contributions made by OFG to the capital of OMIF were converted into shares of Common Stock of the Company in the same manner limited partnership units were converted into shares of Common Stock. No fractional shares were issued in the Merger; instead, cash adjustments were paid in respect of shares otherwise issuable. The Company now, by virtue of the Merger, directly or indirectly owns all of the assets and business formerly owned by OMIF and is a deemed successor issuer to OMIF pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended. For accounting purposes, the merger of OMIF with and into the Company has been treated as a transfer of assets and exchange of shares between entities under common control. The accounting basis used to initially record the assets and liabilities in the Company is the carryover basis of OMIF. The consolidated financial statements reflect the extinguishment of OMIF’s partners’ capital and replacement with 11,198,119 shares of Common Stock and additional paid –in capital as if the Merger occurred on January 1, 2013.

The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with the Company’s taxable year ended December 31, 2012. As a REIT, the Company will be permitted to deduct distributions made to its stockholders, allowing its income and gain represented by such distributions to avoid taxation at the entity level and to be taxed generally only at the stockholder level. The Company intends to distribute substantially all of its income and gain. As a REIT, however, the Company will be subject to separate, corporate-level tax, including potential 100% penalty taxes under various circumstances, as well as certain state and local taxes. In addition, the Company’s taxable REIT subsidiaries will be subject to full corporate income tax. Furthermore, the Company’s ability to qualify as a REIT will depend upon its continuing satisfaction of various requirements, such as those related to the diversity of its stock ownership, the nature of its assets, the sources of its income and the distributions to its stockholders, including a requirement that the Company distribute to its stockholders at least 90% of its REIT taxable income on an annual basis (determined without regard to the dividends paid deduction and by excluding net capital gain).
 
 
F-7
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The consolidated financial statements include the accounts of the Company and its majority and wholly owned limited liability companies (see Notes 5, 6, 8 and 11). All significant inter-company transactions and balances have been eliminated in consolidation. The Company also has a 50% ownership interest in a limited liability company accounted for under the equity method (see Note 4). The Company is in the business of providing mortgage lending services and manages its business as one operating segment. Due to foreclosure activity, the Company also owns and manages real estate assets.
 
Certain reclassifications have been made to the 2013 consolidated financial statements to conform to the 2014 presentation. None of the reclassifications had an impact on net income.
 
Management Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 periods. Such estimates relate principally to the determination of the allowance for loan losses, including the valuation of impaired loans, the valuation of real estate held for sale and investment, and the estimate of the environmental remediation liability (see Notes 5, 6, 14 and 15). Fair value estimates are derived from information available in the real estate markets including similar property, and often require the experience and judgment of third parties such as real estate appraisers and brokers. The estimates figure materially in calculating the value of the property at acquisition, the level of charge to the allowance for loan losses and any subsequent valuation reserves or write-downs. Such estimates are inherently imprecise and actual results could differ significantly from such estimates.

Recently Issued Accounting Standards
 
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” or ASU 2014-09. ASU 2014-09 broadly amends the accounting guidance for revenue recognition. ASU 2014-09 is effective for the first quarter of 2017, and is to be applied prospectively. Early adoption is not permitted. The Company is currently evaluating the impact that ASU 2014-09 will have on its consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” or ASU 2014-15. ASU 2014-15 introduces an explicit requirement for management to assess and provide certain disclosures if there is substantial doubt about an entity’s ability to continue as a going concern. ASU 2014-15 is effective for the first quarter of 2017. The Company is currently evaluating the impact that ASU 2014-15 will have on its consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, “ Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 updated guidance that changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. As a result of this new guidance, future dispositions of real estate owned assets may no longer meet the criteria to be considered as discontinued operations. The guidance is eff ective prospectively as of the first quarter of 2015, with early adoption permitted for new disposals or new classifications as held-for-sale. The Company does not expect that ASU 2014-08 will have a material effect on its consolidated financial statements.
 
 
F-8
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


Cash and Cash Equivalents

Cash and cash equivalents include funds on deposit with financial institutions.

Restricted Cash

Restricted cash includes contingency reserves required pursuant to the Company’s charter, non-interest bearing deposits required pursuant to the Company’s two lines of credit (see Note 7), the deposit required pursuant to the Company’s construction loan payable (see Note 8) and escrow deposits for property taxes and insurance to be paid on certain Company real estate properties.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and loans. The Company places its cash and cash equivalents with financial institutions and, at times, cash held may exceed the Federal Deposit Insurance Corporation, or “FDIC”, insured limit. The Company has exposure to credit risk on its loans and other investments. The Company’s Manager, OFG, will seek to manage credit risk by performing analysis of underlying collateral assets.

Loans and Allowance for Loan Losses
 
Loans are generally stated at the principal amount outstanding. Advances under the terms of a loan to pay property taxes, insurance, legal and other costs are generally capitalized and reported as interest and other receivables. The Company’s portfolio consists primarily of real estate loans generally collateralized by first, second and third deeds of trust.  Interest income on loans is accrued by the simple interest method. Loans are generally placed on nonaccrual status when the borrowers are past due greater than ninety days or when full payment of principal and interest is not expected.  When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest remains accrued until the loan becomes current, is paid off or is foreclosed upon. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Cash receipts on nonaccrual loans are used to reduce any outstanding accrued interest, and then are recorded as interest income, except when such payments are specifically designated as principal reduction or when management does not believe the Company’s investment in the loan is fully recoverable. The Company does not incur origination costs and does not earn or collect origination fees from borrowers as OFG is entitled to all such fees (see Note 12).
 
Loans and the related accrued interest and advances are analyzed by management on a periodic basis for ultimate recovery. The allowance for loan losses is management’s estimate of probable credit losses inherent in the Company’s loan portfolio that have been incurred as of the balance sheet date.  The allowance is established through a provision for loan losses which is charged to expense.  Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth.  Credit exposures determined to be uncollectible are charged against the allowance.  Cash received on previously charged off amounts is recorded as a recovery to the allowance.  The overall allowance consists of two primary components: specific reserves related to impaired loans that are individually evaluated for impairment and general reserves for inherent losses related to loans that are not considered impaired and are collectively evaluated for impairment.

Regardless of the loan type, a loan is considered impaired when, based on current information and events, management believes it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement or when the monthly payments are delinquent for more than 90 days on a loan.  All loans determined to be impaired are individually evaluated for impairment.  When a loan is considered impaired, management estimates impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, management may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent.  A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. These valuations are generally updated during the fourth quarter but may be updated during interim periods if deemed appropriate by management.
 
 
F-9
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


A restructuring of a debt constitutes a troubled debt restructuring (“TDR”) if the Company for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider.  Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms.  Loans that are reported as TDR’s are considered impaired and measured for impairment as described above.

The determination of the general reserve for loans that are not considered impaired and are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors to include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable incurred losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan type).  These portfolio segments include commercial real estate, residential real estate and land loans.   The allowance for loan losses attributable to each portfolio segment, which includes both impaired loans that are individually evaluated for impairment and loans that are not considered impaired and are collectively evaluated for impairment, is combined to determine the Company’s overall allowance, which is included on the consolidated balance sheet. The reserve for loans that are not considered impaired consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses, and (3) other qualitative factors.  These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below.

Land Loans – These loans generally possess a higher inherent risk of loss than other real estate portfolio segments.  A major risk arises from the necessity to complete projects within specified costs and time lines.  Trends in the construction industry significantly impact the credit quality of these loans as demand drives construction activity.  In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial and Residential Real Estate Loans – Adverse economic developments or an overbuilt market impact commercial and residential real estate projects and may result in troubled loans.  Trends in vacancy rates of properties impact the credit quality of these loans.  High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.

Other Assets
 
Other assets primarily include deferred rent, capitalized lease commissions, prepaid expenses, deposits and inventory.  Amortization of lease commissions is provided on the straight-line method over the lives of the related leases.
 
 
F-10
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


Deferred Financing Costs

Issuance and other costs related to the Company’s lines of credit and certain notes payable are capitalized and amortized to interest expense under either the straight-line or effective interest methods over the terms of the respective debt instruments. Deferred financing costs related to the construction loan in TOTB North, LLC are being amortized to the construction project under the straight-line method over the term of construction/renovation.

Rental Income

The Company leases multifamily rental units under operating leases with terms of generally one year or less. Rental revenue is recognized, net of rental concessions, on a straight-line method over the related lease term. Rental income on commercial property is recognized on a straight-line basis over the term of each operating lease. Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale including potential seller financing.

Real Estate Held for Sale
 
Real estate held for sale includes real estate acquired in full or partial settlement of loan obligations, generally through foreclosure, that is being marketed for sale. Real estate held for sale is recorded at acquisition at the property’s estimated fair value less estimated costs to sell. Any excess of the recorded investment in the loan over the net realizable value is charged against the allowance for loan losses. Any excess of the net realizable value over the recorded investment in the loan is credited first to the allowance for loan losses as a recovery to the extent charge-offs had been recorded previously and, then, to earnings as gain on foreclosure of loan.

After acquisition, costs incurred relating to the development and improvement of property are capitalized to the extent they do not cause the recorded value to exceed the net realizable value, whereas costs relating to holding and disposition of the property are expensed as incurred. After acquisition, real estate held for sale is analyzed periodically for changes in fair values and any subsequent write down is charged to impairment losses on real estate properties. Any recovery in the fair value subsequent to such a write down is recorded (not to exceed the net realizable value at acquisition) as an offset to impairment losses on real estate properties. Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale including potential seller financing.

Real Estate Held for Investment

Real estate held for investment includes real estate acquired in full or partial settlement of loan obligations, generally through foreclosure, that is not being marketed for sale and is either being operated, such as rental properties; is being managed through the development process, including obtaining appropriate and necessary entitlements, permits and construction; or are idle properties awaiting more favorable market conditions or properties the Company cannot sell without placing the Company’s REIT status at risk or become subject to prohibited transactions penalty tax. Real estate held for investment is recorded at acquisition at the property’s estimated fair value, less estimated costs to sell.

After acquisition, costs incurred relating to the development and improvement of the property are capitalized, whereas costs relating to operating or holding the property are expensed. Subsequent to acquisition, management periodically compares the carrying value of real estate to expected undiscounted future cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated fair value.
 
 
F-11
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


Depreciation of real estate properties held for investment is provided on the straight-line method over the estimated remaining useful lives of buildings and improvements (5-39 years). Depreciation of tenant improvements is provided on the straight-line method over the shorter of their estimated useful lives or the lease terms.
 
The Company reclassifies real estate properties from held for investment to held for sale in the period in which all of the following criteria are met: 1) Management commits to a plan to sell the property; 2) The property is available for immediate sale in its present condition; 3) An active program to locate a buyer has been initiated; 4) The sale of the property is probable and the transfer of the property is expected to qualify for recognition as a completed sale, within one year; and 5) Actions required to complete the plan indicate it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. Such real estate properties are recorded at the time of reclassification at their carrying amounts prior to reclassification or fair value, whichever is lower. This establishes the initial basis at which the properties are accounted for as held for sale, as described above.
 
If circumstances arise that previously were considered unlikely, and, as a result, the Company decides not to sell a real estate property classified as held for sale, the property is reclassified to held for investment. The property is then measured individually at the lower of its carrying amount, adjusted for depreciation or amortization expense that would have been recognized had the property been continuously classified as held for investment, or its fair value at the date of the subsequent decision not to sell.
 
Environmental Remediation Liability
 
Liabilities related to future environmental remediation costs are recorded when remediation or monitoring or both are probable and the costs can be reasonably estimated. The Company’s environmental remediation liability related to the property located in Santa Clara, California (held within 1850 De La Cruz, LLC – see Notes 4 and 15) was recorded based on a third party consultant’s estimate of the costs required to remediate and monitor the contamination.
 
Earnings per Common Share

The Company calculates basic earnings per common share by dividing net income attributable to common stockholders for the period by the weighted-average shares of Common Stock outstanding for that period. Diluted earnings per common share takes into effect any dilutive instruments, unless if when doing so such effect would be anti-dilutive. At the present time, the Company has not issued any restricted stock or restricted stock units.

Income Taxes
 
The Company has elected to be taxed as a REIT. As a result of the Company’s expected REIT qualification and its distribution policy, the Company does not generally expect to pay U.S. federal corporate level income taxes. Many of the REIT requirements, however, are highly technical and complex. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that the Company distribute annually at least 90% of the Company’s REIT taxable income to the Company’s stockholders. If the Company has previously qualified as a REIT and fails to qualify as a REIT in any subsequent taxable year and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may be precluded from qualifying as a REIT for the Company’s four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain U.S. federal, state, local and foreign taxes on the Company’s income and property and to U.S. federal income and excise taxes on the Company’s undistributed REIT taxable income.

The Company has elected or may elect to treat certain of its existing or newly created corporate subsidiaries as taxable REIT subsidiaries (each a “TRS”). In general, a TRS of a REIT may hold assets that the REIT cannot hold directly and, subject to certain exceptions related to hotels and healthcare properties, may engage in any real estate or non-real estate related business. A TRS is treated as a regular corporation and is subject to federal, state, local and foreign taxes on its income and property. Lone Star Golf, Inc. is treated as a TRS of the Company.
 
 
F-12
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has analyzed its various federal and state filing positions and believes that its income tax filing positions and deductions are well documented and supported.

Certain entities included in the Company’s consolidated financial statements are subject to certain state and local taxes. These taxes are recorded as general and administrative expenses in the accompanying consolidated financial statements.
 
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The following tables show the changes in the allowance for loan losses by portfolio segment for the years ended December 31, 2014 and 2013 and the allocation of the allowance for loan losses and loans as of December 31, 2014 and 2013 by portfolio segment and by impairment methodology:

   
Commercial
 
Residential
 
Land
     
2014
       
Total
 
                   
Allowance for loan losses:
             
 
Beginning balance
 
$
932,651
$
            3,798,203
$
8,234
$
4,739,088
 
 
  Charge-offs
 
            —
 
            —
 
             —
 
—
 
 
  (Reversal) Provision
 
(44,391
) 
(1,823,091
) 
             (2,251
)
  (1,869,733
) 
 
Ending balance
 
$
888,260
$
1,975,112
$
             5,983
$
          2,869,355
 
                   
Ending balance: individually evaluated for impairment
 
$
550,010
$
  1,839,345
$
             —
$
2,389,355
 
                   
Ending balance: collectively evaluated for impairment
 
$
338,250
$
135,767
$
             5,983
$
480,000
 
                   
Ending balance
$
888,260
$
1,975,112
$
             5,983
$
2,869,355
 
                   
Loans:
                 
 
Ending balance
 
$
52,531,537
$
 13,491,906
$
2,010,068
$
68,033,511
 
                   
Ending balance: individually evaluated for impairment
 
$
12,666,935
$
      7,788,747
$
1,860,068
$
22,315,750
 
                   
Ending balance: collectively evaluated for impairment
 
$
39,864,602
$
     5,703,159
$
    150,000
$
45,717,761
 

                 

 
 
F-13
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


   
Commercial
 
Residential
 
Land
     
2013
       
Total
 
                   
Allowance for loan losses:
             
 
Beginning balance
 
$
1,493,585
$
            4,401,448
$
18,522,864
$
 24,417,897
 
 
  Charge-offs
 
            —
 
            —
 
(11,856,697
) 
(11,856,697
) 
 
  (Reversal) Provision
 
(560,934
) 
(603,245
)
(6,657,933
) 
  (7,822,112
) 
 
Ending balance
 
$
932,651
$
3,798,203
$
             8,234
$
          4,739,088
 
                   
Ending balance: individually evaluated for impairment
 
 
$
537,743
$
  3,087,345
$
             —
$
3,625,088
 
                   
Ending balance: collectively evaluated for impairment
 
 
$
394,908
$
710,858
$
             8,234
$
1,114,000
 
                   
Ending balance
$
932,651
$
3,798,203
$
             8,234
$
4,739,088
 
                   
Loans:
                 
 
Ending balance
 
$
26,158,878
$
 27,461,913
$
5,175,502
$
58,796,293
 
                   
Ending balance: individually evaluated for impairment
 
$
16,566,878
$
      10,195,725
$
4,975,502
$
31,738,105
 
                   
Ending balance: collectively evaluated for impairment
 
$
9,592,000
$
     17,266,188
$
    200,000
$
27,058,188
 
 
The following tables show an aging analysis of the loan portfolio by the time monthly payments are past due at December 31, 2014 and 2013:

   
Loans
30-59 Days
Past Due
 
Loans
60-89 Days
Past Due
 
Loans
90 or More Days
Past Due
           
         
Total Past
Due Loans
 
Current Loans
 
Total Loans
December 31, 2014
           
                         
Commercial
$
          —
$
          —
$
       1,078,752
$
        1,078,752
$
       51,452,785
$
52,531,537
Residential
 
—
 
—
 
        7,788,747
 
        7,788,747
 
       5,703,159
 
13,491,906
Land
 
—
 
—
 
        1,860,068
 
        1,860,068
 
150,000
 
2,010,068
 
$
         —
$
              —
$
   10,727,567
$
    10,727,567
$
      57,305,944
$
   68,033,511

 
 
F-14
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


   
Loans
30-59 Days
Past Due
 
Loans
60-89 Days
Past Due
 
Loans
90 or More Days
Past Due
           
         
Total Past
Due Loans
 
Current Loans
 
Total Loans
December 31, 2013
           
                         
Commercial
$
          —
$
690,000
$
       5,100,699
$
        5,790,699
$
       20,368,179
$
26,158,878
Residential
 
—
 
—
 
        10,195,725
 
        10,195,725
 
       17,266,188
 
27,461,913
Land
 
—
 
—
 
        4,975,502
 
        4,975,502
 
200,000
 
5,175,502
 
$
         —
$
     690,000
$
   20,271,926
$
    20,961,926
$
      37,834,367
$
   58,796,293

All of the loans that are 90 or more days past due as listed above were on non-accrual status as of December 31, 2014 and 2013. In addition, two commercial loans totaling $11,466,179 that are considered impaired were also on non-accrual status as of December 31, 2013 (total of $31,738,105). These two loans were restored to accrual status during the first quarter of 2014 because the Company had received consistent payments from the borrower over the previous six month period, and management expects that the borrower will continue to keep the loans current with respect to principal and interest payments.  These two loans continue to be reported as impaired due to the previous modification of the borrower's terms in a troubled debt restructuring. There is an unamortized discount on one of these loans in the amount of approximately $537,000 and $659,000 as of December 31, 2014 and 2013, respectively.

The following tables show information related to impaired loans as of and for the years ended December 31, 2014 and 2013:

   
As of December 31, 2014
 
Year Ended December 31, 2014
 
 
 
Recorded
Investment
 
 
Unpaid
Principal
Balance
 
 
 
Related
Allowance
   
 
Average
Recorded
Investment
 
 
Interest
Income
Recognized
With no related allowance recorded:
                     
 
Commercial
 
$
 
11,588,183
 
 $
 
11,588,183
 
$
 
 —
 
 
$
 
16,686,997
 
$
 
1,714,230
 
Residential
 
 
253,747
 
 
               253,747
 
 
 —
   
 
1,986,693
 
 
688,196
 
Land
 
 
1,860,068
 
 
1,860,068
 
 
  —
   
 
2,440,015
 
 
173,484
                       
With an allowance recorded:                      
 
Commercial
 
 
1,079,699
 
 
 1,078,752
 
 
550,010
   
 
1,079,681
 
 
  47,958
 
Residential
 
 
7,983,345
 
 
7,535,000
 
 
1,839,345
   
 
7,983,366
 
 
150,000
 
Land
 
 
—
 
 
    —
 
 
—
   
 
—
 
 
—
                       
Total:
                     
 
Commercial
 
$
 
12,667,882
 
$
 
12,666,935
  
$
 
550,010
 
 
$
 
17,766,678
 
$
 
 1,762,188
 
Residential
 
$
 
8,267,092
 
$
 
7,788,747
 
$
 
1,839,345
 
 
$
 
9,970,059
 
$
 
 838,196
 
Land
 
$
 
1,860,068
 
$
 
1,860,068
 
$
 
 —
 
 
$
 
2,440,015
 
$
 
173,484
 
 
 
F-15
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


   
As of December 31, 2013
 
Year Ended December 31, 2013
 
 
 
Recorded
Investment
 
 
Unpaid
Principal
Balance
 
 
 
Related
Allowance
   
 
Average
Recorded
Investment
 
 
Interest
Income
Recognized
With no related allowance recorded:
                     
 
Commercial
 
$
 
16,212,899
  
$
 
15,488,126
 
$
 
 —
 
 
$
 
10,880,512
 
$
 
704,623
 
Residential
 
 
2,734,228
 
 
2,660,725
 
 
 —
   
 
2,841,401
 
 
134,702
 
Land
 
 
5,017,839
 
 
4,975,502
 
 
  —
   
 
4,984,885
 
 
259,281
                       
With an allowance recorded:                      
 
Commercial
 
 
1,079,699
 
 
 1,078,752
 
 
537,743
   
 
1,079,699
 
 
  21,000
 
Residential
 
 
7,983,345
 
 
7,535,000
 
 
3,087,345
   
 
7,983,342
 
 
198,100
 
Land
 
 
—
 
 
    —
 
 
—
   
 
8,761,503
 
 
—
                       
Total:
                     
 
Commercial
 
$
 
17,292,598
 
$
 
16,566,878
  
$
 
537,743
 
 
$
 
11,960,212
 
$
 
 725,623
 
Residential
 
$
 
10,717,573
 
$
 
10,195,725
 
$
 
3,087,345
 
 
$
 
10,824,743
 
$
 
 332,802
 
Land
 
$
 
5,017,839
 
$
 
4,975,502
 
$
 
 —
 
 
$
 
13,746,388
 
$
 
259,281

The recorded investment balances presented in the above tables include amounts advanced in addition to principal on impaired loans (such as property taxes, insurance and legal charges) that are reimbursable by borrowers and are included in interest and other receivables in the accompanying consolidated balance sheets. Interest income recognized on a cash basis for impaired loans approximates the interest income recognized as reflected in the tables above.

Troubled Debt Restructurings

The Company had allocated approximately $2,389,000 and $3,625,000 of specific reserves on loans totaling $20,265,000 and $25,781,000 (recorded investments before reserves) to borrowers whose loan terms had been modified in troubled debt restructurings as of December 31, 2014 and 2013, respectively.  The Company has not committed to lend additional amounts to any of these borrowers, other than discussed below.

During the year ended December 31, 2014, the terms of one impaired loan were modified as a troubled debt restructuring. The loan was rewritten as the borrower had previously paid the principal balance down partially from sale proceeds. The maturity date was extended by six months to April 2015. All other terms of the loan remained the same. As of December 31, 2014, no specific loan loss allowance was recorded on this modified loan given the estimated underlying collateral value.

During the year ended December 31, 2013, the terms of two loans were modified as troubled debt restructurings. One loan was modified to combine all principal, delinquent interest and advances into principal and provide for amortizing payments at a reduced interest rate over an extended maturity of 15 years. The borrower is now delinquent in making payments on this modified loan. Another impaired loan was rewritten by the Company during the year whereby the Company repaid the unrelated first deed of trust on the subject property of approximately $5,899,000 and refinanced its second deed of trust by combining them into one first deed of trust in the amount of $9,625,000 with interest at 10% per annum due in five years. As part of the modification, approximately $659,000 of past due interest on the Company’s original note was paid from the proceeds of the rewritten loan, which was recorded as a discount against the principal balance of the new loan because the loan was impaired (net principal balance of $8,966,000). In addition, the Company loaned the borrower an additional $2,500,000 to fund certain improvements to the property (aggregate principal balance of $11,466,000). As of December 31, 2013, no specific loan loss allowance was recorded on either of these modified loans given the estimated underlying collateral values.
 
 
F-16
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

The following tables show information related to loan modifications made by the Company during the years ended December 31, 2014 and 2013:

 
Modifications
During the Year Ended December 31, 2014
   
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded Investment
 
Post-Modification
Outstanding
Recorded Investment
 
 
Troubled Debt Restructurings That Occurred During the Year
 
           
Land
 
1
 $
 1,860,068
 $
 1,860,068
             

 
Modifications
During the Year Ended December 31, 2013
   
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded Investment
 
Post-Modification
Outstanding
Recorded Investment
 
 
Troubled Debt Restructurings That Occurred During the Year
 
           
Commercial
 
1
 $
 2,638,530
 $
 8,966,179
             
Residential
 
1
 
 272,028
 
                         272,028
             
Troubled Debt Restructurings That Subsequently Defaulted During the Year
 
 
Number of
Contracts
 
Recorded
Investment
   
Residential
 
1
 $
 272,028
   

NOTE 4 – INVESTMENT IN LIMITED LIABILITY COMPANY

During 2008, the Company entered into an Operating Agreement of 1850 De La Cruz LLC, a California limited liability company (“1850”), with Nanook Ventures LLC (“Nanook”), an unrelated party.  The purpose of the joint venture is to acquire, own and operate certain industrial land and buildings located in Santa Clara, California that were owned by the Company. The property was subject to a Purchase and Sale Agreement dated July 24, 2007 (the “Sale Agreement”), as amended, between the Company, as seller, and Nanook, as buyer.  During the course of due diligence under the Sale Agreement, it was discovered that the property is contaminated and that remediation and monitoring may be required.  The parties agreed to enter into the Operating Agreement to restructure the arrangement as a joint venture.  At the time of closing in July 2008, the two properties were separately contributed to two new limited liability companies, Nanook Ventures One LLC and Nanook Ventures Two LLC, which are wholly owned by 1850. The Company and Nanook are the Members of 1850 and NV Manager, LLC is the Manager. (See Note 15 for further discussion of the Company’s environmental remediation obligation with respect to the properties owned by 1850.)
 
 
F-17
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


During the years ended December 31, 2014 and 2013, the Company received capital distributions from 1850 in the total amount of $170,000 and $160,000, respectively. The net income to the Company from its investment in 1850 De La Cruz was approximately $170,000 and $161,000 for the years ended December 31, 2014 and 2013, respectively.

NOTE 5 - REAL ESTATE HELD FOR SALE
 
Real estate properties held for sale as of December 31, 2014 and 2013 consists of properties acquired through foreclosure classified by property type as follows:
 
   
December 31,
2014
 
December 31,
2013
 
Residential
 
$
—
 
$
93,647
 
Land (including land under development)
   
36,263,330
   
3,427,200
 
Retail
   
16,494,440
   
—
 
Golf course
   
2,020,410
   
1,961,284
 
Office
   
4,716,159
   
—
 
Marina
   
—
   
408,000
 
   
$
59,494,339
 
$
5,890,131
 

During the year ended December 31, 2014, the Company transferred three properties (one land, one marina and one residential) from “Held for sale” to “Held for investment” because the properties are no longer listed for sale and sales are not likely within the next year. In addition, during the year ended December 31, 2014, the Company transferred five properties (two land, two retail and one office) from “Held for investment” to “Held for sale” as the properties are now listed for sale and sales are expected within the next year. During the year ended December 31, 2013, the Company transferred three properties (one land, one retail and one residential) from “Held for sale” to “Held for investment” because the properties were no longer listed for sale and sales were not likely within the next year. In addition, during the year ended December 31, 2013, the Company transferred three properties (two land and one golf course) from “Held for investment” to “Held for sale” as the properties were listed for sale and sales were expected within the next year. No losses were recorded as a result of transfers between “Held for sale” and “Held for investment” categories for the years ended December 31, 2014 and 2013.

During the year ended December 31, 2014, the Company recorded an impairment loss of $179,000 on the marina property located in Oakley, California due to a decrease in the listing price of the property and a reduction in the fair market value estimated by management. The property was then moved to “Held for investment” as of December 31, 2014.

During the year ended December 31, 2014, the Company sold two real estate properties (both Land) and an easement for aggregate net sales proceeds of approximately $1,821,000, resulting in gain on sales of real estate totaling approximately $292,000. In addition, the Company recognized gains of approximately $2,951,000 during the year ended December 31, 2014 that had previously been deferred related to the sales of real estate properties in 2012 and 2013.  The gains on the sales of those properties were being accounted for under the installment method.
 
 
F-18
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


During the year ended December 31, 2013, the Company sold six real estate properties (three Land, one Residential, one Office and one Retail) for aggregate net sales proceeds of approximately $11,052,000 and carry back notes totaling $11,900,000, resulting in gain on sales of real estate (net) totaling approximately $2,585,000. In addition, the Company recognized gains of approximately $358,000 during the year ended December 31, 2013 that had previously been deferred due to the  receipt of principal repayments on the carryback loans during 2013.

During the year ended December 31, 2014, the Company foreclosed on one loan secured by retail property located in San Jose, California with a principal balance of $690,000 and obtained the properties via the trustee’s sale. The fair market value of the property acquired was estimated to be higher than the Company’s recorded investment in the subject loan, and, thus, a gain on foreclosure in the amount of approximately $208,000 was recorded. The property has been classified as held for sale as a sale is expected within one year.

NOTE 6 - REAL ESTATE HELD FOR INVESTMENT
 
Real estate held for investment as of December 31, 2014 and 2013 consists of properties acquired through foreclosure classified by property type as follows:
 
   
December 31,
2014
 
December 31,
2013
 
Land (1)
 
$
10,797,656
 
$
46,873,135
 
Residential
   
48,154,258
   
47,037,370
 
Retail
   
23,211,896
   
15,588,452
 
Office
   
4,416,108
   
9,348,331
 
Industrial
   
4,486,797
   
4,605,910
 
Storage
   
3,847,884
   
3,943,780
 
Marina
   
3,602,867
   
2,028,855
 
Assisted care
   
5,005,000
   
—
 
   
$
103,522,466
 
$
129,425,833
 
               
( 1) As of December 31, 2013, balance includes all TSV land under development (see below).

The balances of land and the major classes of depreciable property for real estate held for investment as of December 31, 2014 and 2013 are as follows:
   
December 31,
2014
 
December 31,
2013
 
Land and land improvements
 
$
39,003,422
 
$
73,591,953
 
Buildings and improvements
   
70,594,331
   
65,433,599
 
     
109,597,753
   
139,025,552
 
Less: Accumulated depreciation and amortization
   
(6,075,287
)
 
(9,599,719
)
   
$
103,522,466
 
$
129,425,833
 

It is the Company’s intent to sell the majority of its real estate properties held for investment, but expected sales are not probable to occur within the next year.
 
Depreciation expense was approximately $2,151,000 and $2,387,000 for the years ended December 31, 2014 and 2013, respectively.
 
 
F-19
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

For purposes of assessing potential impairment of value during 2014 and 2013, the Company obtained updated appraisals or other valuation support for certain of its real estate properties held for investment. This resulted in the Company recording impairment losses in 2013 as follows:
 
     
2013
 
Two improved residential lots, West Sacramento, California
 
 
$
 
13,440
 
Six improved residential lots, Coeur D’Alene, Idaho
   
652,800
 
   
$
666,240
 

During the year ended December 31, 2014, the Company foreclosed on two loans secured by an assisted care facility located in Bensalem, Pennsylvania and unimproved land, a marina and campground located in Bethel Island, California with aggregate principal balances of approximately $6,981,000 and obtained the properties via the trustee’s sales. The fair market values of certain of the properties acquired were estimated to be higher than the Company’s recorded investments in the subject loans, and, thus a gain on foreclosure in the amount of approximately $257,000 was recorded. The properties have been classified as held for investment as sales are not expected within one year.

During the year ended December 31, 2013, the Company foreclosed on six loans secured by a marina located in Isleton, California and undeveloped parcels of land located in South Lake Tahoe, California with aggregate principal balances of approximately $27,467,000 and obtained the properties via the trustee’s sales. The fair market values of certain of the properties acquired were estimated to be higher than the Company’s recorded investments in the subject loans, and, thus a gain on foreclosure in the amount of approximately $952,000 was recorded.

NOTE 7 – LINES OF CREDIT PAYABLE
 
The Company borrows funds under the California Bank & Trust (“CB&T”) Line of Credit and the Opus Bank (“Opus”) Line of Credit (collectively, the “Funding Agreements”). As of December 31, 2014 and 2013, the outstanding balances and total commitments under the Funding Agreements consisted of the following:
   
As of December 31, 2014
 
As of December 31, 2013
 
                   
   
Outstanding
Balance
 
Total
Commitment
 
Outstanding
Balance
 
Total
Commitment
 
CB&T Line of Credit
 
  $
11,450,000
 
  $
17,355,000
 
  $
—
 
  $
—
 
    Opus Bank Line of Credit    
—
   
16,721,000
   
—
   
—
 
Total
 
  $
11,450,000
 
  $
34,076,000
 
  $
—
 
  $
—
 
 
The Funding Agreements are generally collateralized by assignments of specific loans or real estate properties owned by the Company.

CB&T Line of Credit

In February 2014, the Company entered into a Credit Agreement and Advance Formula Agreement with CB&T as the lender and executed a related Master Revolving Note and Security Agreement, which agreements provide the Company with a new revolving line of credit facility (the “CB&T Credit Facility”).  Subject to various conditions, borrowings under the CB&T Credit Facility will be used for general corporate purposes and to finance the origination of new commercial real estate loans.

The maximum borrowings available (total commitment) under the revolving CB&T Credit Facility is the lesser of $20,000,000, which is the face amount of the Master Revolving Note, or the amount determined pursuant to a borrowing base calculation described in the Advance Formula Agreement. At any time that the aggregate principal amount of the total borrowings under the CB&T Credit Facility exceeds the maximum permitted pursuant to the borrowing base calculation, the Company must promptly repay an amount equal to such excess. 
 
 
F-20
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


Borrowings under the CB&T Credit Facility mature on February 5, 2016.  Such borrowings bear interest payable monthly, in arrears, on the first business day of each month, at the prime rate of interest established by CB&T from time-to-time plus one quarter percent (.25%) per annum (3.5% at December 31, 2014). Upon a default under the CB&T Credit Facility such interest rate increases by 2.00%. The CB&T Credit Facility required the payment of an origination fee of $100,000 and other issuance costs and is subject to certain ongoing administrative fees and expenses. As of December 31, 2014, $177,000 of these costs were paid and capitalized to deferred financing costs and are being amortized to interest expense using the straight-line method through the maturity date of the CB&T Credit Facility.

Interest expense on the CB&T Credit Facility was approximately $458,000 during the year ended December 31, 2014 (including $69,000 in amortization of deferred financing costs).

Borrowings under the CB&T Credit Facility are secured by certain assets of the Company. These collateral assets will include the grant to CB&T of first-priority deeds of trust on certain real property assets and trust deeds of the Company to be identified by the parties from time-to-time and all personal property of the Company, which collateral includes the assets described in the Security Agreement and in other customary collateral agreements that will be entered into by the parties from time-to-time. As of December 31, 2014, the carrying amount and classification of loans and real estate properties securing the CB&T Credit Facility were as follows:

Loans:
   
December 31,
2014
 
Commercial
 
$
11,505,000
 
Real Estate:
       
Residential
   
6,933,229
 
Storage
   
3,847,884
 
Industrial
   
3,027,735
 
Total
 
$
13,808,848
 

The borrowing base calculation outlined in the Advance Formula Agreement equals the sum of: (a) the lesser of (i) 75% of the outstanding principal balance of those mortgage loan promissory notes issued by the Company in the ordinary course of business that qualify as “Eligible Loan Notes” according to criteria outlined in the Advance Formula Agreement and (ii) 50% of the then-current appraised value of the real property securing such Eligible Loan Notes; plus (b) 50% of the then-current appraised value of the real property owned by the Company that qualifies as “Eligible Owned Real Property” according to criteria outlined in the Advance Formula Agreement.

The CB&T Credit Facility contains affirmative, negative, and financial covenants which are customary for loans of this type, including among others: approvals of new leases or lease renewals with respect to collateral properties; maintaining the Company’s principal bank accounts with CB&T and maintenance of $2,000,000 of unencumbered liquid assets as defined (reported as part of restricted cash on the accompanying consolidated balance sheets); obligations to use best efforts to keep certain of the Company’s properties fully leased; maintenance of minimum debt-to-tangible net worth and debt service coverage ratios; limitations on repurchasing or redeeming stock of the Company; limitations on incurrence of liens or additional indebtedness; restrictions against guarantying debt outside the ordinary course of business; restrictions on asset dispositions, capital or corporate restructuring or other transactions outside the ordinary course of business; and restrictions on making certain investments. Management is not aware of any breach of these covenants as of December 31, 2014.
 
 
F-21
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

The Credit Agreement contains certain events of default (subject to specified thresholds and, in certain cases, cure periods), including among others: nonpayment of principal and other amounts when due; breach of covenants or inaccuracy of representations and warranties; maintenance of required insurance; change in the management, ownership or control of the Company which CB&T believes could have a Material Adverse Effect as defined in the Credit Agreement; cross-default and/or cross-acceleration to other indebtedness; certain bankruptcy or insolvency events; the dissolution, merger or consolidation of the Company or if the Company ceases to do business as a going concern; the issuance of a writ of attachment, seizure or similar process against any part of the Company’s property; certain ERISA-related events; entry of non-appealable judgments against the Company that are not covered by insurance, or the entry of a levy or lien of attachment against any assets of the Company or entry by the Company into certain types of settlements; or if CB&T deems itself insecure with respect to the payment obligations of the Company or is of the opinion that a Material Adverse Effect has occurred or could occur. If an event of default occurs and is continuing under the Credit Agreement, CB&T may, among other things, terminate its obligations to lend under the CB&T Credit Facility and require the Company to repay all amounts owed thereunder.

Opus Bank Line of Credit

On April 22, 2014, the Company entered into a Secured Revolving Credit Loan Agreement (the “Opus Credit Agreement”) with Opus as the lender and executed a Promissory Note in favor of Opus, which agreements provide the Company with a new revolving line of credit facility (the “Opus Credit Facility”).  As a condition to providing the Opus Credit Facility to the Company, Opus also required the Company’s Chairman of the Board, President and Chief Executive Officer, William C. Owens, to enter into a Carveout Payment Guaranty (the “Guaranty”), dated April 22, 2014, in favor of Opus.  Mr. Owens’ delivered the Guaranty in his individual capacity and as sole trustee of Owens Trust, a California trust controlled by Mr. Owens, to guarantee performance by the Company of certain specified obligations under the Opus Credit Facility.  Subject to various conditions, borrowings under the Opus Credit Facility will be used by the Company for general corporate purposes and to finance the origination of new commercial real estate loans.

The maximum borrowings available (total commitment) under the revolving Opus Credit Facility is the lesser of $20,000,000, which is the face amount of the Promissory Note, or the Maximum Allowed Advance amount determined pursuant to a borrowing base calculation described in the Opus Credit Agreement. At any time that the aggregate principal amount of the total borrowings under the Opus Credit Facility exceeds the Maximum Allowed Advance permitted pursuant to the borrowing base calculation, the Company must promptly repay an amount equal to such excess. 

Advances under the Opus Credit Facility may be made by Opus until April 1, 2016.  All borrowings under the Opus Credit Facility bear interest payable monthly, in arrears, on the first business day of each month, as follows: (i) continuing through October 1, 2014 the rate of interest will be 4.5%; (ii) commencing October 1, 2014, and on each successive six month anniversary during the term (the “Rate Change Date”), the rate of interest will be reset to the Six Month LIBOR rate of interest (0.36% at December 31, 2014) as reported on such Rate Change Date plus four percent (4.0%) per annum but in no event will the interest rate be lower than 4.5% per annum. The interest rate as of December 31, 2014 was 4.5%. Upon a default under the Opus Credit Facility such interest rate increases by an additional 5.00%. Commencing on May 1, 2016, in addition to the required interest payments, the Company is also required to make mandatory monthly principal payments and all amounts under the Opus Credit Facility are to be repaid not later than April 1, 2017.
 
 
F-22
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


Borrowings under the Opus Credit Facility will be secured by certain of the Company's assets. These collateral assets will include the following types of assets to be identified by the parties and described in Borrowing Base Collateral Certificates  to be entered into by the parties from time-to-time: (i) the grant to Opus of first-priority deeds of trust on certain of the Company's real property assets that meet related eligibility requirements set forth in the Opus Credit Agreement (as further defined in the Opus Credit Agreement, the “REO Collateral”); and (ii) the grant to Opus of a collateral interest in mortgage loan promissory notes issued by the Company in the ordinary course of business that meet related eligibility requirements set forth in the Opus Credit Agreement (as further defined in the Opus Credit Agreement, the “Note Collateral”).

The borrowing base calculation outlined in the Opus Credit Agreement equals the sum of: (a) the lesser of (i) 70% of the outstanding principal balance of the Note Collateral and (ii) 50% of the then-current Appraised Value (using the appraisal method described in the Opus Credit Agreement) of the real property securing such Note Collateral; plus (b) 60% of the then-current Appraised Value of the real property owned by the Company that qualifies as REO Collateral.  As of December 31, 2014, the carrying amount and classification of loans and real estate properties securing the Opus Credit Facility were as follows:

Loans:
   
December 31,
2014
 
Commercial
 
$
13,630,000
 
Real Estate:
       
Office
   
9,132,267
 
Industrial
   
1,459,063
 
Total
 
$
10,591,330
 

The Opus Credit Facility contains affirmative, negative, and financial covenants which are customary for loans of this type, including among others: approvals of new leases or lease renewals with respect to collateral properties; maintaining a minimum of $5,000,000 in bank accounts of the Company and affiliates maintained at Opus ($4,000,000 is reported as part of restricted cash in the accompanying consolidated balance sheets and the remaining $1,000,000 is held by affiliates); compliance by Mr. Owens with all terms of the Guaranty obligations; maintenance of minimum debt-to-tangible net worth and debt service coverage ratios and limitations on making dividends or distributions that could cause a material adverse change in the Company’s financial position or have other financial consequences as described in the agreements. Management is not aware of any breach of these covenants as of December 31, 2014.
 
The Opus Credit Facility required the payment of an origination fee of $100,000 and other issuance costs and is subject to certain administrative fees and expenses. As of December 31, 2014, $231,000 of these costs were paid and capitalized to deferred financing costs and are being amortized to interest expense using the straight-line method through the maturity date of the Opus Credit Facility.

Interest expense on the Opus Credit Facility was approximately $112,000 during the year ended December 31, 2014 (including $51,000 in amortization of deferred financing costs).
 
 
F-23
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


NOTE 8 - NOTES AND LOANS PAYABLE ON REAL ESTATE

The Company had the following notes and loans payable outstanding as of December 31, 2014 and 2013:
   
December 31,
2014
 
December 31,
2013
 
Interest Rate
 
Payment Terms/Frequency
 
Maturity Date
720 University, LLC
Note Payable
 
$
9,741,463
 
$
9,917,585
 
5.07%
 
Amortizing
Monthly
 
March 2015
Tahoe Stateline Venture, LLC
Note #1
   
2,900,000
   
2,900,000
 
5.00%
 
Interest Only
Semi-annual
 
December 2016
Tahoe Stateline Venture, LLC
Note #2
   
—
   
400,000
 
5.00%
 
Interest Only
Semi-annual
 
December 2016
Tahoe Stateline Venture, LLC
Note #3
   
500,000
   
700,000
 
5.00%
 
Interest Only
Quarterly
 
August 2017
TOTB North, LLC
Construction Loan Payable
   
1,007,919
   
—
 
4.50%
 
Amortizing
Monthly
 
June 2017
TOTB Miami, LLC
 Loan Payable
   
12,975,167
   
—
 
4.26%
 
Amortizing
Monthly
 
November 2017
Tahoe Stateline Venture,
LLC Loan Payable
   
10,445,000
   
—
 
3.47%
 
Amortizing
Monthly
 
January 2021
   
$
37,569,549
 
$
13,917,585
           

The following table shows maturities by year on these notes and loans payable as of December 31, 2014:
 
Twelve months ending December 31:
       
2015
 
$
9,741,463
 
2016
   
2,900,000
 
2017
   
14,483,086
 
2021
   
10,445,000
 
   
$
37,569,549
 

720 University, LLC Note Payable

        The Company had a note payable with a bank through its investment in 720 University, LLC (“720 University), which was secured by the retail development located in Greeley, Colorado. The note required amortized monthly payments of $56,816 at a fixed rate of 5.07% per annum with the balance of unpaid principal due on March 1, 2015 (see below). Interest expense was approximately $505,000 and $514,000 for the years ended December 31, 2014 and 2013, respectively.
 
In November 2014, 720 University entered into an agreement to sell the property that secures this note payable, and the buyer extended a new loan to 720 University to repay the existing note payable. The refinancing closed in January 2015. The principal amount of the new loan is $9,771,263 and will accrue interest at 6.0% per annum until paid off with the closing of the sale of the property to the buyer which is expected to occur on or about May 28, 2015.
 
Tahoe Stateline Venture, LLC Notes Payable

The Company obtained these obligations as a result of the foreclosure or purchase of nine parcels by TSV in 2013 and 2012. The Company repaid all of one note in the amount of $400,000 during the year ended December 31, 2014 to allow for the new Rabobank loan to be secured by the phase I retail building recently completed (see below). The Company also repaid $200,000 of one note during the year ended December 31, 2014 to allow demolition of the buildings on the land for the overall development in Phase II of the project. The Company paid approximately $195,000 and $164,000 of interest on the notes during the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, there was approximately $19,000 and $21,000 in accrued but unpaid interest on these notes. The majority of the interest incurred has been capitalized to the basis of the land now under development.
 
 
F-24
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

TOTB North, LLC Construction Loan Payable
 
TOTB Miami, LLC (“TOTB”) contributed the vacant and unimproved “North” apartment building (the “Apartments”) and the related 2.37 acre parcel of land (together with the Apartments, the “North Property”) to a new wholly owned limited liability company, TOTB North, LLC (“TOTB North”) during 2014 and entered into a Construction Loan Agreement (the “Loan Agreement”) with Bank of the Ozarks (“Ozarks”) as the lender providing TOTB North with a loan (the “Loan”) of up to $21,304,000, subject to the terms and conditions of the Loan documents, for the purpose of renovating and improving the Apartments (the “Project”).  The Loan is evidenced by the Loan Agreement, a related Promissory Note (the “Note”), a Mortgage, Security Agreement and Fixture Filing (the “Security Agreement”), an Assignment of Rents and Revenues (the “Assignment”), an Environmental Indemnity Agreement (the “Indemnity Agreement”) and a Post-Closing Agreement (the “Post-Closing Agreement”). As a condition to providing the Loan to TOTB North, Ozarks also required  a joint and several completion guaranty from the Company and the Manager (the “Completion Guaranty”) with respect to completion of the Apartments, a joint and several repayment guaranty from the Company and the Manager (the “Repayment Guaranty”) that guarantees repayment of the Loan subject to certain limitations and a joint and several carve-out guaranty from the Company and the Manager (the “Carve-Out Guaranty” and, together with the Completion Guaranty and the Repayment Guaranty, the “Guarantees”) that provides a guaranty with respect to standard “bad-boy” carve-out provisions. As described below under “TOTB Miami, LLC Loan Payable”, the Loan Agreement was modified in November 2014.

The initial maturity date (the “Maturity Date”) of the Loan is June 12, 2017, which may be extended at the option of TOTB North for two additional one year periods if a number of conditions are met including, among others, the conditions that there be no defaults, that the North Property have a loan to value ratio calculated in accordance with the Loan Agreement at or below 60% at the time of each extension, that the debt service coverage ratio (“DSCR”) of the North Property calculated in accordance with the Loan Agreement equals or exceeds 1.25:1 at the time of each extension, that there be no Material Adverse Change (as defined in the Loan documents) relating to Borrower or any Guarantor and that certain additional fees are paid to Ozarks at the time of the extension.

The balance of the loan was approximately $1,008,000 as of December 31, 2014. All outstanding borrowings under the Loan bear interest equal to the floating daily Three Month LIBOR rate of interest plus four percent (4.0%) per annum (the “Note Rate”), but in no event will the Note Rate be lower than the floor rate of four and one-half percent (4.5%) per annum. The Note Rate as of December 31, 2014 was 4.5% per annum.

Upon a default under the Loan documents the Note Rate increases by an additional eight percent (8.00%) per annum. Interest only payments are payable monthly, in arrears, on the first business day of each month (the “Payment Date”), until the “Amortization Commencement Date” which is the earlier to occur of (i) December 12, 2015 or (ii) the first Payment Date occurring after the Project is completed and the North Property achieves a DSCR of greater than 1.25:1.

Commencing on the Amortization Commencement Date and continuing on each Payment Date thereafter until the Maturity Date, TOTB North is required to make, in addition to the interest payment due on such date, a monthly principal payment.  The principal payment is calculated monthly based on the principal component of a mortgage-style amortization schedule calculated using the principal balance and the Note Rate as of the corresponding Payment Date and a period of 300 months (less the number of any such monthly principal payments made by TOTB North prior to the applicable monthly calculation). The   balance of the Loan is due on the Maturity Date.
 
 
F-25
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


As of December 31, 2014, TOTB North had paid customary closing fees, disbursements and expenses, including an origination fee to Ozarks, which totaled $622,000. The majority of these costs were paid out of proceeds from the loan and capitalized to deferred financing costs and are being amortized to the construction project using the straight-line method through the Maturity Date. During the year ended December 31, 2014, approximately $121,000 of deferred financing costs was amortized to the Project. During the year ended December 31, 2014, approximately $22,000 of interest was incurred which was capitalized to the Project.

Borrowings under the Loan documents are subject to customary conditions, and, additionally, Ozarks was not required to loan more than $1.0 million to TOTB North until TOTB North satisfied certain additional conditions detailed in the Post-Closing Agreement (the “Post-Closing Conditions.  TOTB North was also required to deposit with Ozarks $1.0 million, or such greater amount as was required (the “Bridge Equity”), to fund all Project costs incurred prior to the satisfaction of the Post-Closing Conditions.  The Bridge Equity deposit of $1.0 million was made in 2014 with a capital contribution by TOTB (excess funds held and capital contributions of $453,000 from the Company and $108,000 from OFG). Upon satisfaction of the Post-Closing Conditions in February 2015, Ozarks has reimbursed as part of the Loan the amount of the Bridge Equity to TOTB North to the extent the proceeds were expended in conformance with the approved Project budget.

Borrowings under the Loan Agreement will be secured by: (i) a first mortgage lien on the North Property and all improvements, amenities and appurtenances to the North Property, (ii) an assignment of all personal property, sales contracts, rents, leases, and ground leases associated with the North Property and (iii) all design, development, service, management, leasing and construction contracts associated with the North Property.  In addition, the Bridge Equity and other reserves established by Ozarks are additional collateral for the Loan.

The Loan documents contain affirmative, negative and financial covenants of TOTB North and the Guarantors which are customary for loans of this type, including, among others, a requirement that the Company in its capacity as a Guarantor maintain: (i) a minimum of $5,000,000 in unencumbered cash balances and (ii) a minimum Net Worth of $35,000,000. Management is not aware of any breach of these covenants as of December 31, 2014.
 
The Loan documents contain events of default (subject to specified thresholds and, in certain cases, cure periods) which are customary for loans of this type. If an event of default occurs and is continuing under the Loan documents, Ozarks may, among other things, terminate its obligations to lend and require the Company to repay all amounts owed thereunder, take possession of the Project and proceed to complete the Project at the cost of TOTB North and/or take certain actions against Guarantors pursuant to the Guarantees.

TOTB Miami, LLC Loan Payable
 
In November 2014, TOTB entered into another Loan Agreement (the “TOTB Loan Agreement”) with Ozarks providing TOTB a loan (the “TOTB Loan”) of $13,000,000 secured by the 154 leased condominium units owned in the Point building and the related parcel (the “TOTB Property”). The TOTB Loan is evidenced by the TOTB Loan Agreement, a related Promissory Note, a Mortgage, Security Agreement and Fixture Filing, Assignment of Rents and Revenues, Collateral Assignment of Declaration Rights, Environmental Indemnity Agreement, and Assignment and Subordination of Management Agreement.
 
 
F-26
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


As a condition of providing the TOTB Loan, Ozarks required that the TOTB Loan and the North Loan (see above) be cross collateralized and cross-defaulted, that excess proceeds from any sale of the North Property be used to reduce or pay off the new Loan and that excess proceeds from any sale of the TOTB Property be used to pay off the North Loan. Accordingly, such terms are included in the new Loan documents and a Modification Agreement has been entered to amend the North Loan Agreement, the North Assignment and the North Security Agreement to add these terms.  The Lender also required a joint and several repayment guaranty from the Company and the Manager (the “Repayment Guaranty”) that guarantees repayment of the Loan subject to certain limitations, and a joint and several carve-out guaranty from the Company and the Manager (the “Carve-Out Guaranty” and, together with the Repayment Guaranty, the “Guarantees”) that provides a guaranty with respect to standard “bad-boy” carve-out provisions.

The initial maturity date (the “Maturity Date”) of the TOTB Loan is November 16, 2017, and the Maturity Date may be extended at the option of TOTB for two additional one year periods if a number of conditions outlined in the TOTB Loan Agreement are met, including among others, the conditions that there be no defaults, that the TOTB Property have a loan to value ratio calculated in accordance with the TOTB Loan Agreement at or below 65% at the time of each extension, that the debt service coverage ratio (“DSCR”) of the TOTB Property calculated in accordance with the TOTB Loan Agreement equals or exceeds 1.35:1 at the time of each extension, that all reserves required to be established are fully funded, that there be no Material Adverse Change relating to TOTB or any Guarantor and that certain additional fees are paid to Lender at the time of the extension.

All outstanding borrowings under the TOTB Loan will bear interest equal to the floating daily Three Month LIBOR rate of interest plus four percent (4.0%) per annum (the “Note Rate”), but in no event will the Note Rate be lower than the floor rate of four and one-quarter percent (4.25%) per annum. The Note Rate as of December 31, 2014 was 4.26 % per annum.  Upon a default under the TOTB Loan documents, including any cross-default, the Note Rate increases by an additional eight percent (8.00%) per annum. Principal and interest is payable monthly, in arrears, on the first business day of each month (the “Payment Date”). The principal payment amount is calculated monthly based on the principal component of a mortgage-style amortization schedule calculated using the principal balance and the Note Rate as of the corresponding Payment Date and a period of 300 months (less the number of any such monthly principal payments made by TOTB prior to the applicable monthly calculation), and the balance of the TOTB Loan is due on the Maturity Date.

TOTB was obligated to pay customary closing fees, disbursements and expenses, including an origination fee to the Lender, which totaled approximately $323,000. The majority of these costs were paid out of proceeds from the loan and capitalized to deferred financing costs and are being amortized to interest expense using the effective interest method through the Maturity Date. During the year ended December 31, 2014, approximately $81,000 of interest expense was incurred (including approximately $12,000 of deferred financing costs amortized to interest expense).

Borrowings are secured by: (i) a first mortgage lien on the TOTB Property and all improvements, amenities and appurtenances to the TOTB Property, (ii) an assignment of all personal property, sales contracts, rents, leases, and ground leases associated with the TOTB Property, (iii) all design, development, service, management, leasing and construction contracts associated with the TOTB Property, and (iv) certain reserves established by Lender as additional collateral. The TOTB Loan and the North Loan are cross-collateralized, so each of the TOTB Loan and the North Loan is also secured by the collateral provided pursuant to both loans.

The TOTB Loan documents contain affirmative, negative and financial covenants of TOTB and the Guarantors which are customary for loans of this type, including among others a requirement that the Company in its capacity as a Guarantor maintain: (i) a minimum of $5,000,000 in unencumbered cash balances and (ii) a minimum Net Worth of $35,000,000. Management is not aware of any breach of these covenants as of December 31, 2014.
 
 
F-27
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

The TOTB Loan documents contain events of default (subject to specified thresholds and, in certain cases, cure periods) which are customary for loans of this type, and includes cross-default provisions with respect to the North Loan documents. If an event of default occurs and is continuing under the TOTB Loan or North Loan documents, Lender may, among other things, terminate its obligations to lend funds to the Company and require the Company to repay all amounts owed, take possession of the collateral and proceed to complete the TOTB North project at the cost of the Company and/or take certain actions against Guarantors pursuant to the Guarantees.

Tahoe Stateline Venture, LLC Loan Payable
 
In December 2014, Tahoe Stateline Ventures, LLC (“TSV”) entered into a Credit Agreement (the “Credit Agreement”) with RaboBank, N.A. as the lender (“Lender”) providing TSV with a loan (the “TSV Loan”) of up to $14,500,000. The TSV Loan is evidenced by the Credit Agreement, a Real Estate Term Loan Note, a Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing (the “Security Agreement”) and an Environmental Certificate and Indemnity Agreement. The TSV Loan and related obligations are guaranteed by the Company pursuant to a Guaranty agreement (the “Guaranty” and, together with the Credit Agreement and related agreements, the “TSV Loan Documents”) between the Company and Lender.

TSV borrowed $10,445,000 at the first closing under the TSV Loan and up to an additional $4,055,000 (the “Undisbursed Portion”) will be made available to TSV in one or more future advances, provided that no event of default has occurred under the TSV Loan Documents and that such additional advances do not result in a pro forma Debt Service Coverage ratio (as defined in the Credit Agreement) of less than 1.25:1.00.

All outstanding borrowings under the TSV Loan Documents bear interest initially at a rate of 3.47% per annum (the “Long Term Adjustable Rate”), provided that on January 1, 2018 the Long Term Adjustable Rate will be reset to Lender’s then current market rate for three year fixed rate loans from comparable commercial real estate secured transactions, as determined by Lender in its sole discretion. Upon a default under the TSV Loan Documents, the interest rate on the outstanding principal balance increases by an additional five percent (5.00%) per annum and the rate on any other outstanding obligations thereunder increases to ten percent (10.00%) per annum. Prepayments under the TSV Loan Documents may be made at any time provided that a prepayment fee in the following amount accompanies such prepayment (the “Prepayment Fee”): (i) until January 4, 2016 the Prepayment Fee is 3.00% of the prepayment amount; (ii) from January 5, 2016 until January 4, 2017 the Prepayment Fee is 2.00% of the prepayment amount; and (iii) from January 5, 2017 until January 1, 2021 the Prepayment Fee is 1.00% of the prepayment amount. Notwithstanding the foregoing sentence, during the 90 day period immediately prior to January 1, 2018, and the 90 day period immediately prior to the Maturity Date, TSV may prepay the entire unpaid balance of the Loan in full, without any Prepayment Fee or penalty.

During the term of the TSV Loan, TSV will make equal combined payments of principal and accrued interest on the first day of each month in an amount calculated to fully amortize the original principal amount over a period of 300 months, subject to certain adjustments to the monthly payment amount.  An adjustment to the monthly amount will be made: (i) upon disbursement of the Undisbursed Portion of the Loan so that a recalculated monthly payment will fully amortize the then outstanding principal amount over the remainder of the original amortization period; and (ii) following a reset of the Long Term Adjustable Rate of interest. The balance of the Loan is due on January 1, 2021 (the “Maturity Date”).

The Credit Agreement required the payment of a closing fee of $108,750 and certain administrative fees which totaled approximately $218,000.   The majority of these costs were paid out of proceeds from the loan and capitalized to deferred financing costs and are being amortized to interest expense using the effective interest method through the Maturity Date. During the year ended December 31, 2014, approximately $1,000 of interest expense was incurred.
 
 
F-28
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


Borrowings under the Credit Agreement are secured by a lien on all real, personal and other property owned by TSV, including, without limitation, the land, buildings and other improvements at development located in South Lake Tahoe, California known as Chateau at Lake Tahoe, (the “Project”) and an assignment of all rents and leases associated with the Project, which collateral is further described in the Security Agreement.

The TSV Loan Documents contain affirmative, negative, and financial covenants which are customary for loans of this type, including among others the requirement to obtain Lender approval of new leases or lease renewals with respect to TSV properties. The TSV Loan Documents also contains customary events of default (subject to specified thresholds and, in certain cases, cure periods). If an event of default occurs and is continuing under the TSV Loan Documents , Lender may, among other things, terminate its obligations to lend under the Credit Agreement and require the Company to repay all amounts owed thereunder. Management is not aware of any breach of these covenants as of December 31, 2014.

NOTE 9 – STOCKHOLDERS’ EQUITY
 
The Company was incorporated on August 9, 2012, under the laws of the State of Maryland and was authorized to issue 1,000,000 shares of $0.01 par value Common Stock at the time of its incorporation. Per the Articles of Amendment and Restatement of the Company dated January 23, 2013, the authorized shares of Common Stock were increased to 50,000,000 shares (at $0.01 par value per share). In addition, the Company was authorized to issue 5,000,000 shares of preferred stock at $0.01 par value per share. The Company was created to effect the Merger. The Merger was approved by a requisite vote of OMIF limited partners on April 16, 2013 and was completed on May 20, 2013.

Per resolutions of the Board of Directors of the Company on August 9, 2012, the Board of Directors authorized the issuance of 1,000 shares of $0.01 par value Common Stock to William C. Owens in exchange for cash consideration of $1.00 per share (for total consideration of $1,000). Upon effectiveness of the Merger, the outstanding 1,000 shares of Common Stock of the Company held by William C. Owens were cancelled in exchange for $1,000, and every 25 limited partner units of OMIF were converted into one share of Common Stock of the Company. Additionally, the units representing the general partner interests of OFG were treated as follows: i) the 1,496,000 units representing the interest that was an expense of OMIF were cancelled, and ii) the 1,378,256 units representing the interest relating to cash contributions made by OFG to the capital of OMIF were converted into shares of Common Stock of the Company in the same manner limited partnership units were converted into shares of Common Stock. No fractional shares were issued in the Merger; instead, cash adjustments were paid in respect of shares otherwise issuable.

On August 9, 2013, the Board of Directors authorized a Rule 10b5-1 stock repurchase plan (the “Repurchase Plan”) which permitted the Company to repurchase up to the lesser of $7 million of its Common Stock or five percent of the shares of Common Stock outstanding as of that date. As of December 31, 2014 and 2013, the Company had repurchased 430,118 and 403,910 shares of its Common Stock, respectively, for a total cost of approximately $5,349,000 and $5,024,000 (including commissions) and an average cost of $12.44 per share. No further repurchases were made under the Repurchase Plan which expired on May 19, 2014.

 
 
F-29
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 
The following table presents the tax treatment for dividends paid by the Company on its Common Stock for the years ended December 31, 2014 and 2013:
                               
Dividend Classified as Return of Capital
 
           
Dividends Classified as
Ordinary Income
 
Capital Gain
Distribution
 
   
Total
Dividends
Paid(1)
     
Year
 
Dividends
Paid
Per Share
 
Percent
 
Dividends
Paid
Per Share
 
Qualified
Dividend
Income(2)
 
Percent
 
Dividend
Paid
Per Share
 
Percent
 
Dividends
Paid
Per Share
 
Common Stock:
                         
2014
 
$
3,087,360
 
$
0.287
   
100.00
%
$
0.255
   
—
   
—
   
—
   
00.00
 %
 $
0.000
 
2013(3)
 
$
2,530,290
 
$
0.227
   
28.45
%
$
0.023
   
—
   
—
   
—
   
71.55
 %
 $
0.204
 
                                                         
(1) Dividends for 2014 include dividend declared for shareholders of record as of December 31, 2014 and paid in January 2015. This amount consisted of a $0.07 per share special dividend and a $0.05 per share regular quarterly dividend. This dividend was a split-year dividend with $0.088 allocable to 2014 for federal income tax purposes and $0.032 allocable to 2015 for federal income tax purposes.
(2) Qualified dividend income is eligible for reduced dividend rates.
(3) Dividends for 2013 do not include dividends paid prior to the conversion from OMIF to ORM on May 20, 2013.

NOTE 10 – RESTRICTED CASH
 
Contingency Reserves
 
In accordance with the charter, the Company is required to maintain cash, cash equivalents and marketable securities as contingency reserves in an aggregate amount of 1.50% of Capital as defined in the charter. Although the Manager believes the contingency reserves are adequate, it could become necessary for the Company to sell or otherwise liquidate certain of its investments or other assets to cover such contingencies on terms which might not be favorable to the Company, which could lead to unanticipated losses upon sale of such assets.
 
The contingency reserves required per the charter as of December 31, 2014 and 2013 were approximately $3,876,000 and $3,895,000 and are reported as restricted cash in the accompanying consolidated balance sheets. The $6,000,000 required to be held in non-interest bearing accounts as of December 31, 2014 pursuant to the Company’s two lines of credit agreements satisfy this contingency reserve requirement (see Note 7).
 
Escrow Deposits
 
Restricted cash includes deposits held in third party escrow accounts to pay property taxes and insurance on Company real estate in the amounts of approximately $249,000 and $200,000 as of December 31, 2014 and 2013, respectively.

NOTE 11 - INCOME TAXES
 
The Company operates in such a manner as to qualify as a REIT, under the provisions of the Internal Revenue Code of 1986, as amended (the "Code"); therefore, applicable REIT taxable income is included in the taxable income of its shareholders, to the extent distributed by the Company. To maintain REIT status for federal income tax purposes, the Company is generally required to distribute at least 90% of its REIT taxable income to its shareholders as well as comply with certain other qualification requirements as defined under the Code. As a REIT, the Company is not subject to federal corporate income tax to the extent that it distributes 100% of its REIT taxable income each year. During 2014 and 2013, the Company distributed in excess of 100% of its taxable income to its stockholders.

Taxable income from non-REIT activities managed through the Company's taxable REIT subsidiary (“TRS”) (Lone Star Golf, Inc.) is subject to federal, state and local income taxes. The Company did not record a provision for current income taxes related to its TRS for the years ended December 31, 2014 and 2013 as it was in a net loss position. Deferred taxes related to temporary differences in book and taxable income as well as net operating losses of the TRS were not significant.
 
 
F-30
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


As of December 31, 2014 and 2013, the Company has not recorded a reserve for any uncertain income tax positions. There has been no interest or penalties incurred to date. The Company has capital loss carryforwards from the sale of two properties during 2014 totaling approximately $822,000 as of December 31, 2014. These losses will begin to expire in 2020.

As of December 31, 2014, income tax returns for the calendar years ended 2012 through 2014 remain subject to examination by IRS and/or any state or local taxing jurisdiction. Additionally, tax returns from the predecessor entity (OMIF) remain open for the calendar years ended 2011 and 2012, as well as the short year ended May 19, 2013.

NOTE 12 - TRANSACTIONS WITH AFFILIATES
 
OFG is entitled to receive from the Company a management fee of up to 2.75% per annum of the average unpaid balance of the Company’s loans at the end of the twelve months in the calendar year for services rendered as Manager of the Company.
 
All of the Company’s loans are serviced by OFG, in consideration for which OFG receives 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 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. 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 must be equal to or less than the stated limits. Management fees amounted to approximately $1,727,000 and $1,664,000 for the years ended December 31, 2014 and 2013, respectively, and are included in the accompanying consolidated statements of operations. Service fees amounted to approximately $157,000 and $152,000 for the years ended December 31, 2014 and 2013, respectively, and are included in the accompanying consolidated statements of operations. As of December 31, 2014 and 2013, the Company owed management and servicing fees to OFG in the amount of approximately $171,000 and $294,000, respectively.
 
The maximum servicing fees were paid to OFG during the years ended December 31, 2014 and 2013. The maximum management fees had been paid to OFG during the year ended December 31, 2014. If the maximum management fees had been paid to OFG during the year ended December 31, 2013, the management fees would have been $1,668,000 (increase of $4,000), which would have decreased net income by approximately 0.05%.
 
In determining the management fees to pay to OFG, OFG may consider a number of factors, including current market yields, delinquency experience, uninvested cash and real estate activities. OFG expects that the management fees that it receives from the Company will vary in amount and percentage from period to period. However, due to reduced levels of loans held by the Company during the years ended December 31, 2014 and 2013, OFG has chosen to take close to the maximum compensation that it is able to take pursuant to the Company’s charter and will likely continue to take the maximum compensation for the foreseeable future.
 
Pursuant to the charter, OFG receives all late payment charges from borrowers on loans owned by the Company, with the exception of those loans participated with outside entities. The amounts paid to or collected by OFG for such charges on Company loans totaled approximately $14,000 and $5,000 for the years ended December 31, 2014 and 2013, respectively. In addition, the Company remits other miscellaneous fees to OFG, which are collected from loan payments, loan payoffs or advances from loan principal (i.e. funding, demand and partial release fees). Such fees remitted to OFG totaled approximately $4,000 and $1,000 for the years ended December 31, 2014 and 2013, respectively.
 
 
F-31
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

OFG originates all loans the Company invests in and receives loan origination fees from borrowers. Such fees earned by OFG amounted to approximately $1,228,000 and $658,000 on loans originated, rewritten or extended of approximately $50,440,000 and $18,977,000 for the years ended December 31, 2014 and 2013, respectively. Such fees as a percentage of loans originated, rewritten or extended by the Company were 2.4% and 3.5% for the years ended December 31, 2014 and 2013, respectively.

OFG is reimbursed by the Company for the actual cost of goods, services and materials used for or by the Company and obtained from unaffiliated entities and the salary and related salary expense of OFG’s non-management and non-supervisory personnel performing services for the Company which could be performed by independent parties (subject to certain limitations in the Management Agreement). The amounts reimbursed to OFG by the Company were $704,000 and $742,000 during the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014, there was approximately $113,000 payable to OFG for reimbursable expenses and other fees owed and no amounts payable as of December 31, 2013. The Company also reimbursed certain of OFG’s officers for allowed expenses in the total amount of $1,000 and $19,000 during the years ended December 31, 2014 and 2013, respectively.

The Company paid Investor’s Yield, Inc. (a wholly owned subsidiary of OFG) approximately $30,000 and $34,000 in trustee’s fees related to certain foreclosure proceedings on Company loans during the years ended December 31, 2014 and 2013, respectively.

In February 2015 (subsequent to year-end), the Company purchased OFG’s full interest in a loan secured by an industrial property located in San Ramon, California with a principal balance of $1,499,000 at face value.
 
NOTE 13 - RENTAL INCOME
 
The Company’s real estate properties held for sale and investment are leased to tenants under noncancellable leases with remaining terms ranging from one to twelve years. Certain of the leases require the tenant to pay all or some operating expenses of the properties. The future minimum rental income from noncancellable operating leases due within the five years subsequent to December 31, 2014, and thereafter is as follows:
 
Year ending December 31:
       
2015
 
$
7,148,109
 
2016
   
3,784,137
 
2017
   
3,129,076
 
2018
   
2,652,363
 
2019
   
2,007,112
 
Thereafter (through 2026)
   
3,487,794
 
   
$
22,208,591
 

 
 
F-32
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


NOTE 14 - FAIR VALUE
 
The Company measures its financial and nonfinancial assets and liabilities pursuant to ASC 820 – Fair Value Measurements and Disclosures .  ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
 
Fair value is defined in ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
 
Level 1        Quoted prices in active markets for identical assets or liabilities
 
Level 2        Observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in active markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities

Level 3        Unobservable inputs that are supported by little or no market activity, such as the
Company’s own data or assumptions

Level 3 inputs include unobservable inputs that are used when there is little, if any, market activity for the asset or liability measured at fair value. In certain cases, the inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level in which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another.  In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

The following is a description of the Company’s valuation methodologies used to measure and disclose the fair values of its financial and nonfinancial assets and liabilities on a recurring and nonrecurring basis.
 
Impaired Loans
 
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established.  A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or when monthly payments are delinquent greater than ninety days. Once a loan is identified as impaired, management measures impairment in accordance with ASC 310-10-35.  Impairment is estimated by either the present value of expected cash flows discounted at the note rate or, as a practical expedient, the loan’s observable market price (if available) or the fair value of the underlying collateral, if collateral dependent.  The fair value of the loan’s collateral is determined by third party appraisals, broker price opinions, comparable property sales or other indications of value. Those impaired loans not requiring an allowance represent loans for which the fair value of the collateral exceed the recorded investments in such loans. At December 31, 2014 and 2013, the majority of the total impaired loans were evaluated based on the fair value of the collateral by obtaining third party appraisals that valued the collateral primarily by utilizing an income or market approach or some combination of the two.  In
 
 
F-33
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

accordance with ASC 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data, the Company records the impaired loan as nonrecurring Level 2.  When an appraised value is not available, management determines the fair value of the collateral is further impaired below the appraised value or there are significant unobservable inputs included in a current appraisal, the Company records the impaired loan as nonrecurring Level 3. Unobservable market data included in appraisals often includes adjustments to comparable property sales for such items as location, size and quality to estimate fair values using a sales comparison approach.  Unobservable market data also includes cash flow assumptions and capitalization rates used to estimate fair values under an income approach.

Real Estate Held for Sale and Investment
 
Real estate held for sale and investment includes properties acquired through foreclosure of the related loans. When property is acquired, any excess of the Company’s recorded investment in the loan and accrued interest income over the estimated fair market value of the property, net of estimated selling costs, is charged against the allowance for loan losses. Subsequently, real estate properties held for sale are carried at the lower of carrying value or fair value less costs to sell. The Company periodically compares the carrying value of real estate held for investment to expected future cash flows as determined by internally or third party generated valuations (including third party appraisals that primarily utilize an income or market approach or some combination of the two) for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to fair value. As fair value is generally based upon unobservable inputs, the Company records the impairment on real estate properties as nonrecurring Level 3.  Unobservable market data included in appraisals often includes adjustments to comparable property sales for such items as location, size and quality to estimate fair values using a sales comparison approach.  Unobservable market data also includes cash flow assumptions and capitalization rates used to estimate fair values under an income approach.

 
 
F-34
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


There were no assets or liabilities measured at fair value on a recurring basis at December 31, 2014 and 2013. The following table presents information about the Company’s assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2014 and 2013:
 
     
Fair Value Measurements Using
   
Carrying Value
Quoted Prices In Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
2014
           
Nonrecurring :
           
Impaired loans:
     
 
 
 
  Commercial
$
       529,689
—
—
$
       529,689
  Residential
 
6,144,000
—
—
 
6,144,000
Total
$
6,673,689
—
—
$
  6,673,689
             
Real estate properties:
   
 
 
 
 
  Commercial
$
   1,292,500
—
—
$
   1,292,500
  Land
 
2,334,773
—
—
 
2,334,773
Total
$
3,627,273
—
—
$
3,627,273
             
2013
           
Nonrecurring :
           
Impaired loans:
           
  Commercial
$
       541,956
—
—
 $
       541,956
  Residential
 
4,896,000
—
—
 
4,896,000
Total
$
5,437,956
—
—
$
       5,437,956
             
Real estate properties:
           
  Commercial
$
   408,000
—
—
$
     408,000
  Land
 
433,920
     
433,920
Total
$
   841,920
—
—
 $
     841,920

The reversal of loan losses (net) based on the fair value of loan collateral less estimated selling costs for the impaired loans above totaled approximately $1,236,000 and $466,000 during the years ended December 31, 2014 and 2013, respectively. Impairment losses of approximately $179,000 and $666,000 were recorded on the real estate properties above during the years ended December 31, 2014 and 2013, respectively.
 
During the years ended December 31, 2014 and 2013, there were no transfers into or out of Levels 1 and 2.
 
 
F-35
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013

 
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2014 and 2013:

At December 31, 2014:
Description
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Input/Range
 
Weighted Average
                     
Impaired Loans:
                   
Commercial
$
    529,689
 
Appraisal
 
Estimate of Future Improvements
 
13.6%
   
           
Capitalization Rate
 
6.5%
   
           
Comparable Sales Adjustment
 
(59)% to (2.3)%
   
Residential
$
 6,144,000
 
Appraisal
 
Estimate of Future Improvements
 
1.8%
   
           
Discount Rate
 
12%
   
           
Comparable Sales Adjustment
 
(10)% to 20%
   
Real Estate Properties:
                 
Commercial
$
  1,292,500
 
Appraisal
 
Comparable Purchase Offers
 
(42)% to 13.4%
   
Land
$
  2,334,773
 
Appraisal
 
Comparable Sales Adjustment
 
5% to 62.8%
   
           
Discount Rate
 
8%
   

At December 31, 2013:
Description
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Input/Range
 
Weighted Average
                     
Impaired Loans:
                   
Commercial
$
    541,956
 
Appraisal
 
Estimate of Future Improvements
 
13.6%
   
           
Capitalization Rate
 
6.5%
   
           
Comparable Sales Adjustment
 
(59)% to (2.3)%
   
Residential
$
 4,896,000
 
Appraisal
 
Capitalization Rate
 
5.5%
   
           
Comparable Sales Adjustment
 
(19.1)% to 39%
   
Real Estate Properties:
                 
Commercial
$
   408,000
 
Appraisal
 
Comparable Sales Adjustment
 
(186.2)% to (27.1)%
   
           
Capitalization Rate
 
8.2%
   
           
Estimate of Future Improvements
 
15.8%
   
Land
$
   433,920
 
Appraisal
 
Comparable Sales Adjustment
 
(33.3)% to 35.5%
 
7.5%
           
Estimate of Future Improvements
 
54.1%
   

Where only one percentage is presented in the above table there was only one unobservable input of that type for one loan or property. Adjustments to comparable sales included items such as market conditions, location, size, condition, access/frontage and intended use.
 
 
F-36
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


The approximate carrying amounts and estimated fair values of financial instruments at December 31, 2014 and 2013 are as follows:
 
         
Fair Value Measurements at December 31, 2014
     
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
                   
 
Cash and cash equivalents
$
1,414,000
$
1,414,000
$
—
$
—
$
1,414,000
 
Restricted cash
 
6,249,000
 
6,249,000
 
—
 
—
 
6,249,000
 
Loans, net
 
65,164,000
 
—
 
—
 
66,009,000
 
66,009,000
 
Investment in limited liability company
 
2,143,000
 
—
 
—
 
2,352,000
 
2,352,000
 
Interest and other receivables
 
1,482,000
 
—
 
644,000
 
838,000
 
1,482,000
                       
Financial liabilities
                   
 
Due to Manager
$
284,000
$
—
$
284,000
$
—
$
284,000
 
Accrued interest payable
 
175,000
 
—
 
113,000
 
62,000
 
175,000
 
Lines of credit payable
 
11,450,000
 
—
 
11,450,000
 
—
 
11,450,000
 
Notes payable
 
37,570,000
 
—
 
24,428,000
 
13,155,000
 
37,583,000
                       

 
         
Fair Value Measurements at December 31, 2013
     
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
                   
 
Cash and cash equivalents
$
8,159,000
$
8,159,000
$
—
$
—
$
8,159,000
 
Restricted cash
 
4,095,000
 
4,095,000
 
—
 
—
 
4,095,000
 
Loans, net
 
54,057,000
 
—
 
—
 
54,602,000
 
54,602,000
 
Investment in limited liability company
 
2,143,000
 
—
 
—
 
2,352,000
 
2,352,000
 
Interest and other receivables
 
1,674,000
 
—
 
238,000
 
1,436,000
 
1,674,000
                       
Financial liabilities
                   
 
Due to Manager
$
294,000
$
—
$
294,000
$
—
$
294,000
 
Accrued interest payable
 
64,000
 
—
 
—
 
64,000
 
64,000
 
Notes payable
 
13,918,000
 
—
 
—
 
13,960,000
 
13,960,000
                       

The following methods and assumptions were used by the Company in estimating the fair value of each class of financial instruments:

Cash, cash equivalents and restricted cash: The carrying value of cash and cash equivalents and restricted cash approximates the fair value because of the relatively short maturity of these instruments and are classified as Level 1.
 
 
F-37
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


Loans, net: The fair value of loans that are not impaired are estimated using discounted cash flow methodology, using discount rates, which, in the opinion of management, best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. The fair values of loans that are impaired are estimated by the Company primarily through the use of third party appraisals of the underlying collateral. Such appraisals often include unobservable market data including adjustments to comparable property sales for such items as location, size and quality to estimate fair values using a sales comparison approach and include cash flow assumptions and capitalization rates used to estimate fair values under an income approach.

Investment in limited liability company : The fair value of the Company’s investment in limited liability company is estimated based on an appraisal obtained and is classified as Level 3.

Lines of credit payable: The fair value of the Company’s lines of credit payable is estimated based upon comparable market indicators of current pricing for the same or similar issue or on the current rate offered to the Company for debt of the same remaining maturity and is generally observable resulting in a Level 2 classification.

Notes payable: The fair values of the Company’s notes payable and related accrued interest payable are estimated based upon comparable market indicators of current pricing for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities resulting in either a Level 2 or Level 3 classification.

Other: The carrying values of interest and other receivables and due to Manager are estimated to approximate fair values due to the short term nature of these instruments and are classified as Level 2 (except for accrued interest and advances related to loans which are classified as Level 3).

NOTE 15 - COMMITMENTS AND CONTINGENCIES

Environmental Remediation Obligations

The Company has an obligation to pay all required costs to remediate and monitor contamination of the real properties owned by 1850. As part of the Operating Agreement executed by the Company and its joint venture partner in 1850, Nanook, the Company has indemnified Nanook against all obligations related to the expected costs to monitor and remediate the contamination. In 2008, the Company had accrued an amount that a third party consultant had estimated will need to be paid to monitor and remediate the site. The majority of clean-up activities were completed during 2012 as part of the tenant’s construction of a new building on the site. Thus, approximately $460,000 was paid by the Company from the previously established liability and an additional $100,000 was accrued during the year ended December 31, 2012 as a result of an updated estimate of future costs to be incurred. If additional amounts are required, it will be an obligation of the Company. As of December 31, 2014 and 2013, approximately $60,000 and $63,000 of this obligation remains accrued on the Company’s books. Management expects that all costs for this remediation will be paid from cash reserves.

During the course of due diligence performed by a potential buyer of TOTB during 2012, a low level of arsenic was found in the ground water of a monitoring well located on the property owned by TOTB. While the level of arsenic exceeds the minimum level acceptable for drinking water standards, the water under this property is subject to tidal influence and is not used for domestic consumption.  TOTB has retained an environmental consultant to perform additional testing and analysis with the goal of petitioning the appropriate governmental agency to issue a no further action letter for this property due to the low level of contamination and the low quality of the ground water under the property.  At this time, the costs of any potential remediation and/or monitoring are unknown and cannot be estimated. As of December 31, 2014 and 2013, approximately $79,000 and $55,000 had been paid/accrued to perform testing and analysis.
 
 
F-38
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


Contractual Obligations

The Company has entered into various contracts for design, architectural and engineering for the potential phase II development of the land owned by TSV. The aggregate amount of these contracts as of the date of this filing is approximately $793,000 of which approximately $282,000 has been incurred as of December 31, 2014. Management expects that all costs for this project will be paid from cash reserves and/or construction financing to be obtained in the future.

The Company has also entered into contracts for the construction, demolition and concrete remediation, design, architectural and engineering services related to the renovation of the vacant apartment building owned by TOTB North (see Note 6) in the aggregate amount of approximately $21,786,000 of which approximately $1,557,000 has been incurred to December 31, 2014 in addition to other capitalized costs related to the construction project of $580,000 (total of $2,137,000). Management expects that all costs for this project will be paid from cash reserves or the recently obtained construction loan. It is possible that additional change orders will be submitted and construction costs may be higher than expected.

The Company has entered into contracts for new bathrooms and modular offices and improvements to the bridge that accesses the marina held within Brannan Island, LLC in the aggregate amount of approximately $785,000 of which approximately $230,000 has been incurred to December 31, 2014. Management expects that all costs from the project will be paid from cash reserves or advances from the lines of credit.  It is possible that additional change orders will be submitted and construction costs may be higher than expected.

As of December 31, 2014, the Company has commitments to advance additional funds to borrowers of construction, rehabilitation and other loans in the total amount of approximately $5,935,000 (including approximately $1,645,000 in interest reserves).
 
Legal Proceedings

The Company is involved in various legal actions arising in the normal course of business.  In the opinion of management, such matters will not have a material effect upon the financial position of the Company.

NOTE 16 – SUBSEQUENT EVENTS

720 University, LLC Debt Refinancing

In November 2014, 720 University entered into a Real Estate Sale Agreement pursuant to which 720 University agreed to sell the property for $21,000,000 (subsequently reduced to $20,750,000). The buyer deposited $500,000 upon execution and deposited an additional $500,000 once the due diligence period expired in January 2015, and these deposits are non-refundable. On January 30, 2015, an initial closing was held for the purpose of refinancing the 720 University note payable (see Note 8), and the buyer extended a new loan to 720 University to repay the existing note payable to the bank. The principal amount of the new loan is $9,771,263 and will accrue interest at 6.0% per annum until paid off with the closing of the sale of the property to the buyer which is expected to occur on or about May 28, 2015.
 
 
 
F-39
 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements

December 31, 2014 and 2013


NOTE 17 – SUMMARY QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)

The following tables represent unaudited summarized quarterly financial data of the Company for the years ended December 31, 2014 and 2013 which, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's results of operations.
   
Three Months Ended
 
   
                   December 31, 2014
 
               September 30, 2014
 
 June 30, 2014
 
 March 31, 2014
 
                           
Total revenues
 
$
5,399,844
 
$
4,705,357
 
$
4,054,311
   
4,125,493
 
Total expenses
   
4,325,811
   
3,709,670
   
3,625,646
   
3,462,856
 
Operating income
   
1,074,033
   
995,687
   
428,665
   
662,637
 
Gain on sale of real estate, net
   
503,254
   
113,113
   
2,349,808
   
277,184
 
Reversal of (provision for) loan losses
   
2,010,765
   
(117,680
)
 
103,820
   
(127,172
)
Impairment losses on real estate properties
   
—
   
(123,500
)
 
(48,000
)
 
(7,540
)
Net income
   
3,588,052
   
867,620
   
2,834,293
   
805,109
 
Less: Net income attributable to non-controlling interests
   
(13,693
)
 
(83,797
)
 
(23,409
)
 
(44,546
)
Net income attributable to common stockholders
 
$
3,574,359
 
$
783,823
 
$
2,810,884
 
$
760,563
 
Net income per common share (basic and diluted)
 
$
0.33
 
$
0.07
 
$
0.26
 
$
0.07
 
Weighted average number of common shares outstanding
   
10,768,001
   
10,768,001
   
10,768,001
   
10,769,498
 
Dividends declared per share of Common Stock
 
$
0.12
 
$
0.05
 
$
0.05
 
$
0.05
 

   
Three Months Ended
 
   
                    December 31, 2013
 
            September 30, 2013
 
 June 30, 2013
 
 March 31, 2013
 
                           
Total revenues
 
$
3,519,922
 
$
3,676,957
 
$
3,560,035
   
4,604,798
 
Total expenses
   
3,338,179
   
3,643,731
   
4,172,275
   
3,488,656
 
Operating income (loss)
   
181,743
   
33,226
   
(612,240
)
 
1,116,142
 
Gain on sale of real estate, net
   
230,765
   
251,887
   
2,429,872
   
30,337
 
Reversal of provision for loan losses
   
445,768
   
419,860
   
6,699,271
   
257,213
 
Impairment losses on real estate properties
   
(666,240
)
 
—
   
—
   
—
 
Net income
   
192,036
   
704,973
   
8,516,903
   
1,403,692
 
Less: Net (income) loss attributable to non-controlling interests
   
(21,162
)
 
(3,899
)
 
(2,085,886
)
 
26,240
 
Net income attributable to common stockholders
 
$
170,874
 
$
701,074
 
$
6,431,017
 
$
1,429,932
 
Net income per common share (basic and diluted)
 
$
0.02
 
$
0.06
 
$
0.57
 
$
0.13
 
Weighted average number of common shares outstanding
   
10,920,690
   
11,196,646
   
11,198,119
   
11,198,119
 
Dividends declared per share of Common Stock
 
$
0.05
 
$
0.05
 
$
0.15
 
$
0.00
 



 
 
F-40
 
O
 

OWENS REALTY MORTGAGE, INC.
FINANCIAL STATEMENT SECHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2014

Description
Encumbrances
Initial Cost
Capitalized
Costs
Sales
Impairment
Writedowns
Accumulated
Depreciation
 
Carrying
Value
Date
Acquired
Depreciable
Lives
 
                     
169 Condominium Units & 160 Unit Vacant Apartment Building Under Renovation,
Miami, Florida
$13,983,086  
 Note and Construction Loan Payable
$   34,560,000
$   2,136,658
$             —
 
 
$          —
$   (2,342,700)   
 
  $34,353,958
2/2/2011
27.5 Years
                     
Retail Complex,                   
Greeley, Colorado
$9,741,463   
Note Payable
  4,136,239
   7,539,507
 (128,274)
—
—
                Note
4
   11,547,472
7/31/2000
1-39 Years
                     
Commercial and Residential Land under Development,
South Lake Tahoe, California
              $3,400,000
Notes Payable
    17,871,561
   12,578,335
               —
 
 
 
—
       —
                 Note
5
     30,449,896
   Various
N/A
                     
Retail Complex,
South Lake Tahoe, California
             $10,445,000
              Note Payable
6,409,617
16,946,784
—
—
(144,505)
 
23,211,896
   Various
5-39 Years
                     
133 Condominium Units,
Phoenix, Arizona
None
      5,822,597
     3,459,377
               —
 
(1,443,790)
       (904,955)
                Note
                6
     6,933,229
11/18/2009
5-27.5 Years
                     
Residential and Commercial Land,
Gypsum, Colorado
None
9,600,000
53,434
—
 
 
(3,840,000)
—
                 Note
                7
5,813,434
 10/1/2011
N/A
                     
Assisted Living Facility,
Bensalem, Pennsylvania
None
5,018,166
—
—
—
(13,166)
 
5,005,000
12/12/2014
27.5 Years
                     
Medical Office Condominium Complex,                            
Gilbert, Arizona
None
     4,535,781
180,378
         —
 
 
 
—
—
                 Note
8
4,716,159
5/19/2010
5-39 Years
 
                   
60 Condominium Units,               
Lakewood, Washington
None
     6,616,881
         65,502
              —
 
(1,882,384)
       (435,256)
                Note
                9
         4,364,743
8/20/2010
27.5 Years
                     
Storage Facility,               
Stockton, California
None
       5,674,000
42,980
               —
 (1,580,079)
       (289,017)
                Note
               10
           3,847,884
6/3/2008
15-39 Years
                     
Office Condominium Complex,
Roseville, California
None
8,569,286
303,178
  (1,095,670)
 
 
(3,712,707)
(379,884)
                Note
               11
3,684,203
   9/26/2008
2-39 Years
                     
Retail Building,            
Sacramento, California
None
3,890,968
                  —
  —
—
—
 
3,890,968
9/3/2010
N/A
                     
75 Residential Lots,
Auburn, California
None
13,746,625
36,745
   —
 
(9,904,826)
—
                Note
               12
3,878,544
   9/27/2007
N/A
                     
Industrial Building,
Sunnyvale, California
None
3,428,885
54,514
—
 
—
(455,665)
 
3,027,734
 11/5/2009
10-39 Years
                     
12 Condominium & 3 Commercial Units, Tacoma, Washington
None
2,486,400
84,909
—
 
 
—
(162,628)
 
2,408,681
   7/8/2011
27.5-39 Years
                     
 
 
 
F-41
 
 
Marina & Boat Club with 179 Boat Slips,
Isleton, California
None
2,002,525
255,543
—
 
 
—
(37,620)
 
2,220,448
1/29/2013
5-15 Years
                     
Undeveloped, Industrial Land,
San Jose, California
None
3,025,992
—
—
(1,067,592)
—
               Note
               13
1,958,400
12/27/2002
N/A
                     
Golf Course,
Auburn, California
None
1,917,981
102,429
—
—
—
               Note
              14
2,020,410
6/20/2009
N/A
                     
Unimproved residential and commercial land, Bethel Island, California
None
2,336,640
—
(1,867)
—
—
 
2,334,773
3/11/2014
N/A
                     
Miscellaneous Real Estate
None
       
     (909,891)
 
7,348,973
                  Various
Various
                     
TOTALS
         
$(6,075,287)
 
  $163,016,805
   

NOTE 1: All real estate listed above was acquired through foreclosure or deed in lieu of foreclosure other than certain parcels of the commercial and residential land under development located in South Lake Tahoe, California that was purchased in 2012 and 2014.

NOTE 2: Changes in real estate held for sale and investment were as follows:
Balance at beginning of period (1/1/13)
 
$
127,773,349
Additions during period:
     
Acquisitions through foreclosure
   
19,602,478
Investments in real estate properties
   
9,017,333
Subtotal
   
156,393,160
Deductions during period:
     
Cost of real estate properties sold
   
18,023,870
Impairment losses on real estate properties
   
666,240
Depreciation of properties held for investment
   
2,387,086
Balance at end of period (12/31/13)
 
$
135,315,964
       
Balance at beginning of period (1/1/14)
 
$
135,315,964
Additions during period:
     
Acquisitions through foreclosure
   
9,572,406
Investments in real estate properties
   
21,987,250
Subtotal
   
166,875,620
Deductions during period:
     
Cost of real estate properties sold
   
1,529,227
Impairment losses on real estate properties
   
179,040
Depreciation of properties held for investment
   
2,150,548
Balance at end of period (12/31/14)
 
$
163,016,805
 
 
F-42
 

 
NOTE 3: Changes in accumulated depreciation were as follows:
Balance at beginning of period (1/1/13)
 
$
6,518,160
Additions during period:
     
Depreciation expense
   
2,387,086
Previous accumulated depreciation on real estate moved back to held for investment
   
849,125
Subtotal
   
9,754,371
 
Deductions during period:
     
Accumulated depreciation of real estate sold during 2013
   
8,663
Accumulated depreciation on real estate moved to held for sale
   
145,989
Balance at end of period (12/31/13)
 
$
9,599,719
       
Balance at beginning of period (1/1/14)
 
$
9,599,719
Additions during period:
     
Depreciation expense
   
2,150,548
Subtotal
   
11,750,267
Deductions during period:
     
Accumulated depreciation on real estate moved to held for sale
   
5,674,980
Balance at end of period (12/31/14)
 
$
6,075,287

NOTE 4: Property was moved to Held for Sale during 2014 and accumulated depreciation up to that time of $5,170,761 is shown net with the Initial Cost above.
NOTE 5: Capitalized costs include purchases of parcels in the total amount of $6,074,000 adjacent to parcels obtained via foreclosure.
NOTE 6: A write-down of $1,115,660 was recorded on this property during 2011 based on a third party appraisal. Accumulated depreciation of $328,130 was netted with basis at time of write-down and is reflected in write-down amount above.
NOTE 7: A write-down of $3,840,000 was recorded on this property during 2012 based on a third party appraisal.
NOTE 8: Property was moved to Held for Sale during 2014 and accumulated depreciation up to that time of $504,219 is shown net with the Initial Cost above.
NOTE 9: A write-down of $1,608,100 was recorded on this property during 2011 based on a third party appraisal. Accumulated depreciation of $274,284 was netted with basis at time of write-down and is reflected in write-down amount above.
NOTE 10: Write-downs totaling $1,183,571 were recorded on this property during 2009 and 2011 based on third party appraisals. Accumulated depreciation of $396,508 was netted with basis at time of write-downs and is reflected in write-down amount above.
NOTE 11: Write-downs totaling $3,712,707 were recorded on this property during 2010 and 2011 based on third party appraisals and comparable sales.
NOTE 12: Write-downs totaling $9,904,826 were recorded on this property during 2009 through 2012 based on broker's opinions of value and third party appraisals.
NOTE 13: Write-downs totaling $1,067,592 were recorded on this property in 2010 through 2012 based on third party appraisals.
NOTE 14: Property was moved to Held for Sale during 2013 and accumulated depreciation up to that time of $145,989 is shown net with the Initial Cost above.
NOTE 15: The aggregate cost of the above real estate properties for Federal income tax purposes is approximately $230,061,000.

 
 
F-43
 
O








OWENS REALTY MORTGAGE, INC.
FINANCIAL STATEMENT SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
 DECEMBER 31, 2014
Description
 
Interest Rate
 
Final Maturity date
 
Carrying Amount of Mortgages
   
Principal Amount of Loans Subject to Delinquent Principal
 
Principal Amount of Loans Subject to Delinquent Payments
 
TYPE OF PROPERTY
                     
Commercial
 
5.00-10.00%
 
Current to October 2018
$
52,531,537
 
$
1,078,752
 
$
1,078,752
 
Residential
 
7.50-11.00%
 
Current to March 2028
 
13,491,906
   
8,397,329
   
7,788,747
 
Land
 
8.00 %
 
April 2015 to February 2016
 
2,010,068
   
—
   
1,860,068
 
TOTAL
       
$
68,033,511
 
$
9,476,081
 
$
10,727,567
 
                           
AMOUNT OF LOAN
                     
$0-500,000
 
7.88-8.00%
 
Current to March 2028
$
653,747
 
$
—
 
$
253,747
 
$500,001-1,000,000
 
7.50-8.00%
 
Current to March 2017
 
5,627,223
   
862,329
   
—
 
$1,000,001-5,000,000
 
5.00-10.00%
 
Current to October 2018
 
31,499,358
   
1,078,752
   
2,938,820
 
Over $5,000,000
 
8.00-11.00%
 
Current to August 2018
 
30,253,183
   
7,535,000
   
7,535,000
 
TOTAL
       
$
68,033,511
 
$
9,476,081
 
$
10,727,567
 
                           
POSITION OF LOAN
                     
First
 
5.00-11.00%
 
Current to March 2028
$
65,533,511
 
$
9,476,081
 
$
10,727,567
 
Second
 
10.00%
 
October 2018
 
2,500,000
   
—
   
—
 
TOTAL
       
$
68,033,511
 
$
9,476,081
 
$
10,727,567
 

NOTE 1:   All loans are arranged by or acquired from an affiliate of the Company, namely Owens Financial Group, Inc., the Manager.
NOTE 2:  
Balance at beginning of period (1/1/13)
 
$
70,262,262
 
Additions during period:
       
New loans, including from sales of real estate properties
   
31,618,852
 
Advances moved  to principal of loans
   
22,880
 
Subtotal
   
101,903,994
 
Deductions during period:
       
Collection of principal
   
15,641,192
 
Foreclosures
   
27,466,509
 
Balance at end of period (12/31/13)
 
$
58,796,293
 
         
Balance at beginning of period (1/1/14)
 
$
58,796,293
 
Additions during period:
       
New loans
   
44,505,577
 
Discount accretion
   
122,004
 
Subtotal
   
103,423,874
 
Deductions during period:
       
Collection of principal
   
27,718,917
 
Foreclosures
   
7,671,446
 
Balance at end of period (12/31/14)
 
$
68,033,511
 


 
F-44
 

 
NOTE 3:  Included in the above loans are the following loans which exceed 3% of the total loans as of December 31, 2014:
Description
 
Interest Rate
 
Final Maturity  Date
 
Periodic Payment Terms
 
Prior Liens
 
Face Amount of Mortgages
 
Carrying Amount of Mortgages
Principal Amount of Loans Subject to Delinquent Principal or Interest
                                 
                                 
Mixed Commercial  Buildings (Office)
Oakland, California (2 Notes)
 
10.00%
 
8/1/18
and 10/1/18
 
Interest only, balance due at maturity
$
              0
 
$
11,588,183
 
$
11,588,183
$
0
                                 
Office Building and Single Family Home
Dublin, California
 
8.00%
 
6/1/16
 
Interest and principal due monthly
 
               0
   
8,500,000
   
7,780,000
 
0
                                 
Condominiums
Phoenix, Arizona
 
11.00%
 
7/1/09
 
Interest only, balance due at maturity
 
              0
   
7,535,000
   
5,695,655
Note 5
 
  5,695,655
                                 
Office Building
Santa Clara, California
 
8.00%
 
4/15/16
 
Interest only, balance due at maturity
 
               0
   
5,850,000
   
5,850,000
 
 
                 0
                                 
Marina
Tiburon, California
 
8.00%
 
10/1/15
 
Interest only, balance due at maturity
 
 0
   
3,200,000
   
3,200,000
 
0
                                 
Retail Building
South Lake Tahoe, California
 
8.00%
 
1/1/17
 
Interest only, balance due at maturity
 
 0
   
4,593,803
   
2,809,838
 
0
                                 
Apartment Building
Berkeley, California
 
8.00%
 
6/15/16
 
 
Interest only, balance due at maturity
 
       0
   
2,300,000
   
2,135,821
 
0
                                 
Apartment Building
San Anselmo, California
 
7.50%
 
3/1/17
 
Interest only, balance due at maturity
 
0
   
2,986,625
   
2,064,760
 
0
                                 
TOTALS
           
$
 0
 
$
46,553,611
 
$
 41,124,257
$
5,695,655

NOTE 4:  The aggregate cost of the Company’s loans for Federal income tax purposes is approximately $68,570,000 as of December 31, 2014.

NOTE 5:  A third party appraisal was obtained on this loan’s underlying property resulting in a specific loan loss allowance of $1,839,345 as of December 31, 2014.


 
F-45
 
 

SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


   
OWENS REALTY MORTGAGE, INC.
     
Dated:           March 16, 2015
 
By: 
 
/s/ William C. Owens
     
William C. Owens, Chief Executive Officer and President
       

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.

     
Dated:           March 16, 2015
 
By: 
 
/s/ William C. Owens
     
William C. Owens, Chairman of the Board of Directors, Chief Executive Officer and President (Principal Executive Officer)
       
Dated:           March 16, 2015
 
By: 
 
/s/ Bryan H. Draper
     
Bryan H. Draper, Director, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)
       
Dated:           March 16, 2015
 
By: 
 
*
     
Dennis G. Schmal, Director
       
Dated:           March 16, 2015
 
By: 
 
*
     
M. Lyman Bates, Jr., Director
       
Dated:           March 16, 2015
 
By: 
 
*
     
James M. Kessler, Director
       
 
*
By:
/s/ Bryan H. Draper
     
Bryan H. Draper
     
Attorney-in-fact




 
F-46
 
 

(3)       List of Exhibits:
   
**     3.1
  Articles of Amendment and Restatement of Owens Realty Mortgage, Inc., dated January 23, 2013, and related Certificate of Correction dated September 17, 2013
*     3.2
  Bylaws of Owens Realty Mortgage, Inc.,  incorporated herein by reference to Annex C to Proxy Statement/Prospectus on Form S-4 which was filed with the SEC on February 13, 2013
*     3.3
  Articles Supplementary, dated November 13, 2014, relating to the election to be subject to Subtitle 8 of Title 3 of the Maryland General Corporation Law, incorporated by reference to exhibit 3.1 of the current report on Form 8-K filed with the SEC on November 13, 2013
*     4.1
  Form of Common Stock Certificate, incorporated herein by reference to exhibit 4.1 to Proxy Statement/Prospectus on Form S-4 which was filed with the SEC on January 25, 2013
*   10.1
  Form of Management Agreement, dated May 20, 2013, by and between Owens Financial Group, Inc. and Owens Realty Mortgage, Inc., incorporated herein by reference to exhibit 10.1 to Current Report on Form 8-K which was filed with the SEC on May 20, 2013
*   10.2
  Credit Agreement, dated as of February 5, 2014, between California Bank & Trust and Owens Realty Mortgage, Inc., together with related Master Revolving Note, Advance Formula Agreement, and Security Agreement, incorporated by reference to exhibits 10.1, 10.2, 10.3 and 10.4 of the current report on Form 8-K filed with the SEC on
    February 14, 2014
*   10.3
  Secured Revolving Credit Loan Agreement and Exhibits, dated as of April 22, 2014, between Owens Realty Mortgage, Inc. and Opus Bank, together with related Promissory Note and Carveout Payment Guaranty, incorporated by reference to exhibits 10.1, 10.2 and 10.3 of the current report on Form 8-K filed with the SEC on April 28, 2014
*   10.4
  Construction Loan Agreement and Exhibits, dated as of June 12, 2014, between TOTB North, LLC and Bank of the Ozarks, together with related Promissory Note, Mortgage, Security Agreement and Fixture Filing, Assignment of Rents and Revenues, Environmental Indemnity Agreement, Carveout Guaranty, Repayment Guaranty,
    Completion Guaranty, and Post-Closing Agreement, incorporated by reference to exhibits 10.1 through 10.9 of the current report on Form 8-K filed with the SEC on June 18, 2014
**   10.5
  Real Estate Sale Agreement, dated November 10, 2014, between 720 University, LLC and Alberta Development Partners, LLC
*   10.6
  Loan Agreement and Exhibits, dated as November 17, 2014, between TOTB Miami, LLC and Bank of the Ozarks, together with related Promissory Note, Mortgage, Security Agreement and Fixture Filing, Assignment of Rents and Revenues, Environmental Indemnity Agreement, Carveout Guaranty, Repayment Guaranty, Modification
    Agreement, Collateral Assignment and Declaration of Rights and Assignment and Subordination of Mortgage Agreement, incorporated by reference to exhibits 10.1 through 10.10 of the current report on Form 8-K filed with the SEC on November 18, 2014
*   10.7
  Credit Agreement, dated as of December 15, 2014, between Tahoe Stateline Venture, LLC and RaboBank, N.A., together with related Real Estate Term Loan Note, Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, Environmental Certificate and Indemnity Agreement, and Guaranty,  incorporated by reference to
    exhibits 10.1 through 10.5 of the current report on Form 8-K filed with the SEC on  December 30, 2014 and amended on Form 8-K/A filed with the SEC on January 8, 2015
**      21
  List of Subsidiaries of the Registrant
**      24
  Power of Attorney
**   31.1
  Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
**   31.2
  Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
**      32
  Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
***101.INS
  XBRL Instance Document
***101.SCH
  XBRL Taxonomy Extension Schema Document
***101.CAL
  XBRL Taxonomy Extension Calculation Linkbase Document
***101.LAB
  XBRL Taxonomy Extension Labels Linkbase Document
***101.PRE
  XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
F-47
 
 
***101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
*Previously filed.
** Filed herewith.
*** This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

Financial Statement Schedules Index:
Schedule III – Real Estate and Accumulated Depreciation (included in financials)
Schedule IV – Mortgage Loans on Real Estate (included in financials)


 
 
F-48
 





 
OWENS REALTY MORTGAGE, INC.
 
ARTICLES OF AMENDMENT AND RESTATEMENT

 


 
FIRST :                        Owens Realty Mortgage, Inc., a Maryland corporation (the “Corporation”), desires to amend and restate its charter as currently in effect and as hereinafter amended.
 
SECOND :                    The following provisions are all the provisions of the charter currently in effect and as hereinafter amended:

 
ARTICLE I
 
Incorporator
 
The undersigned, Hirsh M. Ament, whose address is c/o Venable LLP, Suite 900, 750 East Pratt Street, Baltimore, Maryland 21202, being at least 18 years of age, formed a corporation under the general laws of the State of Maryland on August 9, 2012.

 
ARTICLE II
 
Name
 
The name of the corporation (the “Corporation”) is:
 

 
Owens Realty Mortgage, Inc.

 
ARTICLE III
 
Purpose; Term of Existence

 
Section 3.1   Purposes .  The purposes for which the Corporation is formed are:
 
(a)   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, without limitation, developing, managing and either holding for investment or disposing of real property acquired through foreclosure; and
 
(b)   to engage in any other lawful act or activity (including, without limitation or obligation, engaging in business as a real estate investment trust under the Internal Revenue Code of 1986, as amended, or any successor statute (the “Code”)) for which corporations may be organized under the general laws of the State of Maryland as now or hereafter in force. For purposes of these Articles, “REIT” means a real estate investment trust under Sections 856 through 860 of the Code.
 
                             Section 3.2   Term of Existence .  The Corporation’s existence shall continue until December 31, 2034.

 
 
 
 
ARTICLE IV
 
Principal Office in State and Resident Agent
 
                             The address of the principal office of the Corporation in the State of Maryland is c/o The Corporation Trust Incorporated, 351 West Camden Street, Baltimore, Maryland 21201. The name of the resident agent of the Corporation in the State of Maryland is The Corporation Trust Incorporated, whose post address is 351 West Camden Street, Baltimore, Maryland 21201. The resident agent is a Maryland corporation.
 
ARTICLE V
 
Provisions for Defining, Limiting
and Regulating Certain Powers of the
Corporation and of the Stockholders and Directors
 
                             Section  5.1      Number of Directors . The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. The number of directors of the Corporation initially shall be one (1), which number may be increased or decreased only by the Board of Directors pursuant to the Bylaws of the Corporation (the “Bylaws”), but shall never be less than the minimum number required by the Maryland General Corporation Law (the “MGCL”). The name of the director who shall serve until the first annual meeting of stockholders and until his successor is duly elected and qualifies is:
 
William C. Owens
 
Any vacancy on the Board of Directors may be filled in the manner provided in the Bylaws.
 
            S ection  5.2      Extraordinary Actions . Notwithstanding any provision of law permitting or requiring any action to be taken or approved by the affirmative vote of the holders of shares entitled to cast a greater number of votes, any such action shall be effective and valid if declared advisable by the Board of Directors and taken or approved by the affirmative vote of holders of shares entitled to cast a majority of all the votes entitled to be cast on the matter.
 
             Section  5.3      Authorization by Board of Stock Issuance . The Board of Directors may authorize the issuance from time to time of shares of stock of the Corporation of any class or series, whether now or hereafter authorized, or securities or rights convertible into shares of its stock of any class or series, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable (or without consideration in the case of a stock split or stock dividend), subject to such restrictions or limitations, if any, as may be set forth in the charter of the Corporation (the “Charter”) or the Bylaws.
 
                             Section  5.4      Preemptive and Appraisal Rights . Except as may be provided by the Board of Directors in setting the terms of classified or reclassified shares of stock pursuant to Section 6.4 or as may otherwise be provided by a contract approved by the Board of Directors, no holder of shares of stock of the Corporation shall, as such holder, have any preemptive right to purchase or subscribe for any additional shares of stock of the Corporation or any other security of the Corporation which it may issue or sell.  Holders of shares of stock shall not be entitled to exercise any rights of an objecting stockholder provided for under Title 3, Subtitle 2 of the MGCL or any successor statute unless the Board of Directors, upon the affirmative vote of a majority of the Board of Directors, shall determine that such rights apply, with respect to all or any shares of all or any classes or series of stock, to one or more transactions occurring after the date of such determination in connection with which holders of such shares would otherwise be entitled to exercise such rights.  Notwithstanding the foregoing, in the event the Corporation is subject to the Maryland Control Share Acquisition Act, holders of shares of stock shall be entitled to exercise rights of an objecting stockholder under Section 3-708(a) of the MGCL.
 
 
2
 
                             Section  5.5      Indemnification . The Corporation shall have the power, to the maximum extent permitted by Maryland law in effect from time to time, to obligate itself to indemnify, and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to, (a) any individual who is a present or former director or officer of the Corporation or (b) any individual who, while a director or officer of the Corporation and at the request of the Corporation, serves or has served as a director, officer, partner, trustee, member or manager of another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or any other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his or her service in such capacity. The Corporation shall have the power, with the approval of the Board of Directors, to provide such indemnification and advancement of expenses to a person who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation.
 
                             Section  5.6      Determinations by Board . The determination as to any of the following matters, made by or pursuant to the direction of the Board of Directors shall be final and conclusive and shall be binding upon the Corporation and every holder of shares of its stock: the amount of the net income of the Corporation for any period and the amount of assets at any time legally available for the payment of dividends, redemption of its stock or the payment of other distributions on its stock; the amount of paid-in surplus, net assets, other surplus, annual or other cash flow, funds from operations, net profit, net assets in excess of capital, undivided profits or excess of profits over losses on sales of assets; the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged); any interpretation or resolution of any ambiguity with respect to any provision of the Charter (including any of the terms, preferences, conversion or other rights, voting powers or rights, restrictions, limitations as to dividends or distributions, qualifications or terms or conditions of redemption of any class or series of stock of the Corporation) or of the Bylaws; the number of shares of stock of any class of the Corporation; the fair value, or any sale, bid or asked price to be applied in determining the fair value, of any asset owned or held by the Corporation or of any shares of stock of the Corporation; any matter relating to the acquisition, holding and disposition of any assets by the Corporation; any interpretation of the terms and conditions of one or more agreements with any person, corporation, association, company, trust, partnership (limited or general) or other organization; or any other matter relating to the business and affairs of the Corporation or required or permitted by applicable law, the Charter or Bylaws or otherwise to be determined by the Board of Directors.
 
                             Section  5.7      REIT Qualification . If the Corporation elects to qualify for federal income tax treatment as a REIT, the Board of Directors shall use its reasonable best efforts to take such actions as are necessary or appropriate to preserve the status of the Corporation as a REIT; however, if the Board of Directors determines that it is no longer in the best interests of the Corporation to continue to be qualified as a REIT, the Board of Directors may revoke or otherwise terminate the Corporation’s REIT election pursuant to Section 856(g) of the Code.  The Board of Directors also may determine that compliance with any restriction or limitation on stock ownership and transfers set forth in Article VII is no longer required for REIT qualification.  Any decision of or action taken by the Board of Directors pursuant to Article VII hereof shall be in its sole and absolute discretion.
 
 
3
 
                             Section  5.8      Removal of Directors . Subject to the rights of holders of one or more classes or series of Preferred Stock to elect or remove one or more directors, any director, or the entire Board of Directors, may be removed from office at any time, with or without cause, but only by the affirmative vote of at least a majority of the votes entitled to be cast generally in the election of directors.
 
                             Section  5.9      Advisor Agreements . Subject to such approval of stockholders and other conditions, if any, as may be required by the Charter or any applicable statute, rule or regulation, the Board of Directors may authorize the execution and performance by the Corporation of one or more agreements with any person, corporation, association, company, trust, partnership (limited or general) or other organization whereby, subject to the supervision and control of the Board of Directors, any such other person, corporation, association, company, trust, partnership (limited or general) or other organization shall render or make available to the Corporation managerial, investment, advisory and/or related services, office space and other services and facilities (including, if deemed advisable by the Board of Directors, the management or supervision of the investments of the Corporation) upon such terms and conditions as may be provided in such agreement or agreements (including, if deemed fair and equitable by the Board of Directors and set in accordance with the Charter, the compensation payable thereunder by the Corporation).

 
ARTICLE VI

 
Stock

 
                             Section  6.1      Authorized Shares . The Corporation has authority to issue 55,000,000 shares of stock, consisting of 50,000,000 shares of Common Stock, $0.01 par value per share (“Common Stock”), and 5,000,000 shares of Preferred Stock, $0.01 par value per share (the “Preferred Stock”). The aggregate par value of all authorized shares of stock having par value is $550,000. If shares of one class of stock are classified or reclassified into shares of another class of stock pursuant to Section 6.2, 6.3 or 6.4 of this Article VI, the number of authorized shares of the former class shall be automatically decreased and the number of shares of the latter class shall be automatically increased, in each case by the number of shares so classified or reclassified, so that the aggregate number of shares of stock of all classes that the Corporation has authority to issue shall not be more than the total number of shares of stock set forth in the first sentence of this paragraph. The Board of Directors, with the approval of a majority of the entire Board and without any action by the stockholders of the Corporation, may amend the Charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that the Corporation has authority to issue.
 
                             Section  6.2      Common Stock . Subject to the provisions of Article VII, and except as may otherwise be specified in the Charter, each share of Common Stock shall entitle the holder thereof to one vote. The Board of Directors may reclassify any unissued shares of Common Stock from time to time into one or more classes or series of stock.
 
 
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                             Section  6.3      Preferred Stock .  The Board of Directors may classify any unissued shares of Preferred Stock and reclassify any previously classified but unissued shares of Preferred Stock of any series from time to time, into one or more classes or series of stock.
 
            Section 6.4      Classified or Reclassified Shares . Prior to issuance of classified or reclassified shares of any class or series, the Board of Directors by resolution shall: (a) designate that class or series to distinguish it from all other classes and series of stock of the Corporation; (b) specify the number of shares to be included in the class or series; (c) set or change, subject to the provisions of Article VII and subject to the express terms of any class or series of stock of the Corporation outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series; and (d) cause the Corporation to file articles supplementary with the State Department of Assessments and Taxation of Maryland (“SDAT”). Any of the terms of any class or series of stock set or changed pursuant to clause (c) of this Section 6.4 may be made dependent upon facts or events ascertainable outside the Charter (including determinations by the Board of Directors or other facts or events within the control of the Corporation) and may vary among holders thereof, provided that the manner in which such facts, events or variations shall operate upon the terms of such class or series of stock is clearly and expressly set forth in the articles supplementary or other Charter document filed with the SDAT.
 
             Section  6.5      Distributions .   The Board of Directors from time to time may authorize and the Corporation may pay to its stockholders such dividends or other distributions in cash or other property, including in shares of one class of the Corporation’s stock payable to holders of shares of another class of stock of the Corporation, as the Board of Directors in its discretion shall determine.
 
             Section  6.6      S tockholders’ Consent in Lieu of Meeting .   Any action required or permitted to be taken at any meeting of the holders of common stock entitled to vote generally in the election of directors may be taken without a meeting by consent, in writing or by electronic transmission, in any manner and by any vote permitted by the MGCL and set forth in the Bylaws.
 
             Section 6.7   Charter and Bylaws . The rights of all stockholders and the terms of all stock are subject to the provisions of the Charter and the Bylaws.
 
ARTICLE VII
 
Restriction on Transfer and Ownership of Shares
 
             Section 7.1    Definitions .  For the purpose of this Article VII, the following terms shall have the following meanings:
 
                Aggregate Stock Ownership Limit .  The term “Aggregate Stock Ownership Limit” shall mean 9.8 percent in value of the aggregate of the outstanding shares of Capital Stock, or such other percentage determined by the Board of Directors in accordance with Section 7.2.8 of the Charter.
 
 
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Beneficial Ownership .  The term “Beneficial Ownership” shall mean ownership of Capital Stock by a Person, whether the interest in the shares of Capital Stock is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code.  The terms “Beneficial Owner,” “Beneficially Owns” and “Beneficially Owned” shall have the correlative meanings.
 
Business Day .  The term “Business Day” shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close.
 
Capital Stock .  The term “Capital Stock” shall mean all classes or series of stock of the Corporation, including, without limitation, Common Stock and Preferred Stock.
 
Charitable Beneficiary .  The term “Charitable Beneficiary” shall mean one or more beneficiaries of the Trust as determined pursuant to Section 7.3.6, provided that each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.
 
Common Stock Ownership Limit .  The term “Common Stock Ownership Limit” shall mean 9.8 percent (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of Common Stock of the Corporation, or such other percentage determined by the Board of Directors in accordance with Section 7.2.8 of the Charter.
 
Constructive Ownership .  The term “Constructive Ownership” shall mean ownership of Capital Stock by a Person, whether the interest in the shares of Capital Stock is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code.  The terms “Constructive Owner,” “Constructively Owns” and “Constructively Owned” shall have the correlative meanings.
 
Excepted Holder .  The term “Excepted Holder” shall mean a stockholder of the Corporation for whom an Excepted Holder Limit is created by the Charter or by the Board of Directors pursuant to Section 7.2.7.
 
Excepted Holder Limit .  The term “Excepted Holder Limit” shall mean, provided that the affected Excepted Holder agrees to comply with the requirements established by the Board of Directors pursuant to Section 7.2.7 and subject to adjustment pursuant to Section 7.2.8, the percentage limit established by the Board of Directors pursuant to Section 7.2.7.
 
Initial Date .  The term “Initial Date” shall mean the date on which the Merger (as defined in the Agreement and Plan of Merger, dated as of January 23, 2013, by and between the Corporation and Owens Mortgage Investment Fund, a California limited partnership) becomes effective.
 
Market Price .  The term “Market Price” on any date shall mean, with respect to any class or series of outstanding shares of Capital Stock, the Closing Price for such Capital Stock on such date.  The “Closing Price” on any date shall mean the last sale price for such Capital Stock, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, for such Capital Stock, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the NYSE or, if such Capital Stock is not listed or admitted to trading on the NYSE, as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which such Capital Stock is listed or admitted to trading or, if such Capital Stock is not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market or, if such system is no longer in use, the principal other automated quotation system that may then be in use or, if such Capital Stock is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in such Capital Stock selected by the Board of Directors or, in the event that no trading price is available for such Capital Stock, the fair market value of the Capital Stock, as determined in good faith by the Board of Directors.
 
 
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NYSE .  The term “NYSE” shall mean the NYSE MKT LLC.
 
Person .  The term “Person” shall mean an individual, corporation, partnership, estate, trust (including a trust qualified under Sections 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and a group to which an Excepted Holder Limit applies.
 
Prohibited Owner .  The term “Prohibited Owner” shall mean, with respect to any purported Transfer, any Person who, but for the provisions of this Article VII, would Beneficially Own or Constructively Own shares of Capital Stock in violation of Section 7.2.1, and if appropriate in the context, shall also mean any Person who would have been the record owner of the shares that the Prohibited Owner would have so owned.
 
Restriction Termination Date .  The term “Restriction Termination Date” shall mean the first day after the Initial Date on which the Corporation determines pursuant to Section 5.7 of the Charter that it is no longer in the best interests of the Corporation to attempt to, or continue to, qualify as a REIT or that compliance with the restrictions and limitations on Beneficial Ownership, Constructive Ownership and Transfers of shares of Capital Stock set forth herein is no longer required in order for the Corporation to qualify as a REIT.
 
Transfer .  The term “Transfer” shall mean any issuance, sale, transfer, gift, assignment, devise or other disposition, as well as any other event that causes any Person to acquire Beneficial Ownership or Constructive Ownership, or any agreement to take any such actions or cause any such events, of Capital Stock or the right to vote or receive dividends on Capital Stock, including (a) the granting or exercise of any option (or any disposition of any option), (b) any disposition of any securities or rights convertible into or exchangeable for Capital Stock or any interest in Capital Stock or any exercise of any such conversion or exchange right and (c) Transfers of interests in other entities that result in changes in Beneficial or Constructive Ownership of Capital Stock; in each case, whether voluntary or involuntary, whether owned of record, Constructively Owned or Beneficially Owned and whether by operation of law or otherwise.  The terms “Transferring” and “Transferred” shall have the correlative meanings.
 
Trust .  The term “Trust” shall mean any trust provided for in Section 7.3.1.
 
 
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Trustee .  The term “Trustee” shall mean the Person unaffiliated with the Corporation and a Prohibited Owner, that is appointed by the Corporation to serve as trustee of the Trust.
 
Section 7.2    Capital Stock .
 
Section 7.2.1    Ownership Limitations .  During the period commencing on the Initial Date and prior to the Restriction Termination Date, but subject to Section 7.4:
 
(a)            Basic Restrictions .
 
(i)  (1) No Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own shares of Capital Stock in excess of the Aggregate Stock Ownership Limit, (2) no Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own shares of Common Stock in excess of the Common Stock Ownership Limit and (3) no Excepted Holder shall Beneficially Own or Constructively Own shares of Capital Stock in excess of the Excepted Holder Limit for such Excepted Holder.
 
(ii)  No Person shall Beneficially or Constructively Own shares of Capital Stock to the extent that such Beneficial or Constructive Ownership of Capital Stock would result in the Corporation being “closely held” within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise failing to qualify as a REIT (including, without limitation, Beneficial or Constructive Ownership that would result in the Corporation owning (actually or Constructively) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by the Corporation from such tenant would cause the Corporation to fail to satisfy any of the gross income requirements of Section 856(c) of the Code).
 
(iii)  Any Transfer of shares of Capital Stock that, if effective, would result in the Capital Stock being beneficially owned by less than 100 Persons (determined under the principles of Section 856(a)(5) of the Code) shall be void ab initio , and the intended transferee shall acquire no rights in such shares of Capital Stock.
 
(b)            Transfer in Trust .  If any Transfer of shares of Capital Stock occurs which, if effective, would result in any Person Beneficially Owning or Constructively Owning shares of Capital Stock in violation of Section 7.2.1(a)(i) or (ii),
 
(i)  then that number of shares of the Capital Stock the Beneficial or Constructive Ownership of which otherwise would cause such Person to violate Section 7.2.1(a)(i) or (ii)(rounded up to the nearest whole share) shall be automatically transferred to a Trust for the benefit of a Charitable Beneficiary, as described in Section 7.3, effective as of the close of business on the Business Day prior to the date of such Transfer, and such Person shall acquire no rights in such shares; or
 
(ii)  if the transfer to the Trust described in clause (i) of this sentence would not be effective for any reason to prevent the violation of Section 7.2.1(a)(i) or (ii), then the Transfer of that number of shares of Capital Stock that otherwise would cause any Person to violate Section 7.2.1(a)(i) or (ii) shall be void ab initio , and the intended transferee shall acquire no rights in such shares of Capital Stock.
 
(iii)           To the extent that, upon a transfer of shares of Capital Stock pursuant to this Section 7.2.1(b), a violation of any provision of this Article VII would nonetheless be continuing (for example where the ownership of shares of Capital Stock by a single Charitable Trust would violate the 100 stockholder requirement applicable to REITs), then shares of Capital Stock shall be transferred to that number of Charitable Trusts, each having a distinct Trustee and a Charitable Beneficiary or Beneficiaries that are distinct from those of each other Charitable Trust, such that there is no violation of any provision of this Article VII.
 
 
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Section 7.2.2   Remedies for Breach .  If the Board of Directors shall at any time determine that a Transfer or other event has taken place that results in a violation of Section 7.2.1 or that a Person intends to acquire or has attempted to acquire Beneficial or Constructive Ownership of any shares of Capital Stock in violation of Section 7.2.1 (whether or not such violation is intended), the Board of Directors shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or other event, including, without limitation, causing the Corporation to redeem shares, refusing to give effect to such Transfer on the books of the Corporation or instituting proceedings to enjoin such Transfer or other event; provided , however , that any Transfer or attempted Transfer or other event in violation of Section 7.2.1 shall automatically result in the transfer to the Trust described above and, where applicable, such Transfer (or other event) shall be void ab initio as provided above irrespective of any action (or non-action) by the Board of Directors.
 
Section 7.2.3   Notice of Restricted Transfer .  Any Person who acquires or attempts or intends to acquire Beneficial Ownership or Constructive Ownership of shares of Capital Stock that will or may violate Section 7.2.1(a) or any Person who would have owned shares of Capital Stock that resulted in a transfer to the Trust pursuant to the provisions of Section 7.2.1(b) shall immediately give written notice to the Corporation of such event or, in the case of such a proposed or attempted transaction, give at least 15 days prior written notice, and shall provide to the Corporation such other information as the Corporation may request in order to determine the effect, if any, of such Transfer on the Corporation’s status as a REIT.
 
Section 7.2.4   Owners Required To Provide Information .  From the Initial Date and prior to the Restriction Termination Date:
 
(a)           every owner of five percent or more (or such lower percentage as required by the Code or the Treasury Regulations promulgated thereunder) of the outstanding shares of Capital Stock, within 30 days after the end of each taxable year, shall give written notice to the Corporation stating the name and address of such owner, the number of shares of Capital Stock Beneficially Owned and a description of the manner in which such shares are held.  Each such owner shall provide to the Corporation such additional information as the Corporation may request in order to determine the effect, if any, of such Beneficial Ownership on the Corporation’s status as a REIT and to ensure compliance with the Aggregate Stock Ownership Limit; and
 
(b)           each Person who is a Beneficial or Constructive Owner of Capital Stock and each Person (including the stockholder of record) who is holding Capital Stock for a Beneficial or Constructive Owner shall provide to the Corporation such information as the Corporation may request, in good faith, in order to determine the Corporation’s status as a REIT and to comply with requirements of any taxing authority or governmental authority or to determine such compliance.
 
Section 7.2.5    Remedies Not Limited .  Subject to Section 5.7 of the Charter, nothing contained in this Section 7.2 shall limit the authority of the Board of Directors to take such other action as it deems necessary or advisable to protect the Corporation in preserving the Corporation’s status as a REIT.
 
 
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Section 7.2.6    Ambiguity .  In the case of an ambiguity in the application of any of the provisions of this Section 7.2, Section 7.3, or any definition contained in Section 7.1, the Board of Directors shall have the power to determine the application of the provisions of this Section 7.2 or Section 7.3 or any such definition with respect to any situation based on the facts known to it.  In the event Section 7.2 or 7.3 requires an action by the Board of Directors and the Charter fails to provide specific guidance with respect to such action, the Board of Directors shall have the power to determine the action to be taken so long as such action is not contrary to the provisions of Sections 7.1, 7.2 or 7.3.  Absent a decision to the contrary by the Board of Directors, if a Person would have (but for the remedies set forth in Section 7.2.2) acquired Beneficial or Constructive Ownership of Stock in violation of Section 7.2.1, such remedies (as applicable) shall apply first to the shares of Stock which, but for such remedies, would have been Beneficially Owned or Constructively Owned (but not actually owned) by such Person, pro rata among the Persons who actually own such shares of Stock based upon the relative number of the shares of Stock held by each such Person.
 
Section 7.2.7    Exceptions .
 
(a)           Subject to Section 7.2.1(a)(ii), the Board of Directors may exempt (prospectively or retroactively) a Person from the Aggregate Stock Ownership Limit and the Common Stock Ownership Limit, as the case may be, and may establish or increase an Excepted Holder Limit for such Person if:
 
(i) the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain that no individual’s Beneficial or Constructive Ownership of such shares of Capital Stock will violate Section 7.2.1(a)(ii);
 
(ii) such Person does not and represents that it will not own, actually or Constructively, an interest in a tenant of the Corporation (or a tenant of any entity owned or controlled by the Corporation) that would cause the Corporation to own, actually or Constructively, more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in such tenant and the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain this fact (for this purpose, a tenant from whom the Corporation (or an entity owned or controlled by the Corporation) derives (and is expected to continue to derive) a sufficiently small amount of revenue such that, in the judgment of the Board of Directors, rent from such tenant would not adversely affect the Corporation’s ability to qualify as a REIT shall not be treated as a tenant of the Corporation); and
 
(iii) such Person agrees that any violation or attempted violation of such representations or undertakings (or other action which is contrary to the restrictions contained in Sections 7.2.1 through 7.2.6) will result in such shares of Capital Stock being automatically transferred to a Trust in accordance with Sections 7.2.1(b) and 7.3.
 
(b)           Prior to granting any exception pursuant to Section 7.2.7(a), the Board of Directors may require a ruling from the Internal Revenue Service, or an opinion of counsel, in either case in form and substance satisfactory to the Board of Directors, as it may deem necessary or advisable in order to determine or ensure the Corporation’s status as a REIT.  Notwithstanding the receipt of any ruling or opinion, the Board of Directors may impose such conditions or restrictions as it deems appropriate in connection with granting such exception.
 
 
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(c)           Subject to Section 7.2.1(a)(ii), an underwriter which participates in a public offering or a private placement of Capital Stock (or securities convertible into or exchangeable for Capital Stock) may Beneficially Own or Constructively Own shares of Capital Stock (or securities convertible into or exchangeable for Capital Stock) in excess of the Aggregate Stock Ownership Limit, the Common Stock Ownership Limit, or both such limits, but only to the extent necessary to facilitate such public offering or private placement.
 
(d)           The Board of Directors may only reduce the Excepted Holder Limit for an Excepted Holder: (1) with the written consent of such Excepted Holder at any time, or (2) pursuant to the terms and conditions of the agreements and undertakings entered into with such Excepted Holder in connection with the establishment of the Excepted Holder Limit for that Excepted Holder.  No Excepted Holder Limit shall be reduced to a percentage that is less than the Common Stock Ownership Limit.

Section 7.2.8    Increase or Decrease in Common Stock Ownership or Aggregate Stock Ownership Limits .   Subject to Section 7.2.1 (a)(ii), the Board of Directors may from time to time increase the Common Stock Ownership Limit and the Aggregate Stock Ownership Limit for one or more Persons and decrease the Common Stock Ownership Limit and the Aggregate Stock Ownership Limit for all other Persons; provided, however, that the decreased Common Stock Ownership Limit or Aggregate Stock Ownership Limit will not be effective for any Person whose percentage ownership in Stock is in excess of such decreased Common Stock Ownership Limit or Aggregate Stock Ownership Limit until such time as such Person’s percentage of Stock equals or falls below the decreased Common Stock Ownership Limit and/or Aggregate Stock Ownership Limit, but any further acquisition of Stock by such person will be in violation of the Common Stock Ownership Limit or Aggregate Stock Ownership Limit and, provided further, that the new Common Stock Ownership Limit and/or Aggregate Stock Ownership Limit would not allow five or fewer Persons to Beneficially Own more than 49.9% in value of the outstanding Stock.
 
Section 7.2.9    Legend .  Each certificate for shares of Capital Stock shall bear substantially the following legend:

 
The shares represented by this certificate are subject to restrictions on Beneficial and Constructive Ownership and Transfer for the purpose, among others, of the Corporation’s maintenance of its status as a Real Estate Investment Trust under the Internal Revenue Code of 1986, as amended (the “Code”).  Subject to certain further restrictions and except as expressly provided in the Corporation’s Charter, (i) no Person may Beneficially or Constructively Own shares of the Corporation’s Common Stock in excess of the Common Stock Ownership Limit unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (ii) no Person may Beneficially or Constructively Own shares of Capital Stock of the Corporation in excess of the Aggregate Stock Ownership Limit, unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (iii) no Person may Beneficially or Constructively Own Capital Stock that would result in the Corporation being “closely held” under Section 856(h) of the Code or otherwise cause the Corporation to fail to qualify as a REIT; and (iv) no Person may Transfer shares of Capital Stock if such Transfer would result in the Capital Stock of the Corporation being owned by fewer than 100 Persons.  Any Person who Beneficially or Constructively Owns or attempts to Beneficially or Constructively Own shares of Capital Stock which causes or will cause a Person to Beneficially or Constructively Own shares of Capital Stock in excess or in violation of the above limitations must immediately notify the Corporation.  If any of the restrictions on transfer or ownership are violated, the shares of Capital Stock represented hereby will be automatically transferred to a Trustee of a Trust for the benefit of one or more Charitable Beneficiaries.  In addition, the Corporation may redeem shares upon the terms and conditions specified by the Board of Directors if the Board of Directors determines that ownership or a Transfer or other event may violate the restrictions described above.  Furthermore, upon the occurrence of certain events, attempted Transfers in violation of the restrictions described above may be void ab initio .  All capitalized terms in this legend have the meanings defined in the Charter of the Corporation, as the same may be amended from time to time, a copy of which, including the restrictions on transfer and ownership, will be furnished to each holder of Capital Stock of the Corporation on request and without charge.  Requests for such a copy may be directed to the Secretary of the Corporation at its Principal Office.
 
 
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Instead of the foregoing legend, the certificate may state that the Corporation will furnish a full statement about certain restrictions on transferability to a stockholder on request and without charge.
 
Section 7.3    Transfer of Capital Stock in Trust .
 
Section 7.3.1    Ownership in Trust .  Upon any purported Transfer or other event described in Section 7.2.1(b) that would result in a transfer of shares of Capital Stock to a Trust, such shares of Capital Stock shall be deemed to have been transferred to the Trustee as trustee of a Trust for the exclusive benefit of one or more Charitable Beneficiaries.  Such transfer to the Trustee shall be deemed to be effective as of the close of business on the Business Day prior to the purported Transfer or other event that results in the transfer to the Trust pursuant to Section 7.2.1(b).  The Trustee shall be appointed by the Corporation and shall be a Person unaffiliated with the Corporation and any Prohibited Owner.  Each Charitable Beneficiary shall be designated by the Corporation as provided in Section 7.3.6.
 
Section 7.3.2    Status of Shares Held by the Trustee .  Shares of Capital Stock held by the Trustee shall be issued and outstanding shares of Capital Stock of the Corporation.  The Prohibited Owner shall have no rights in the shares held by the Trustee.  The Prohibited Owner shall not benefit economically from ownership of any shares held in trust by the Trustee, shall have no rights to dividends or other distributions and shall not possess any rights to vote or other rights attributable to the shares held in the Trust.
 
 
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Section 7.3.3   Dividend and Voting Rights .  The Trustee shall have all voting rights and rights to dividends or other distributions with respect to shares of Capital Stock held in the Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary.  Any dividend or other distribution paid prior to the discovery by the Corporation that the shares of Capital Stock have been transferred to the Trustee shall be paid by the recipient of such dividend or distribution to the Trustee upon demand and any dividend or other distribution authorized but unpaid shall be paid when due to the Trustee.  Any dividend or distribution so paid to the Trustee shall be held in trust for the Charitable Beneficiary.  The Prohibited Owner shall have no voting rights with respect to shares held in the Trust and, subject to Maryland law, effective as of the date that the shares of Capital Stock have been transferred to the Trustee, the Trustee shall have the authority (at the Trustee’s sole and absolute discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior to the discovery by the Corporation that the shares of Capital Stock have been transferred to the Trustee and (ii) to recast such vote; provided, however, that if the Corporation has already taken irreversible corporate action, then the Trustee shall not have the authority to rescind and recast such vote.  Notwithstanding the provisions of this Article VII, until the Corporation has received notification that shares of Capital Stock have been transferred into a Trust, the Corporation shall be entitled to rely on its share transfer and other stockholder records for purposes of preparing lists of stockholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes and determining the other rights of stockholders.
 
Section 7.3.4    Sale of Shares by Trustee .  Within 20 days of receiving notice from the Corporation that shares of Capital Stock have been transferred to the Trust, the Trustee of the Trust shall sell the shares held in the Trust to a person, designated by the Trustee, whose ownership of the shares will not violate the ownership limitations set forth in Section 7.2.1(a).  Upon such sale, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary as provided in this Section 7.3.4.  The Prohibited Owner shall receive the lesser of (1) the price paid by the Prohibited Owner for the shares or, if the Prohibited Owner did not give value for the shares in connection with the event causing the shares to be held in the Trust ( e.g. , in the case of a gift, devise or other such transaction), the Market Price of the shares on the day of the event causing the shares to be held in the Trust and (2) the price per share received by the Trustee (net of any commissions and other expenses of sale) from the sale or other disposition of the shares held in the Trust.  The Trustee may reduce the amount payable to the Prohibited Owner by the amount of dividends and distributions which have been paid to the Prohibited Owner and are owed by the Prohibited Owner to the Trustee pursuant to Section 7.3.3 of this Article VII.  Any net sales proceeds in excess of the amount payable to the Prohibited Owner shall be immediately paid to the Charitable Beneficiary.  If, prior to the discovery by the Corporation that shares of Capital Stock have been transferred to the Trustee, such shares are sold by a Prohibited Owner, then (i) such shares shall be deemed to have been sold on behalf of the Trust and (ii) to the extent that the Prohibited Owner received an amount for such shares that exceeds the amount that such Prohibited Owner was entitled to receive pursuant to this Section 7.3.4, such excess shall be paid to the Trustee upon demand.
 
 
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Section 7.3.5   Purchase Right in Stock Transferred to the Trustee .  Shares of Capital Stock transferred to the Trustee shall be deemed to have been offered for sale to the Corporation, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the Trust (or, in the case of a devise or gift, the Market Price at the time of such devise or gift) and (ii) the Market Price on the date the Corporation, or its designee, accepts such offer.  The Corporation may reduce the amount payable to the Prohibited Owner by the amount of dividends and distributions which has been paid to the Prohibited Owner and are owed by the Prohibited Owner to the Trustee pursuant to Section 7.3.3 of this Article VII.  The Corporation may pay the amount of such reduction to the Trustee for the benefit of the Charitable Beneficiary.  The Corporation shall have the right to accept such offer until the Trustee has sold the shares held in the Trust pursuant to Section 7.3.4.  Upon such a sale to the Corporation, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner.
 
Section 7.3.6    Designation of Charitable Beneficiaries .  By written notice to the Trustee, the Corporation shall designate one or more nonprofit organizations to be the Charitable Beneficiary of the interest in the Trust such that (i) the shares of Capital Stock held in the Trust would not violate the restrictions set forth in Section 7.2.1(a) in the hands of such Charitable Beneficiary and (ii) each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.  Neither the failure of the Corporation to make such designation nor the failure of the Corporation to appoint the Trustee before the automatic transfer provided in Section 7.2.1(b) shall make such transfer ineffective, provided that the Corporation thereafter makes such designation and appointment.
 
Section 7.4     NYSE Transactions .  Nothing in this Article VII shall preclude the settlement of any transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system.  The fact that the settlement of any transaction occurs shall not negate the effect of any other provision of this Article VII and any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this Article VII.
 
Section 7.5     Enforcement . The Corporation is authorized specifically to seek equitable relief, including injunctive relief, to enforce the provisions of this Article VII.
 
Section 7.6    Non-Waiver .  No delay or failure on the part of the Corporation or the Board of Directors in exercising any right hereunder shall operate as a waiver of any right of the Corporation or the Board of Directors, as the case may be, except to the extent specifically waived in writing.
 
ARTICLE VIII
 
Investment and Operating Policies

 
Section 8.1   Definitions .     For the purpose of this Article VIII and Article IX below, the following terms shall have the following meanings:

 
Acquisition and Origination Expenses .        The term “Acquisition and Origination Expenses” shall mean expenses including, without limitation, legal fees and expenses, travel and communications expenses, costs of appraisals, accounting fees and expenses, title insurance funded by the Corporation, and miscellaneous expenses related to the origination, selection and acquisition of mortgages, whether or not acquired.
 
 
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Acquisition and Origination Fees .       The term “Acquisition and Origination Fees” shall mean the total of all fees and commissions paid to the Management Company by any party other than the Corporation and any subsidiary in connection with the Corporation 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 Management Company, or any fee of a similar nature, however designated, but shall not include the Management Fee and the Servicing Fee.
 
Affiliate .       The term “Affiliate” shall mean, for any person, (a) any person directly or indirectly controlling, controlled by or under common control with the person, (b) any other person owning or controlling ten percent (10%) or more of the outstanding voting securities of the person, (c) any officer or director of the person, or (d) if the other person is an officer or director, any company for which the person acts in any similar capacity.
 
Capital .        The term “Capital” shall mean the total investment and contribution to the capital of the Corporation by its stockholders in cash or by way of automatic reinvestment of dividends or other distributions of the Corporation.
 
Front-End Fees .         The term “Front-End Fees” shall mean fees and expenses paid by any party to acquire assets for the Corporation, 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 Board of Directors.
 
Independent Expert .      The term “Independent Expert” shall mean a Person with no material current or prior business or personal relationship with the Management Company who is engaged to a substantial extent in the business of rendering opinions regarding the value of assets of the type held by the Corporation and who is qualified to perform such work.
 
Investment in Mortgage Loans .   The term “Investment in Mortgage Loans” shall mean the amount of Capital 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 three percent (3%) shall not be included) and other cash payments, such as interest and taxes, but not including Front-End Fees.

 
Late Payment Charges .       The term “Late Payment Charges” shall mean additional charges paid by borrowers on delinquent loans and loans past maturity held by the Corporation, including additional interest and late payment fees.
 
Management Agreement .       The term “Management Agreement” shall mean an agreement between the Corporation and the Management Company for management services to be provided by the Management Company to the Corporation and its subsidiaries.
 
Management Company .         The term “Management Company” shall mean Owens Financial Group, Inc., a California corporation.
 
Management Fee .        The term “Management Fee” shall mean a fee paid to the Management Company or other Person for management and administration of the Corporation.
 
 
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Mortgage Loans .       The term “Mortgage Loans” shall mean investments of the Corporation that are notes, debentures, bonds and other evidence of indebtedness or obligations that are negotiable or non-negotiable, which are secured or collateralized by mortgages or deeds of trust.
 
NASAA Guidelines .      The term “NASAA Guidelines” shall mean the Mortgage Program Guidelines of the North American Securities Administrators Association, Inc. adopted on September 10, 1996.
 
Organization and Offering Expenses .      The term “Organization and Offering Expenses” shall mean those expenses incurred in connection with and in preparing for registration and subsequently offering and distributing shares of stock of the Corporation to the public, including sales commissions, if any, paid to broker-dealers in connection with the distribution of stock and any advertising expenses.
 
Person .       The term “Person” shall mean any natural person, partnership, corporation, association or other legal entity.
 
Program .       The term “Program” shall mean 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.
 
Property Management Fee .        The term “Property Management Fee” shall mean any fee paid for day-to-day professional property management services.
 
Prospectus .        The term “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.
 
Servicing Fee .       The term “Servicing Fee” shall mean a monthly fee paid to the Management Company for its services as servicing agent with respect to the Mortgage Loans.
 
Sponsor .       The term “Sponsor” shall mean the Management Company 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 or any Affiliate of any such Person, but does not include a Person whose only relation with the Program is that of an independent property manager whose only compensation is as such. The term “Sponsor” shall 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 interests in Programs.

 
Section 8.2   Investment Policy .  The Board of Directors shall cause at least eighty-six and one-half percent (86.5%) of Capital to be committed as Investment in Mortgage Loans.  The Corporation may make or purchase Mortgage Loans of such duration and on such real property and with such additional security as the Management Company 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 Board of Directors.
 
The Corporation 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 Corporation, 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 Section, the “aggregate amount of all Mortgage Loans outstanding on the property, including loans of the Corporation,” 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.
 
 
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Section 8.3   Operating Policies .
 
Section 8.3.1    The Corporation will limit any single Mortgage Loan and will limit its Mortgage Loans to any one borrower to not more than ten percent (10%) of the Corporation’s total assets as of the date the loan is made or purchased.
 
Section 8.3.2   The Corporation may not invest in or make Mortgage Loans on unimproved real property in an amount in excess of twenty-five percent (25%) of the Corporation’s total assets.
 
Section 8.3.3   The Corporation 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.
 
Section 8.3.4  T he Corporation 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 Corporation 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.
 
Section 8.3.5    There shall at all times be title, fire, and casualty insurance in an amount equal to the Corporation’s Mortgage Loans plus any outstanding senior lien on the security property naming the Corporation 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.
 
Section 8.3.6     Mortgage Loans may be purchased from the Management Company or its Affiliates only if the Management Company 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 Corporation for a price no greater than the cost of such loans to the Management Company (except compensation in accordance with Article IX below), there is no other benefit arising out of such transactions to the Management Company and such loans are not in default and otherwise satisfy all requirements of this Article VIII. 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 Corporation. The Corporation shall not acquire a loan from the Management Company if the cost of the loan exceeds the funds reasonably anticipated to be available to the Corporation to purchase the loan.
 
Section 8.3.7   The Corporation shall not sell a Mortgage Loan to the Management Company unless all of the following criteria are met: (i) the loan is in default; (ii) the Management Company pays the Corporation an amount in cash equal to the cost of the loan to the Corporation (including all cash payments and carrying costs related thereto); and (iii) the Management Company assumes all of the Corporation’s obligations and liabilities incurred in connection with the holding of the loan by the Corporation.
 
 
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Section 8.3.8   The Corporation shall not acquire a loan from, or sell a loan to, another Program in which the Management Company has an interest.
 
Section 8.3.9   The Corporation shall not sell a foreclosed property to the Management Company or to another Program in which the Management Company has an interest.
 
Section 8.3.10   Except as may be necessary or appropriate to preserve the status of the Corporation as a REIT, the Corporation will maintain a contingency reserve in an aggregate amount of at least one and one-half percent (1.5%) of the Capital.
 
Section 8.3.11   No loans may be made by the Corporation to the Management Company or an Affiliate except in connection with any advancement of expenses or indemnification as permitted herein and provided for in the Bylaws or Management Agreement.
 
Section 8.4   Investments in or with Other Programs .
 
Section 8.4.1   The Corporation may 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 Corporation, alone or together with any publicly registered Affiliate of the Corporation meeting the requirements of Section 8.4.2 below, 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.

 
Section 8.4.2   The Corporation may invest in general partnerships or joint ventures with other publicly registered Affiliates of the Corporation if all of the following conditions are met:
 
(a)   the Programs have substantially identical investment objectives;
 
 
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(b)   there are no duplicate fees;
 
(c)   the compensation to Sponsors is substantially identical in each Program;
 
(d)   each Program has 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; and
 
(f)   the Prospectus discloses the potential risk of impasse on joint venture decisions since no Program controls the decisions of the joint venture 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.
 
Section 8.4.3    The Corporation shall be permitted to invest in general partnerships or joint ventures with Affiliates other than publicly registered Affiliates of the Corporation 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 Section 8.3.6 above 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.
 
Section 8.4.4    Other than as specifically permitted in Sections 8.4.2 and 8.4.3 above, the Corporation may not invest in general partnerships or joint ventures with Affiliates.
 
Section 8.4.5    The Corporation may invest in general partnership interests of limited partnerships if the Corporation alone or together with any publicly registered Affiliate of the Corporation meeting the requirements of Section 8.4.2 above acquires a “controlling interest” as defined in Section 8.4.1 above, no duplicate fees are permitted, and no additional compensation beyond that permitted by Article IX is paid to the Sponsor.
 
Section 8.4.6   A Program that is an “upper-tier Program” shall be permitted to invest in interests of other Programs only if the conditions provided for under Sections V.G. 6 and 7 of the NASAA Guidelines are met.
 

 
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ARTICLE IX
 
Compensation to Management Company
 
                         Section 9.1   Management Agreement . The Corporation shall enter into a Management Agreement that sets forth the services to be provided by the Management Company to the Corporation and its subsidiaries in exchange for compensation from the Corporation as set forth in this Article IX. The fees and other compensation payable to the Management Company by the Corporation and its subsidiaries will be as set forth in the Charter. In the event that the Management Agreement is terminated in accordance with its terms or otherwise, the Board of Directors, with the approval of a majority of the directors of the Corporation who are independent directors under the rules of the NYSE MKT LLC or other national securities exchange upon which the Corporation’s securities are listed or admitted to trading and without any action by the stockholders of the Corporation, may cause the Corporation to enter into one or more agreements for management services on substantially the same terms and conditions as the Management Agreement, and any and all such agreements shall remain subject to the provisions of the Charter.
 
         Section 9.2   Management Company Compensation .   During the term of the Management Agreement, the Corporation shall pay the Management Company the following fees and compensation:
 
Section 9.2.1   Management Fee .   In consideration of the management services rendered to the Corporation, the Management Company is entitled to receive from the Corporation the Management Fee payable monthly, subject to a maximum of 2.75% per annum of the average unpaid balance of the 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 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 Mortgage Loans at the end of each month in the calendar year. In the event the Management Fee paid by the Corporation in a calendar year exceeds such 2.75%, the Management Company shall promptly refund such excess to the Corporation. The Management Fee may be accrued without interest when Corporation funds are not available for its payment.
 
Section 9.2.2   Loan Servicing Fee .   The Management Company may act as servicing agent with respect to the Mortgage Loans, in consideration for which it shall be entitled to receive from the Corporation the 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: (i) 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 (ii) an amount up to 0.25% per annum of the unpaid principal balance of the Mortgage Loans at the end of each month.
 
Section 9.2.3   No Other Fees .    The Management Company is not entitled to receive or retain any real estate brokerage commissions, Property Management Fees, insurance service fees or a Promotional Interest (as defined by the NASAA Guidelines) from the Corporation. In addition, the Management Company is not entitled to receive reimbursement of Acquisition and Origination Expenses incurred by the Management Company or its Affiliates in the origination, selection and acquisition of Mortgage Loans.
 
         Section 9.3 Payments by Borrowers .
 
  Section 9.3.1 Acquisition and Origination Fees .   The Management Company 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 Corporation.
 
 
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Section 9.3.2    Late Payment Charges .   The Management Company shall receive and retain all Late Payment Charges paid by borrowers on delinquent loans held by the Corporation.
 
  Section 9.4 Reductions in Management Company Compensation .
 
  Section 9.4.1 Agreements to Reduce Compensation .   The Board of Directors, without any action by the stockholders of the Corporation, may authorize the Corporation to amend the Management Agreement (with the consent of the Management Company) or enter into one or more other agreements with the Management Company to adjust the compensation to be paid to the Management Company, provided that such adjustment shall not have a significant adverse impact on the stockholders of the Corporation. Such amendment or agreements shall be effective notwithstanding Sections 9.1, 9.2 and 9.3 of this Article IX.
 
  Section 9.4.2 Voluntary Reduction in Compensation .   Notwithstanding Sections 9.1, 9.2 and 9.3 of this Article IX, the Management Company from time to time may voluntarily accept compensation that is less than the maximum compensation set forth herein, provided that no such change in compensation shall result in a significant adverse impact on the stockholders of the Corporation.
 
ARTICLE X
 
Amendments
 
      The Corporation reserves the right from time to time to make any amendment to its Charter, now or hereafter authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in the Charter, of any shares of outstanding stock. All rights and powers conferred by the Charter on stockholders, directors and officers are granted subject to this reservation.  Except for those amendments permitted to be made without stockholder approval under Maryland law or as otherwise set forth herein, any amendment to the Charter shall be valid only if declared advisable by the Board of Directors and approved by the affirmative vote of a majority of all the votes entitled to be cast on the matter.
 
ARTICLE XI
 
Limitation of Liability
 
                             To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of directors and officers of a corporation, no present or former director or officer of the Corporation shall be liable to the Corporation or its stockholders for money damages. Neither the amendment nor repeal of this Article XI, nor the adoption or amendment of any other provision of the Charter or Bylaws inconsistent with this Article XI, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.
 
THIRD :  The amendment to and restatement of the charter as hereinabove set forth have been duly advised by the Board of Directors and approved by the stockholders of the Corporation as required by law.
 
 
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FOURTH :  The current address of the principal office of the Corporation is as set forth in Article IV of the foregoing amendment and restatement of the charter.
 
FIFTH :  The name and address of the Corporation’s current resident agent is as set forth in Article IV of the foregoing amendment and restatement of the charter.
 
SIXTH :  The number of directors of the Corporation and the names of those currently in office are as set forth in Article V of the foregoing amendment and restatement of the charter.
 
SEVENTH :  The total number of shares of stock which the Corporation had authority to issue immediately prior to this amendment and restatement was 1,000,000, consisting of 1,000,000 shares of Common Stock, $0.01 par value per share.  The aggregate par value of all shares of stock having par value was $10,000.
 
EIGHTH :  The total number of shares of stock which the Corporation has authority to issue pursuant to the foregoing amendment and restatement of the charter is 55,000,000, consisting of 50,000,000 shares of Common Stock, $0.01 par value per share, and 5,000,000 shares of Preferred Stock,  $0.01 par value per share.  The aggregate par value of all authorized shares of stock having par value is $550,000.
 
NINTH :  The undersigned Chief Executive Officer and President acknowledges these Articles of Amendment and Restatement to be the corporate act of the Corporation and as to all matters or facts required to be verified under oath, the undersigned Chief Executive Officer and President acknowledges that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury.
 

 
[ Signature page follows. ]

 
 
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IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment and Restatement to be signed in its name and on its behalf by its Chief Executive Officer and President and attested to by its Secretary on this 23rd day of January, 2013.

ATTEST:                                                                           OWENS REALTY MORTGAGE, INC.



/s/ Bryan H. Draper                                                   By: /s/ William C. Owens (SEAL)
Bryan H. Draper                                                                William C. Owens
Secretary                                                                            Chief Executive Officer and President

































[ Signature Page to Articles of Amendment and Restatement ]
 
 
23
 
OWENS REALTY MORTGAGE, INC.
 
CERTIFICATE OF CO RRECTION


THIS IS TO CERTIFY THAT:

FIRST :                       The title of the document being corrected is Articles of Amendment and Restatement (the “Articles”).

SECOND :                  The sole party to the Articles is Owens Realty Mortgage, Inc., a Maryland corporation (the “Corporation”).

THIRD :                      The Articles were filed with the State Department of Assessments and Taxation of Maryland (the “SDAT”) on January 24, 2013.

FOURTH :                  The definition of “Capital Account” was omitted from Section 8.1 in Article VIII of the Articles as previously filed with the SDAT.

FIFTH :                       Section 8.1 in Article VIII of the Articles is hereby corrected by inserting the definition of “Capital Account” in alphabetical order as set forth below:

Capital Account .  The term “Capital Account” shall initially mean Capital.  Thereafter, the term Capital Account shall mean Capital net of cash distributions to stockholders, stock repurchases by the Corporation and the aggregate profits credited and losses debited to the stockholders of the Corporation.

SIXTH :                      Section 8.3.10 in Article VIII of the Articles as previously filed with the SDAT is set forth below:

Section 8.3.10   Except as may be necessary or appropriate to preserve the status of the Corporation as a REIT, the Corporation will maintain a contingency reserve in an aggregate amount of at least one and one-half percent (1.5%) of the Capital.

SEVENTH :                 Section 8.3.10 in Article VIII of the Articles as corrected hereby is set forth below:

Section 8.3.10   Except as may be necessary or appropriate to preserve the status of the Corporation as a REIT, the Corporation will maintain a contingency reserve in an aggregate amount of at least one and one-half percent (1.5%) of the Capital Account.

 
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EIGHTH :                      The undersigned acknowledges this Certificate of Correction to be the corporate act of the Corporation and as to all matters or facts required to be verified under oath, the undersigned acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury.


[SIGNATURE PAGE FOLLOWS]







 
 
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IN WITNESS WHEREOF, the Corporation has caused this Certificate of Correction to be signed in its name and on its behalf by its Chief Executive Officer and President and attested to by its Secretary on this 17th day of September, 2013.

 
ATTEST:                                                                           OWENS REALTY MORTGAGE, INC.



/s/ Bryan H. Draper                                                    By: /s/ William C. Owens (SEAL)
Bryan H. Draper                                                                William C. Owens
Secretary                                                                            Chief Executive Officer and President

 




 
 
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Exhibit 21


Subsidiaries of the Registrant


 
State of
Fictitious
Subsidiary Name
Organization
Business Name
     
720 University, LLC
Wyoming
 
Dation, LLC
Delaware
 
Baldwin Ranch Subdivision, LLC
California
 
The Last Resort and Marina, LLC
California
The Last Resort and Marina
Lone Star Golf, Inc.
Maryland
Auburn Valley Golf Club
Wolfe Central, LLC
California
 
54th Street Condos, LLC
Arizona
 
AMFU, LLC
Arizona
 
Phillips Road, LLC
Washington
 
TOTB Miami, LLC
Florida
 
Broadway & Commerce, LLC
Washington
 
Bensalem Primary Fund, LLC
Pennsylvania
 
Brannan Island, LLC
California
 
Tahoe Stateline Venture, LLC
California
 
Sandmound Marina, LLC
California
Piper Point Marina






EXHIBIT 24
POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors and officers of Owens Realty Mortgage, Inc., a corporation organized under the laws of the state of Maryland (the “Company”), hereby constitute and appoint William C. Owens and Bryan H. Draper and each of them (with full power to each of them to act alone), his true and lawful attorneys in fact and agents for him and on his behalf and in his name, place and stead, in all cases with full power of substitution and resubstitution, in any hand and all capacities, to sign, execute and affix his seal to and file with the Securities and Exchange Commission (or any other governmental or regulatory authority) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and all amendments or supplements thereto with all exhibits and any and all documents required to be filed with respect thereto, and grants to each of them full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully and to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that said attorneys in fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, each of the undersigned directors and/or officers have hereunto set his hand and seal, as of the date specified.
 
 
 
Dated: March 16, 2015
 
 
 
 
 
Dated: March 16, 2015
OWENS REALTY MORTGAGE, INC.
 
/s/ William C. Owens
William C. Owens
Chairman of the Board of Directors, Chief Executive Officer and President (Principal Executive Officer)
 
 
/s/ William C. Owens
William C. Owens
Chairman of the Board of Directors, Chief Executive Officer and President (Principal Executive Officer)
 
 
Dated: March 16, 2015
 
 
/s/ Bryan H. Draper
Bryan H. Draper
Director, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)
 
 
Dated: March 16, 2015
 
 
/s/ Dennis G. Schmal
Dennis G. Schmal
Director
 
 
Dated: March 16, 2015
 
 
/s/ M. Lyman Bates, Jr.
M. Lyman Bates, Jr.
Director





EXHIBIT 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION


I, William C. Owens, certify that:

1.
I have reviewed this annual report on Form 10-K of Owens Realty Mortgage, Inc. (the “Registrant”);
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
 
4.
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c)
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
 
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
 

Dated:  March 16, 2015


/s/ William C. Owens
William C. Owens
Chief Executive Officer and President
 
 
 
 
 
EXHIBIT 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION


I, Bryan H. Draper, certify that:

1.
I have reviewed this annual report on Form 10-K of Owens Realty Mortgage, Inc. (the “Registrant”);
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
 
4.
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c)
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
 
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
 
 
Dated:  March 16, 2015
 

/s/ Bryan H. Draper
Bryan H. Draper
Chief Financial Officer and Secretary


EXHIBIT 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350


William C. Owens, as Chief Executive Officer and President of Owens Realty Mortgage, Inc. (the “Registrant”), and Bryan H. Draper, as Chief Financial Officer and Secretary of the Registrant, hereby certify, pursuant to 18 U.S.C. § 1350, that:

(1)       the Registrant’s Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the applicable requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)       the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.


/s/ William C. Owens
William C. Owens
Chief Executive Officer and President
March 16, 2015

/s/ Bryan H. Draper
Bryan H. Draper
Chief Financial Officer and Secretary
March 16, 2015




 
 
Exhibit10.5



REAL ESTATE SALE AGREEMENT
 

 
by and between
 

 
720 UNIVERSITY, LLC, as Seller
 
and
 
ALBERTA DEVELOPMENT PARTNERS, LLC, as Purchaser
 

 
UNIVERSITY SQUARE SHOPPING CENTER
 
2604-2724 ELEVENTH AVENUE, GREELEY, COLORADO
 

 



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THIS REAL ESTATE SALE AGREEMENT (this “ Agreement ”) is made as of November 10, 2014 (the “ Contract Date ”), by and between 720 UNIVERSITY, LLC, a Wyoming limited liability company (“ Seller ”) and ALBERTA DEVELOPMENT PARTNERS, LLC, a Colorado limited liability company (“ Purchaser ”).
 
PRELIMINARY STATEMENTS
 
A.           Seller is the owner of the real estate and related assets hereinafter described; and
 
B.           Seller desires to sell, and Purchaser desires to buy, the real estate and related assets hereinafter described, at the price and on the terms and conditions hereafter set forth.
 
In consideration of the recitals, the mutual covenants hereafter set forth, and other good and valuable considerations, the receipt and sufficiency of which are mutually acknowledged, it is agreed by and between the parties as follows:
 
1.   Premises .  The real estate which is the subject of this Agreement is legally described on Exhibit A attached hereto, and consists of the property commonly known as University Square Shopping Center, located at 2604-2724 Eleventh Avenue, Greeley, Colorado, County of Weld, together with all buildings and improvements located thereon and all rights, easements, tenancies, signage and appurtenances belonging or appertaining thereto, and all right, title and interest of Seller in and to any and all roads, streets, alleys or public and private rights of way, bounding such property (the “ Premises ”).
 
2.   Personal Property and Leases .
 
(a)   The “ Personal Property ” referred to herein shall consist of all right, title, and interest of Seller, if any, in all tangible and intangible personal property and any and all existing licenses and permits held by Seller and not constituting part of the real estate, located on and used in connection with the Premises, including (i) licenses and permits relating to the construction and operation of the Property, (ii) the right to use the name of the property (if any) in connection with the Property, but specifically excluding any trademarks, service marks and trade names of Seller, and (iii) if still in effect and not assigned to any tenant under the Leases, guaranties and warranties received by Seller from any contractor, manufacturer or other person in connection with the construction or operation of the Property.
 
(b)   The “ Leases ” referred to herein shall consist of the leases or occupancy agreements, including those in effect on the Contract Date, and any new leases entered into pursuant to Section 6(d)(6) which, as of the Closing (as hereinafter defined), affect all or any portion of the Premises, and any security deposits actually held by Seller with respect to any such Leases (but excluding Seller’s rights otherwise expressly retained hereunder, such as rents applicable to periods prior to Closing), together with all amendments thereto and guaranties thereof.
 
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3.   Sale/Conveyance and Assignment .  Seller agrees to sell, convey and assign to Purchaser, and Purchaser agrees to buy and assume from Seller, at the price and upon the other terms and conditions hereafter set forth (a) the Premises, (b) the Personal Property and (c) the Leases (a-c collectively, the “ Property ”).
 
4.   Transfer of Title .  (a)  Title to the Premises shall be conveyed to Purchaser by a special warranty deed (the “ Deed ”) executed by Seller, in the form attached hereto as Exhibit B .
 
(a)   The Personal Property shall be conveyed to Purchaser by a bill of sale (the “ Bill of Sale ”) executed by Seller, in the form attached hereto as Exhibit C , and by an assignment of intangible property (the “ Assignment of Intangible Property ”), in the form attached hereto as Exhibit G .
 
(b)   The Leases shall be assigned by Seller and assumed by Purchaser by an Assignment and Assumption of Leases (the “ Assignment of Leases ”), in the form attached hereto as Exhibit D .
 
5.   Purchase Price; Earnest Money; Refinancing .  The purchase price for the Property shall be, subject to adjustment pursuant to subsection (c) below, Twenty One Million and No/100 Dollars ($21,000,000.00) (the “ Purchase Price ”) payable by Purchaser to Seller as follows:
 
(a)   Within three (3) Business Days immediately following the Contract Date, Purchaser shall deposit into a strict joint order escrow trust established with Land Title Guarantee Company, 772 Whalers Way #100 Fort Collins, CO  80525 (the “ Title Insurer ”) as earnest money hereunder the sum of Five Hundred Thousand and No/100 Dollars ($500,000.00) (the “ Initial Deposit ”).  In the event that Purchaser fails to timely deposit the Initial Earnest Money with the Title Insurer, this Agreement, at Seller’s option, shall be of no force and effect.  The Earnest Money (hereinafter defined) shall at all times prior to Closing be invested in United States treasury obligations or such other interest bearing accounts or securities as are approved by Purchaser and Seller in writing; all interest earned on the Earnest Money shall be administered, paid or credited (as the case may be) in the same manner as the Earnest Money and, when credited to the escrow account shall constitute additional Earnest Money.  At the closing of the purchase and sale of the Property contemplated by this Agreement (the “ Closing ”), Purchaser shall receive a credit against the Purchase Price for the Earnest Money.  If Purchaser does not terminate this Agreement pursuant to Section 7(b), Purchaser shall deposit with Title Insurer an additional amount of Five Hundred Thousand and No/100 Dollars ($500,000.00), as additional earnest money, prior to the expiration of the Due Diligence Period (the “ Second Deposit ” and together with the Initial Deposit, the “ Earnest Money ”).
 
(b)   As of the Contract Date, there exists a mortgage loan in the original principal amount of $10,500,000.00 (the “ Existing Loan ”) that encumbers the Property.  The current holder of the documents evidencing and securing the Existing Loan (collectively, the “ Existing Loan Documents ”) is NorthMarq Capital, as Sub-Servicer for Berkadia Commercial Mortgage, LLC, as Master Servicer, for Wells Fargo Bank NA, as Trustee for the registered holders of GS Mortgage Securities Corporation II, Commercial Mortgage Pass-Through Certificates, Series 2005-GG4 (the " Existing Lender ").  To accommodate Seller’s structuring needs, Purchaser (or an affiliate designated by Purchaser) shall, on the date that is thirty (30) days after the expiration of the Due Diligence Period (the “ Initial Closing Date ”), provided that all Loan Conditions Precedent (defined below) have been fulfilled or have been waived in writing by the respective party entitled to waive same, extend a new mortgage loan to Seller (the “ Buyer Loan ”) to refinance, in full, the Existing Loan.  The principal amount of the Buyer Loan shall not exceed the outstanding principal balance of the Existing Loan (plus interest that accrues in the month in which the Initial Closing Date occurs), but in any event shall not exceed $9,771,213, and the Buyer Loan shall accrue interest at six percent (6%) per annum and shall not
 
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amortize.  Seller shall make monthly interests payments but shall not otherwise have the right to prepay the Buyer Loan, and the principal balance of the Buyer Loan, together with all accrued interest (if any), shall be payable on the Final Closing Date (as defined in Section 10 below) 1 .  In connection with the Buyer Loan, Seller (and, as applicable, its credit-worthy affiliate) shall deliver to Purchaser (or its affiliate) all customary loan documents requested by Purchaser, including a note, deed of trust, assignment of leases and rents, assignment of Property contracts, UCC financing statements, account control agreement, pledge agreement, non-recourse carve-out guaranty and environmental indemnity (collectively, the “ Buyer Loan Documents ”).  The Buyer Loan Documents shall be prepared by Purchaser and reasonably approved by Seller prior to the expiration of the Due Diligence Period.  In the event the Buyer Loan Documents are not approved by Seller in its sole and absolute discretion prior to the Due Diligence Period, this Agreement shall be terminated and the deposit returned to Purchaser.  As used herein, the term “ Loan Conditions Precedent ” shall mean (i) receipt by Purchaser of an executed payoff letter from Existing Lender that is acceptable to Purchaser in its sole and absolute discretion, (ii) execution and delivery of the Buyer Loan Documents by Seller and its credit-worthy affiliates, as applicable, (iii) release of the deed of trust, financing statements and similar instruments securing the Existing Loan that are recorded against the Premises, and termination of all other Existing Loan Documents, (iv) recordation of the deed of trust securing the Buyer Loan in the appropriate jurisdiction, (v) Purchaser’s receipt of the Required Estoppels, (vi) this Agreement shall not have been previously terminated pursuant to any provision hereof, (vii) Seller shall cause to be delivered to Purchaser a lender’s standard coverage title insurance policy (the “ Loan Policy ”), issued by Title Insurer, dated as of the Initial Closing Date, in the full amount of the Buyer Loan and insuring the Buyer Loan as a first priority lien against the Premises, the form of which shall be ALTA Loan Policy (6-17-06) (or other form required or promulgated pursuant to applicable state insurance regulations), subject only to the Permitted Exceptions (defined below), at Seller’s sole expense (including any endorsements requested by Purchaser), (viii) all representations and warranties of Seller in this Agreement shall be true and correct in all material respects, (ix) receipt by Purchaser of evidence of Property insurance that is reasonably acceptable to Purchaser, (x) Purchaser’s receipt of an executed side letter agreement, between Seller, Purchaser and Waterbury Properties, as property manager of the Property (“ Property Manager ”), governing the interim management of the Property by Property Management from the Initial Closing Date until the Final Closing Date, the form of which shall be prepared by Purchaser and reasonably approved by Seller prior to the expiration of the Due Diligence Period, consistent with the terms and conditions described in Section 6(f) , (xii) Purchaser’s receipt of evidence of termination of any existing leasing agreements affecting the Property, at no cost, liability or expense to Purchaser, (xiii) execution and delivery of a new leasing agreement with Sullivan Hayes, the form of which shall be prepared by Purchaser and reasonably approved by Seller prior to the expiration of the Due Diligence Period, (xiv) Purchaser’s receipt of customary corporate documents evidencing Seller’s authority to borrow the Buyer Loan and consummate the transactions contemplated by the Buyer Loan Documents, (xv) no Material Damage or Material Condemnation has occurred and (xvi) recordation of the PSA Memorandum pursuant to Section 22(n).

________________________
1 NTD:  The Buyer Loan Documents will have an extension option for 90 days if the closing doesn’t occur on the Final Closing Date.

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(c)   The Purchase Price, less a credit for the Earnest Money, less a credit for the Buyer Loan (including all accrued interest, if any), and plus or minus pro-rations and adjustments as set forth in Section 17 hereof, shall be paid by Purchaser to Seller by wire transfer of immediately available federal funds into escrow with Title Insurer prior to 2:00 p.m. Chicago time on the Final Closing Date.  Purchaser shall receive a credit for the Buyer Loan provided that Purchaser (or its affiliate) holds the note evidencing the Buyer Loan and the Buyer Loan is deemed satisfied in full at Closing.
 
In the event that any of the Loan Conditions Precedent shall not have been fulfilled on or before the Initial Closing Date, then subject to the provisions of Section 18(b) hereof, Purchaser may elect, upon notice to Seller, to terminate this Agreement, in which event the Earnest Money shall be returned to Purchaser, and neither party shall have any further liability or obligation to the other, except for the provisions of this Agreement which are expressly stated to survive the termination of this Agreement.
 
6.   Representations, Warranties, Covenants and Estoppels .
 
(a)   Seller’s Representations and Warranties .  As a material inducement to Purchaser to execute this Agreement and consummate this transaction, Seller represents and warrants to Purchaser as follows:
 
(1)   Organization and Authority .  Seller has been duly organized and is validly existing as a Wyoming limited liability company.  Seller has the full right and authority and has obtained any and all consents required therefor to enter into this Agreement, consummate or cause to be consummated the sale and make or cause to be made transfers and assignments contemplated herein.  The persons signing this Agreement on behalf of Seller are authorized to do so.  This Agreement and all of the documents to be delivered by Seller at the Closing have been authorized and properly executed and will constitute the valid and binding obligations of Seller, enforceable against Seller in accordance with their terms.
 
(2)   Conflict .  There is no agreement to which Seller is a party or, to Seller’s Knowledge, binding on Seller or the Property which is in conflict with this Agreement or which would limit or restrict the timely performance by Seller of its obligations pursuant to this Agreement.
 
(3)   Litigation .  There are no (i) actions, suits or proceedings pending, or, to Seller’s Knowledge, threatened against Seller or (ii) outstanding orders or unsatisfied judgments from any governmental authority binding upon Seller, which (x) if adversely determined, would adversely affect the Property, or (y) challenges or impairs Seller’s ability to execute, deliver or perform this Agreement or consummate the transaction contemplated hereby.
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(4)   Notice of Violations .  Seller has received no written notice that either the Premises or the use thereof violates any laws, rules and regulations of any federal, state, city or county government or any agency, body, or subdivision thereof having any jurisdiction over the Property that have not been resolved to the satisfaction of the issuer of the notice.
 
(5)   Withholding Obligation .  Seller is not a “foreign person” within the meaning of Section 1445 of the Internal Revenue Code of 1986, as amended (the “ Code ”).
 
(6)   Condemnation .  Except for any condemnation proceedings which Seller has not yet been served with process, there are no pending or, to Seller’s Knowledge, threatened condemnation or similar proceedings affecting the Premises or any part thereof.
 
(7)   Leases .  Except for those tenants in possession of the improvements under Leases for space in the Improvements, as shown in the rent roll attached hereto as Exhibit H (which is true, correct and complete), there are no other tenants in possession of, or claiming any possession to, any portion of the Property.  Except as otherwise set forth on Exhibit H , (A) to Seller’s Knowledge, all of the Leases are in full force and effect in accordance with their respective terms; (B) no tenant, other than Victory Outreach Church, under any Lease is more than thirty (30) days in arrears in the payment of rents under its Lease; (C) no tenant has paid rent more than thirty (30) days in advance except in the ordinary course in accordance with the terms of any such tenant’s Lease; and (D) there are no tenant inducement costs payable to or for the benefit of any tenant under the Leases, nor is any tenant entitled to any free rent or abated rent.  The copies of the Leases delivered to Purchaser by Seller (or its representatives) prior to the Contract Date are true, correct and complete copies of such Leases. There are no oral understandings or side agreements with any tenant under any Lease that has not been reduced to writing and which is not set forth among the Leases.  To Seller’s Knowledge, neither Seller nor any other party to any Lease is in material breach thereof or material default thereunder.  During the twelve (12) months prior to the Contract Date, Seller has not given to, and has not received from, any tenant under any Lease any written notice of a default that has not subsequently been cured.
 
(8)   Security Deposits .   Exhibit H sets forth a list of all of the security deposits under the Leases in effect as of the Contract Date, which list is true, correct and complete.
 
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(10)   Environmental Matters .  To Seller’s Knowledge, except for the matters set forth in the environmental reports delivered by Seller to Purchaser, and except for reasonable quantities of Hazardous Materials that are typically used, stored or sold in retail shopping centers, the Property is not now and has not ever been used for the purpose of disposal of, refining, generating, manufacturing, producing, storing, handling, treating, transferring, releasing, processing or transporting any Hazardous Materials, there are no Hazardous Materials in, on or under the Property (other than gas and oil extraction by Mineral Resources or its assignee) and the Property is not in material violation of any Environmental Laws.  “ Hazardous Material ” means any substance, material or waste that is regulated, classified or otherwise characterized under or pursuant to any Environmental Law as "hazardous," "toxic," "radioactive" or words of similar meaning or effect, including petroleum and its by-products, asbestos, and polychlorinated biphenyls.  “ Environmental Law ” means any United States federal, state or local statute, regulation or ordinance currently in effect or as in effect as of the Final Closing Date relating to the environment or natural resources, including the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. § 9601 et seq.), the Oil Pollution Act of 1990 (33 U.S.C. § 2701 et seq. ), the Resource Conservation and Recovery Act (42 U.S.C. § 6901 et seq. ), the Clean Water Act (33 U.S.C. § 1251 et seq. ), the Clean Air Act (42 U.S.C. § 7401 et seq. ), the Toxic Substances Control Act (15 U.S.C. § 2601 et seq. ) and the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. § 136 et seq. ), as to each, as amended, and the regulations promulgated pursuant thereto and as each is in effect on and as interpreted on the date of this Agreement or the Final Closing Date.
 
(11)   OFAC; Prohibited Person .  Neither Seller nor any of Seller’s affiliates, nor, to Seller’s Knowledge, any of their respective brokers or other agents acting in any capacity in connection with the transactions contemplated by this Agreement, is or will be (a) conducting any business or engaging in any transaction or dealing with any person appearing on the U.S. Treasury Department’s OFAC list of prohibited countries, territories, “specifically designated nationals” or “blocked person” (each, a “ Prohibited Person ”) (which lists can be accessed at the following web address:  http://www.ustreas.gov/offices/enforcement/ofac/), including the making or receiving of any contribution of funds, goods or services to or for the benefit of any such Prohibited Person; (b) engaging in certain dealings with countries and organizations designated under Section 311 of the USA PATRIOT Act as warranting special measures due to money laundering concerns; (c) dealing in, or otherwise engaging in any transaction relating to, any property or interests in property blocked pursuant to Executive Order No. 13224 dated September 24, 2001, relating to “Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism”; (d) a foreign shell bank or any person that a financial institution would be prohibited from transacting with under the USA PATRIOT Act; or (e) engaging in or conspiring to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempting to violate, any of the prohibitions set forth in (i) any U.S. anti-money laundering law, (ii) the Foreign Corrupt Practices Act, (iii) the U.S. mail and wire fraud statutes, (iv) the Travel Act, (v) any similar or successor statutes or (vi) any regulations promulgated under the foregoing statutes.
 
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(12)   ERISA .  Seller is not (and, throughout the period transactions are occurring pursuant to this Agreement, will not be) an entity deemed to hold plan assets of any “employee benefit plan” as defined in Section 3(3) of ERISA that is subject to Title I of ERISA or “plan” as defined in and subject to Section 4975 of the Code pursuant to 29 C.F.R. Section 2510.3-101, as modified by Section 3(42) of ERISA.  None of the transactions contemplated by this Agreement are in violation of any statutes applicable to Seller that regulate investments of, and fiduciary obligations with respect to, governmental plans and that are similar to the provisions of Section 406 of ERISA or Section 4975 of the Code.  As used herein, “ ERISA ” means the United States Employee Retirement Income Security Act of 1974, as amended.
 
(13)   Construction Projects .   Exhibit E sets forth a list of all current construction projects which are ongoing at the Premises as of the Contract Date, including the budgeted cost of each such project and the amount spent as of the Contract Date in connection with each such project.
 
(14)   Leasing Commissions .  To Seller’s Knowledge, (i) there are no lease brokerage agreements, leasing commission agreements or other agreements providing for payments of any amounts for leasing activities or procuring tenants with respect to any Leases other than the agreements disclosed in Exhibit J , and (ii) there are no agreements currently in effect relating to the management or leasing of the Property other than the agreements disclosed in Exhibit J .  Except as disclosed in Exhibit J , Seller has paid in full all leasing commissions and brokerage fees accrued or due and payable under all commission agreements or Leases.
 
(15)   Service Contracts .   Exhibit I attached hereto sets forth a true, correct and complete list of all contracts relating to the Property, other than the Leases.  To the Seller’s Knowledge, (i) all such contracts are in full force and effect, (ii) Seller is not in material breach of, or material default under, any such contract, (iii) no other party to any such contract is in material breach thereof or material default thereunder; and (iv) during the twelve (12) months prior to the Contract Date, Seller has not received any written notice from any Person asserting that Seller is in material default under any such contract (which default remains uncured).
 
(16)   Financial Statements .  Seller has made or will make available to Purchaser (a) an unaudited consolidated balance sheet of the Seller as of December 31, 2013 and an unaudited consolidated statement of income for the Seller for the twelve (12) month period then-ended, and (b) an unaudited consolidated balance sheet of the Seller as of September 30, 2014 and an unaudited consolidated statement of income for the Seller for the three (3) month period then-ended (collectively, the “ Financial Statements ”). The Financial Statements fairly present in all material respects the financial condition and the results of operations of the Seller (and the Property) as of the end of and for the periods presented.
 
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              (17)   Insurance .  Each insurance policy maintained by Seller with respect to the Property is in full force and effect and all premiums due thereunder have been paid.  No notice has been received from the insurance company which issued any of such policies, or from any agent, stating in effect that such policy will not be renewed or will be renewed at a higher premium than is presently payable therefor, and, to Seller’s Knowledge, there are no defects or inadequacies in any portion of the Property which, if not corrected, would result in termination of insurance coverage or increase in the cost thereof.
 
For purposes of this Section 6(a), the term “ Seller’s Knowledge ” means the actual knowledge of John G. Waterbury, without imposing any personal liability upon such persons, and shall not be construed, by imputation or otherwise, to refer to the knowledge of any other officer, director, agent, manager, member, representative, employee or advisor of Seller.
 
(b)   Purchaser’s Representations and Warranties .  As a material inducement to Seller to execute this Agreement and consummate this transaction, Purchaser represents and warrants to Seller as follows:
 
(1)     Organization and Authority .  Purchaser has been duly organized and is validly existing as a limited liability company formed under the laws of the State of Colorado.  Purchaser has the full right and authority and has obtained any and all consents required therefor to enter into this Agreement, consummate or cause to be consummated the purchase, and make or cause to be made the deliveries and undertakings contemplated herein or hereby.  The persons signing this Agreement on behalf of each Purchaser are authorized to do so.  This Agreement and all of the documents to be delivered by Purchaser at the Closing have been authorized and properly executed and will constitute the valid and binding obligations of Purchaser, enforceable against Purchaser in accordance with their terms.  There is no agreement to which Purchaser is a party or to Purchaser’s knowledge binding on Purchaser which is in conflict with this Agreement.  There is no action or proceeding pending or, to Purchaser’s knowledge, threatened against Purchaser which challenges or impairs Purchaser’s ability to execute or perform its obligations under this Agreement.
 
(2)   OFAC; Prohibited Person .  Neither Purchaser nor any person that owns an interest in Purchaser (each, a " Purchaser Party "), nor, to Purchaser's actual knowledge, any of their respective brokers or other agents acting in any capacity in connection with the transactions contemplated by this Agreement, is or will be (a) knowingly (after reasonable inquiry) conducting any business or engaging in any transaction or dealing with any Prohibited Person, including the making or receiving of any contribution of funds, goods or services to or for the benefit of any such Prohibited Person; (b) engaging in certain dealings with countries and organizations designated under Section 311 of the USA PATRIOT Act as warranting special measures due to money laundering concerns; (c) dealing in, or otherwise engaging in any transaction relating to, any property or interests in property blocked pursuant to Executive Order No. 13224 dated September 24, 2001, relating to “Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism”; (d) a foreign shell bank or any person that a financial institution would be prohibited from transacting with under the USA PATRIOT Act; or (e) engaging in or conspiring to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempting to violate, any of the prohibitions set forth in (i) any U.S. anti-money laundering law, (ii) the Foreign Corrupt Practices Act, (iii) the U.S. mail and wire fraud statutes, (iv) the Travel Act, (v) any similar or successor statutes or (vi) any regulations promulgated under the foregoing statutes.  Each of the representations and warranties of Purchaser in this paragraph (2) are based solely on written disclosures made to Parent Company and its affiliates by direct and indirect investors in Purchaser.
 
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(c)   Representation and Warranties Prior to Closing .  The continued validity in all respects of the representations and warranties in Sections 6(a) and 6(b) shall be a condition precedent to the obligation of the party to whom the representation and warranty is given to close this transaction.  If any of Seller’s representations and warranties shall not be true and correct at any time on or before the Closing whether not true and correct as of the date of this Agreement or whether any change in facts or circumstances has made the applicable representation and warranty no longer true and correct, and regardless as to whether Purchaser becomes aware of such fact through Seller’s notification or otherwise, then Purchaser may, at Purchaser’s option, exercised by written notice to Seller (and as its sole and exclusive remedy), either (i) proceed with this transaction, accepting the applicable representation and warranty as being modified by such subsequent matters or knowledge and waiving any right relating thereto, if any, or (ii) terminate this Agreement and declare this Agreement of no further force and effect and in which event the Earnest Money shall promptly be returned to Purchaser and Seller shall have no further liability hereunder by reason thereof.
 
(d)   Covenants of Seller .  Seller covenants and agrees that, unless consented to in writing by Purchaser (which consent may be withheld by Purchaser in its sole and absolute discretion, unless a different approval standard is indicated below) during the period from the date of this Agreement through and including the Final Closing Date:
 
(1)   Seller will timely perform each of its obligations under the Leases.
 
(2)   Seller will use, own and operate the Property in substantially the same manner as currently conducted, including maintenance of current (or substantially comparable) property and liability insurance policies.
 
(3)   Other than Leases (which are addressed in clause (6) below), Seller shall not (A) enter into any new contract, (B) amend, modify, terminate or cancel any existing contract, or (C) grant any consent under, or waive any provisions of, any contract, in each case without the prior written consent of Purchaser, which consent shall not be unreasonably withheld, conditioned or delayed prior to the expiration of the Due Diligence Period, but which consent may be withheld in Purchaser's sole and absolute discretion after the expiration of the Due Diligence Period; provided, that (x) Purchaser shall not have the right to disapprove any consent or approval that Seller is not entitled to withhold under a contract, (y) prior to the expiration of the Due Diligence Period, any Purchaser consent or approval requested by Seller pursuant to this clause (3) shall be deemed to have been given if Purchaser shall fail to respond to such request within three (3) business days after its receipt of written request therefor from Seller and (z) with respect to any new contract, if the same is capable of being terminated upon thirty (30) days or less notice without payment of any penalty or premium, Purchaser’s consent shall not be required.  On or before the expiration of the Due Diligence Period, Purchaser shall notify Seller in writing if Purchaser elects not to assume at Closing any of the service, maintenance, supply or other contracts relating to the operation of the Property which are identified on Exhibit I attached hereto.  If Purchaser does not exercise its right to terminate this Agreement pursuant to Section 7(b), Seller shall give notice of termination of such disapproved contract(s) to the respective counterparties under such contracts at no cost or expense to Purchaser.
 
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(4)   Seller shall not remove any Personal Property from the Premises except as may be required for necessary repair or replacement, and in the event of such replacement, the replacement shall be of materially equal or better quality and quantity as existed as of the time of its removal.
 
(5)   Seller shall not do anything, nor authorize anything to be done, which would adversely affect the condition of title as shown on the Title Commitment as of the expiration of the Due Diligence Period.
 
(6)   Seller shall not (A) enter into any new Lease, (B) amend, modify, terminate or cancel any existing Lease, or (C) grant any consent under, or waive any provisions of, any Lease, in each case without the prior written consent of Purchaser, which consent shall not be unreasonably withheld, conditioned or delayed prior to the expiration of the Due Diligence Period, but which consent may be withheld in Purchaser's sole and absolute discretion after the expiration of the Due Diligence Period; provided, that (x) Purchaser shall not have the right to disapprove any consent or approval that Seller is not entitled to withhold under a Lease and (y) prior to the expiration of the Due Diligence Period, any Purchaser consent or approval requested by Seller pursuant to this clause (6) shall be deemed to have been given if Purchaser shall fail to respond to such request within three (3) business days after its receipt of written request therefor from Seller.
 
(7)   Seller shall not transfer, issue, sell or dispose of any direct or indirect ownership or beneficial interests in Seller, and shall not permit the transfer, issuance, sale or disposition of any direct or indirect ownership or beneficial interests in Seller.  Seller shall not grant direct or indirect options, warrants, calls or other rights to purchase or otherwise acquire any direct or indirect ownership interests in Seller or permit such grant or acquisition.
 
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(8)   Seller shall not sell, mortgage, pledge, hypothecate or otherwise transfer or dispose of all or any part of the Property.
 
(9)   Seller shall not effect any liquidation, dissolution, recapitalization, reclassification or like change in the capitalization of Seller or enter into any merger or consolidation with any person.
 
(10)   Seller shall not amend its corporate organizational documents.
 
(11)   Seller shall not incur any indebtedness for borrowed money (other than the Buyer Loan) or make any loans.
 
(12)   Seller shall not acquire any material properties or assets.
 
(13)   Seller shall not initiate or settle any legal action or proceeding, other than settlements involving the payment of cash (and no ongoing restrictions that would affect the Property after Closing) for which Purchaser shall bear no financial responsibility.
 
(14)   Seller shall use commercially reasonable efforts to obtain from tenants under the Leases any subordination, non-disturbance and attornment agreements (each, an “ SNDA ”) that may be required by Purchaser’s lender.  Notwithstanding the foregoing, the parties agree that procurement of any or all of the SNDAs that may be reasonably required by Purchaser’s lender shall not be a condition precedent to Purchaser’s obligation to close.
 
(15)   Seller shall pursue completion of all construction projects at the Property, and after the Contract Date, Seller shall not commence any new material construction projects without first obtaining Purchaser’s prior written consent, unless required by the Leases.
 
(e)   Estoppels .
 
(1)   It shall be a condition precedent to Purchaser’s obligation to make the Buyer Loan and subsequently consummate the Closing that Purchaser receive and reasonably approve (i) tenant estoppel certificates from the Major Tenants (hereinafter defined) and such additional tenants under Leases that, exclusive of Major Tenants, occupy at least 75% of the remaining leased square footage of the Property (each individually, a “ Tenant Estoppel ” and collectively, the “ Required Tenant Estoppels ”), on the form of the Tenant Estoppel certificate attached as Exhibit K-1 or on the form promulgated by the tenant (if a national tenant) or required by the applicable Lease, and (ii) estoppel certificates from each person that is subject to a reciprocal easement and operating agreement (or similar agreement) (each, an “ REA ”) affecting the Property (each, an “ REA Estoppel ” and collectively, the “ Required REA Estoppels ”), on the form of the REA Estoppel certificate attached as Exhibit K-2 or on the form required by the applicable REA.  All Required Tenant Estoppels and Required REA Estoppels (collectively, the “ Required Estoppels ”) shall be dated after the date of this Agreement (but not more than one (1) monthly pay period prior to the Initial Closing Date and the Final Closing Date, as applicable), in the form prescribed by this Section 6(e).
 
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(2)   As used herein, the “ Major Tenants ” shall mean King Soopers, Big Lots, Conditioning Spa, Ben’s Furniture, Ace Hardware and Jo Ann Fabrics.  Notwithstanding the foregoing, and except as otherwise provided below, if despite Seller’s commercially reasonable efforts, Seller is unable to obtain a Tenant Estoppel with respect to any tenants other than Major Tenants, Seller may, for purposes of satisfying the 75% threshold above, elect to deliver to Purchaser at Closing an estoppel certificate executed by Seller (a “ Seller Estoppel ”) with respect to such tenants for up to 10% of such other Leases, which Seller Estoppel shall be on the same form as the Required Tenant Estoppels but executed to Seller’s Knowledge, and each Seller Estoppel shall be counted toward the Required Tenant Estoppels.
 
(3)   Purchaser shall have five (5) business days after receipt of any Required Estoppel to disapprove of such Required Estoppel; it being understood that if Purchaser does not timely disapprove of any Required Estoppel within such five (5) business day period, then Purchaser shall be deemed to have approved such Required Estoppel.  If Purchaser does not receive the Required Estoppels on or before the Initial Closing Date (and, if Purchaser does not receive updated Required Estoppels on or before the Final Closing Date, as applicable), Purchaser may either (i) terminate this Agreement in writing delivered to Seller on or before the Initial Closing Date (or the Final Closing Date, as applicable), in which event the Earnest Money shall be returned to Purchaser and neither party shall have any further obligations hereunder other than those which expressly survive the Closing or earlier termination of this Agreement, or (ii) waive the foregoing condition precedent and proceed with the Closing (or the Buyer Loan, as applicable).
 
(f)   Interim Property Management .  The Property is currently managed by Property Manager pursuant to the terms of that certain Property Management Agreement, dated July 1, 2003, between Seller and Property Management (as amended and extended, the “ Property Management Agreement ”).  In consideration of Purchaser’s agreement to have Property Manager continue as property manager during the period between the Initial Closing Date and the Final Closing Date, prior to the expiration of the Due Diligence Period, Seller, Purchaser and Property Manager shall enter into a side letter agreement which shall, among other things, address the following matters relating to property management at the Property:
 
(1)   Property Manager shall no longer act as leasing agent for the Property, and shall not receive any leasing fees, commissions and/or override payments in connection with any new leases, or amendments, extensions or expansions of existing leases, at the Property (other than the automatic lease extension by Burger King); additionally, other than the base monthly Management Fee (as defined in the Property Management Agreement), no other fees, commissions or compensation shall be paid by Seller to Property Manager (except travel expenses to the Property);
 
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(2)   Property Manager, for itself and its affiliates, agrees that it shall not solicit or encourage any tenants at the Property to enter into any lease of retail space in any other property which is owned or managed by Property Manager, or any Affiliate of Manager;
 
(3)   On the Initial Closing Date, Seller and Purchaser shall have approved the Annual Budget (as defined in the Property Management Agreement) and all other capital improvement projects (and budgets relating thereto); Property Manager shall operate, manage and maintain the Property in strict compliance with the Annual Budget, and shall obtain the consent and approval of Seller and Purchaser for all deviations, re-allocations or amendments to such Annual Budget in excess of $5,000, per line-item, or $25,000 in the aggregate;
 
(4)   Property Manager shall continue to use its best efforts to collect all payments from tenants under Leases and immediately deposit such collections into an operating account pursuant to the terms of the Buyer Loan Documents;
 
(5)   All information and reports delivered by Property Manager to Seller pursuant to the Property Management Agreement, together with all information reasonably requested by Purchaser from time to time, shall be simultaneously delivered by Property Manager to Purchaser; and
 
(6)   Any default by Property Manager under this side letter shall constitute an immediate event of default under the Buyer Loan Documents and this Agreement.
 
7.   Due Diligence Period .
 
(a)   Purchaser shall have a period ending at 5:00 p.m Chicago time on the date which is thirty (30) days after the Contract Date (the “ Due Diligence Period ”), i.e. December 10, 2014, to examine, inspect, and investigate the Property and, in Purchaser’s sole judgment and discretion, to determine whether Purchaser wishes to, proceed to purchase the Property. Purchaser may terminate this Agreement for any reason or no reason by giving written notice of such termination to Seller on or before the expiration of the Due Diligence Period. If this Agreement is terminated pursuant to this Section 7(b), the Earnest Money shall be immediately refunded to Purchaser, and neither party shall have any further liability or obligation to the other under this Agreement except for the indemnity provisions set forth in Section 7(c) of this Agreement and any other provision of this Agreement that is expressly intended to survive the termination of this Agreement.  If Purchaser does not timely elect to terminate this Agreement, then Purchaser shall be deemed to have elected to proceed to purchase the Property and this Agreement shall continue in full force and effect.  If Purchaser elects to proceed (or is deemed to have elected to proceed) to purchase the Property, then except as otherwise expressly provided in this Agreement, the Earnest Money shall be non-refundable.
 
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(c)   Subject to the rights of tenants under the Leases, Purchaser shall have reasonable access to the Premises for the purpose of conducting on a non-destructive basis, surveys, architectural, engineering, non-invasive geo-technical and environmental inspections and tests, and any other inspections, studies, or tests reasonably required by Purchaser.  Purchaser shall give Seller not less than twenty-four (24) hours prior telephonic notice before entering onto the Premises to perform inspections or tests, and in the case of tests (i) Purchaser shall specify to Seller the precise nature of the test to be performed, and (ii) Seller may require, as a condition precedent to Purchaser’s right to perform any such test, that Purchaser deliver Seller evidence of public liability and other appropriate insurance naming Seller as an additional insured thereunder.  Such examination of the physical condition of the Premises may include an examination for the presence or absence of hazardous or toxic materials, substances or wastes (collectively, “ Hazardous Materials ”), which shall be performed or arranged by Purchaser at Purchaser’s sole expense.  Such examination shall be limited to non-invasive, non-destructive methods, and no Phase II environmental inspection or other invasive inspection or sampling of soil or materials, including without limitation construction materials, either as part of the Phase I inspection or any other inspection, shall be performed without the prior written consent of Seller, which may be withheld in its sole and absolute discretion.  Purchaser shall keep the Premises free and clear of any liens arising from Purchaser’s test and inspections at the Property and will indemnify, defend and hold Seller and the Seller Related Parties (defined below) harmless from and against all losses, costs, damages, claims, liabilities and expenses (including reasonable attorneys’ fees and court costs) related to injury to persons or damage to property asserted against or incurred by any of such parties as a direct result of any such entry by, or tests and inspections of, Purchaser, its agents, employees or representatives.  If any inspection or test disturbs the Premises and Purchaser does not acquire the Property, Purchaser will restore the Premises to substantially the same condition as existed immediately prior to any such inspection or test.  Except with Seller’s prior written consent, which consent will not be unreasonably be withheld, conditioned or delayed, Purchaser shall not contact tenants under any Leases at the Property. Any Proprietary Information provided to Purchaser by Seller with respect to the Premises shall be subject to the provisions of Section 7(d) of this Agreement.  The obligations of Purchaser under this Section 7(c) shall survive the termination of the Agreement.
 
(d)   Unless Seller specifically and expressly otherwise agrees in writing, Purchaser agrees that (a) the results of all inspections, analyses, studies and similar reports relating to the Property prepared by or for Purchaser utilizing any information acquired in whole or in part through the exercise of Purchaser’s inspection rights; and (b) all other non-public information regarding the Property of whatsoever nature made available to Purchaser by Seller or Seller’s agents or representatives (collectively, the “ Proprietary Information ”) is confidential and shall not be disclosed to any other person except those assisting Purchaser with the transaction, or Purchaser’s lender, if any, and then only upon Purchaser making such persons aware of the confidentiality restriction (in which event Purchaser shall be responsible for such person’s breach of such confidentiality restrictions, as if such breach were committed by Purchaser), or as otherwise required by applicable law.  Purchaser agrees not to use or allow to be used any such information for any purpose other than to determine whether to proceed with the contemplated purchase, or if Closing is consummated, in connection with the operation of the Property post-Closing.  Further, if the purchase and sale contemplated hereby fails to close for any reason other than a Seller default, Purchaser agrees to return to Seller, or cause to be returned to Seller, all Proprietary Information (except to the extent Purchaser is required to retain any such Proprietary Information for legal, regulatory or compliance purposes).  Notwithstanding any other term of this Agreement, the provisions of this Section 7(d) shall survive Closing or the termination of this Agreement for a period of one (1) year.
 
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8.   As Is Sale; Release.
 
(a)   By Closing this transaction, Purchaser will be deemed to have acknowledged and agreed that it has been given a full opportunity to inspect and investigate each and every aspect of the Property, either independently or through agents of Purchaser’s choosing, including, without limitation:
 
(1)   All matters relating to title, together with all governmental and other legal requirements such as taxes, assessments, zoning, use permit requirements and building codes.
 
(2)   The physical condition of the Premises, including, without limitation, the interior, the exterior, the structure, the paving, the utilities, environmental and all other physical and functional aspects of the Premises.
 
(3)   Any easements and/or access rights affecting the Premises, whether reflected in the Title Commitment, the Survey or in any other survey obtained by or delivered to Purchaser.
 
(4)   The Leases and all matters in connection therewith, including, without limitation, the ability of the tenants thereunder to pay the rent.
 
(5)   Any other documents or agreements of significance affecting the Property and furnished to Purchaser.
 
(b)   PURCHASER SPECIFICALLY ACKNOWLEDGES AND AGREES THAT SELLER IS SELLING AND PURCHASER IS PURCHASING THE PREMISES ON AN “AS IS WITH ALL FAULTS” BASIS AND THAT, EXCEPT AS EXPRESSLY SET FORTH IN SECTIONS 6(a) OR 20 OF THIS AGREEMENT, PURCHASER IS NOT RELYING ON ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, FROM SELLER, ITS AGENTS, OR BROKERS AS TO ANY MATTERS CONCERNING THE PROPERTY, INCLUDING WITHOUT LIMITATION:  (I) THE QUALITY, NATURE, ADEQUACY AND PHYSICAL CONDITION OF THE PREMISES, INCLUDING, BUT NOT LIMITED TO THE STRUCTURAL ELEMENTS, FOUNDATION, ROOF, APPURTENANCES, ACCESS, LANDSCAPING, PARKING FACILITIES AND THE ELECTRICAL, MECHANICAL, HVAC, PLUMBING, SEWAGE, AND UTILITY SYSTEMS, FACILITIES AND APPLIANCES, (II) THE QUALITY, NATURE, ADEQUACY, AND PHYSICAL CONDITION OF SOILS, GEOLOGY AND ANY GROUNDWATER, (III) THE EXISTENCE, QUALITY, NATURE, ADEQUACY AND PHYSICAL CONDITION OF UTILITIES SERVING THE PREMISES, (IV) THE DEVELOPMENT POTENTIAL OF THE PREMISES, AND THE PREMISES’ USE, HABITABILITY, MERCHANTABILITY, OR FITNESS, SUITABILITY, VALUE OR ADEQUACY OF THE PREMISES FOR ANY PARTICULAR PURPOSE, (V) THE ZONING OR OTHER LEGAL STATUS OF THE PREMISES OR ANY OTHER PUBLIC OR PRIVATE RESTRICTIONS ON USE OF THE PREMISES, (VI) THE COMPLIANCE OF THE PREMISES OR ITS OPERATION WITH ANY APPLICABLE CODES, LAWS, REGULATIONS, STATUTES, ORDINANCES, COVENANTS, CONDITIONS AND RESTRICTIONS OF ANY GOVERNMENTAL OR QUASI-GOVERNMENTAL ENTITY OR OF ANY OTHER PERSON OR ENTITY, (VII) THE PRESENCE OR ABSENCE OF HAZARDOUS MATERIALS ON, UNDER OR ABOUT THE PREMISES OR THE ADJOINING OR NEIGHBORING PROPERTY, (VIII) THE QUALITY OF ANY LABOR AND MATERIALS USED IN ANY IMPROVEMENTS ON THE PREMISES, (IX) THE LEASES AND ANY OTHER AGREEMENTS AFFECTING THE PREMISES AND (XI) THE ECONOMICS OF ANY PAST OR FUTURE OPERATIONS OF THE PROPERTY.
 
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(c)   WITHOUT LIMITING THE ABOVE, PURCHASER ON BEHALF OF ITSELF AND ITS SUCCESSORS AND ASSIGNS WAIVES ITS RIGHT TO RECOVER FROM, AND FOREVER RELEASES AND DISCHARGES, SELLER, SELLER’S SHAREHOLDERS, AGENTS, INVESTMENT ADVISORS AND AFFILIATES AND THE MEMBERS, PARTNERS, TRUSTEES, SHAREHOLDERS, DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS OF EACH OF THEM, AND THEIR RESPECTIVE HEIRS, SUCCESSORS, PERSONAL REPRESENTATIVES AND ASSIGNS (COLLECTIVELY, THE “ SELLER RELATED PARTIES ”), FROM ANY AND ALL DEMANDS, CLAIMS, LEGAL OR ADMINISTRATIVE PROCEEDINGS, LOSSES, LIABILITIES, DAMAGES, PENALTIES, FINES, LIENS, JUDGMENTS, COSTS OR EXPENSES WHATSOEVER (INCLUDING, WITHOUT LIMITATION, ATTORNEYS’ FEES AND COSTS), WHETHER DIRECT OR INDIRECT, KNOWN OR UNKNOWN, FORESEEN OR UNFORESEEN, THAT MAY ARISE ON ACCOUNT OF OR IN ANY WAY BE CONNECTED WITH THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT OF 1980, AS AMENDED (42 U.S.C. SECTION 6901, ET SEQ.), THE RESOURCES CONVERSATION AND RECOVERY ACT OF 1976 (42 U.S.C. SECTION 6901, ET SEQ.), THE CLEAN WATER ACT (33 U.S.C. SECTION 1251, ET SEQ.), THE SAFE DRINKING WATER ACT (14 U.S.C. SECTION 1401, ET SEQ.), THE HAZARDOUS MATERIALS TRANSPORTATION ACT (49 U.S.C. SECTION 1801, ET SEQ.), THE TOXIC SUBSTANCE CONTROL ACT (15 U.S.C. SECTION 2601, ET SEQ.), ANY SIMILAR ENVIRONMENTAL STATE OR LOCAL STATUTES, REGULATIONS, RULES OR REQUIREMENTS, AND ANY FEDERAL, STATE OR LOCAL ENVIRONMENTAL STATUTES, REGULATIONS, RULES OR REQUIREMENTS RELATING TO TOXIC MOLDS.  THE PROVISIONS OF THIS SECTION 8(c) SHALL SURVIVE CLOSING AND SHALL NOT BE MERGED INTO THE CLOSING DOCUMENTS.
 
9.   Survival of Representations, Warranties and Covenants after Closing; Limitation of Seller’s Liability .  All representations, warranties and covenants of Seller in this Agreement (and in any document or agreement entered into in connection with this Agreement) shall survive the Closing for a period of twelve (12) months after Closing (the “ Limitation Period ”).
 
(a)   Purchaser shall provide actual written notice to Seller of any breach of any of Seller’s warranties or representations or covenants of which Purchaser acquires knowledge, through any means, at any time after the Final Closing Date but prior to the expiration of the Limitation Period, and shall allow Seller thirty (30) days within which to cure such breach, or, if such breach is susceptible of cure but cannot reasonably be cured within thirty (30) days, an additional reasonable time period required to effect such cure so long as such cure has been commenced within such thirty (30) days and diligently pursued.  If Seller fails to cure such breach after actual written notice and within such cure period (as extended), Purchaser’s sole remedy shall be an action at law for damages as a consequence thereof, which must be commenced, if at all, within three (3) months after the expiration of the Limitation Period.
 
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(b)   Notwithstanding anything in this Section 9 to the contrary, (i) Purchaser shall not be entitled to make a claim against Seller for a violation of the representations, warranties, and covenants unless the amount of damages to Purchaser equals or exceeds
 
Twenty Five Thousand Dollars ($25,000) in any one instance and (ii) the cumulative, maximum amount of liability that Seller shall have to Purchaser for breaches of the representations, warranties and covenants under this Agreement and in any document executed by Seller in connection with this Agreement shall not exceed One Million Fifty Thousand and No/100 Dollars ($1,050,000).
 
10.   Closing .  The Closing shall be accomplished through the escrow referred to in this Section 10, and shall take place on May 28, 2015   (the “ Final Closing Date ”), provided that all conditions precedent to the Closing have been fulfilled or have been waived in writing by the respective party entitled to waive same.  On or prior to the date set for Closing under this Agreement, the parties shall establish the usual form of deed and money escrow with Title Insurer.  Counsel for the respective parties are hereby authorized to execute the escrow trust instructions as well as any amendments thereto.
 
11.   Conditions to Purchaser’s Obligation to Close .
 
(a)   Purchaser shall not be obligated to proceed with the Closing unless and until each of the following conditions has been either fulfilled or waived in writing by Purchaser:
 
(1)   This Agreement shall not have been previously terminated pursuant to any provision hereof;
 
(2)   Purchaser receives updated Required Estoppels as contemplated by Section 6(e);
 
(3)   Seller shall be prepared to deliver or cause to be delivered to Purchaser all items to be delivered to Purchaser at the Closing pursuant to Section 14, Section 16 or any other provision of this Agreement; and
 
(4)   No Seller (i.e. borrower) default exists under the Buyer Loan Documents.
 
(b)   In the event that any of the foregoing conditions shall not have been fulfilled on or before the Final Closing Date, then subject to the provisions of Section 18(b) hereof, Purchaser may elect, upon notice to Seller, to terminate this Agreement, in which event the Earnest Money shall be returned to Purchaser, and neither party shall have any further liability or obligation to the other, except for the provisions of this Agreement which are expressly stated to survive the termination of this Agreement.
 
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12.   Conditions to Seller’s Obligation to Close .
 
(a)   Seller shall not be obligated to proceed with the Closing unless and until each of the following conditions has been fulfilled or waived in writing by Seller:
 
(1)   Purchaser shall be prepared to deliver to Seller all items to be delivered to Seller at the Closing pursuant to Section 15 and Section 16 or any other provision of this Agreement; and
 
(2)   This Agreement shall not have been previously terminated pursuant to any provision hereof.
 
(b)   In the event that any of the foregoing conditions shall not have been fulfilled on or before the time for Closing hereunder, then Seller may elect, upon notice to Purchaser, to terminate this Agreement, in which event the Earnest Money shall be returned to Purchaser, and neither party shall have any further liability or obligation to the other, except for the provisions of this Agreement which are expressly stated to survive the termination of this Agreement.
 
13.   Title Insurance .  Within five (5) days after the Contract Date, Seller shall deliver to Purchaser (i) a commitment for the Loan Policy described in Section 5(c) above from Title Insurer, as Order No. FCC25125938 (970)-282-3649, and a commitment for the Title Policy described in Section 13(b) below (collectively, the “ Title Commitment ”), together with all of the underlying documentation described in such Title Commitment and (ii) Seller’s most recent survey of the Premises dated October 15, 2014 and performed by Point Consulting, LLC (the “ Survey ”).
 
(a)   Seller, at its sole expense (other than the cost of any endorsements requested by Purchaser, which shall be paid by Purchaser pursuant to Section 19 hereof), shall cause to be delivered to Purchaser at Closing an owner’s standard coverage title insurance policy (the “ Title Policy ”) issued by Title Insurer, dated the day of Closing, in the full amount of the Purchase Price, the form of which shall be ALTA Owner’s Policy (6-17-06) (or other form required or promulgated pursuant to applicable state insurance regulations), subject only to the Permitted Exceptions (defined below). The Title Policy may contain any endorsements reasonably requested by Purchaser; provided, that if the Title Insurer is unable to provide any of the foregoing endorsements to Purchaser’s Title Policy, Purchaser shall nevertheless be obligated to proceed to the Closing of the transactions contemplated by this Agreement.
 
(b)   Prior to the expiration of the Due Diligence Period, Purchaser shall review title to the Premises as disclosed by the Title Commitment and the Survey, and satisfy itself as to the availability from the Title Insurer of the Loan Policy, the Title Policy and all requested endorsements to the Loan Policy and the Title Policy.  Purchaser shall have the right, at its sole cost and expense, to obtain an update of the Survey at any time prior to the expiration of the Due Diligence Period.
 
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(c)   Seller shall have no obligation to remove or cure title objections, except for (1) liens of an ascertainable amount created by Seller, which liens Seller shall cause to be released on or prior to the Initial Closing Date (with respect to the Loan Policy) and on or prior to the Final Closing Date (with respect to the Title Policy), or affirmatively insured over by the Title Insurer, and (2) any exceptions or encumbrances to title which are created by Seller after the date of this Agreement without Purchaser’s consent. Any additional title costs incurred by Seller in order to cause the Title Insurer to affirmatively insure any objectionable matters which Seller is obligated to cure shall be at Seller’s expense.  In addition, Seller will provide the Title Insurer with a customary ALTA statement, personal undertaking or owner’s affidavit (collectively, an “ Owner’s Affidavit ”), in form and substance reasonably acceptable to Seller, which will permit the Title Insurer to remove the standard “mechanics lien” and “GAP” exceptions.
 
(d)   “ Permitted Exceptions ” shall mean: (1) any exception arising out of an act of Purchaser or its representatives, agents, employees or independent contractors; (2) zoning and subdivision ordinances and regulations; (3) the specific exceptions in the Title Commitment that the Title Insurer has not agreed to insure over or remove from the Title Commitment as of the end of the Due Diligence Period and that Seller is not required to remove as provided above; (4) real estate taxes and assessments assessed in the calendar year of Closing not yet due; (5) rights of tenants under the Leases as tenants only, without any options or other rights to purchase any portion of the Property; and (6) any liens created by the Buyer Loan Documents.
 
14.   Items to be Delivered to Purchaser at Closing .  At Closing, Seller shall deliver or cause to be delivered to Purchaser each of the following instruments and documents:
 
(a)   Deed .  The Deed, in the form attached hereto as Exhibit B .
 
(b)   Bill of Sale .  The Bill of Sale covering the tangible Personal Property, in the form attached hereto as Exhibit C .
 
(c)   The Title Policy .  The Title Policy, which may be delivered after the Closing if at the Closing the Title Insurer issues a currently effective, duly-executed “marked-up” Title Commitment and irrevocably commits in writing to issue the Title Policy in the form of the “marked-up” Title Commitment after the Closing.
 
(d)   Assignment of Leases .  The Assignment of Leases, in the form attached hereto as Exhibit  D .
 
(e)   Assignment of Intangible Property .  The Assignment of Intangible Property covering the intangible Personal Property, in the form attached hereto as Exhibit G .
 
(f)   Transfer Tax Declarations .  Original copies of any required real estate transfer tax or documentary stamp tax declarations executed by Seller or any other similar documentation required to evidence the payment of any tax imposed by the state, county and city on the transaction contemplated hereby.
 
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(g)   FIRPTA .  An affidavit, in the form attached hereto as Exhibit F , stating Seller’s U.S. taxpayer identification number and that Seller is a “United States person”, as defined by Internal Revenue Code Section 7701(a)(30).
 
(h)   Owner’s Affidavit .  The Owner’s Affidavit materials referred to in Section 13(c) above.
 
(i)   State Affidavit .  A duly executed affirmation reasonably satisfactory to the Title Insurer or the purposes of satisfying the Title Insurer that the transaction is exempt from the withholding requirements of Colorado Revised Statutes, Section 39-22-604.5.
 
(j)   Termination of Property Management .  Evidence of termination of any existing property management agreements affecting the Property, at no cost, liability or expense to Purchaser.
 
(k)   Other Deliveries .  Such other documents and instruments as may be required by any other provision of this Agreement or as may reasonably be required to carry out the terms and intent of this Agreement.
 
15.   Items to be Delivered to Seller at Closing .  At Closing, Purchaser shall deliver or cause to be delivered to Seller each of the following instruments, documents and amounts:
 
(a)   Purchase Price .  The Purchase Price calculated pursuant to Section 5 hereof, subject to adjustment and proration as provided in Section 17 below.
 
(b)   Transfer Tax Declarations .  Original copies of any required real estate transfer tax or documentary stamp tax declarations executed by Purchaser or any other similar documentation required to evidence the payment of any tax imposed by the state, county and city on the transaction contemplated hereby.
 
(c)   Assignment of Leases .  A counterpart of the Assignment of Leases, in the form attached hereto as Exhibit D .
 
(d)   Assignment of Intangible Property .   A counterpart of the Assignment of Intangible Property, in the form attached hereto as Exhibit G .
 
(e)  Promissory Note .  The original note evidencing the Buyer Loan marked “PAID” and original deed of trust securing the Buyer Loan.
 
(f)   Other Documents .  Such other documents and instruments as may be required by any other provision of this Agreement or as may reasonably be required to carry out the terms and intent of this Agreement.
 
16.   Documents to be Delivered by Seller and Purchaser at Closing .  At Closing, Purchaser and Seller shall deliver or cause to be delivered each of the following instruments and documents:
 
(a)   Escrow Instructions .  Escrow instructions (as described in Section 10.
 
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(b)   Settlement Statement .  A fully executed settlement statement approved by Purchaser and Seller.
 
(c)  Notice to Tenants .  Duly executed notices to the tenant under the Leases.
 
17.   Pro-rations and Adjustments .
 
(a)   General .  The following shall be prorated as of the Final Closing Date and the Purchase Price shall be adjusted accordingly at Closing:  (a) Rents and any other amounts actually collected from tenants and other persons using or occupying the Property as of the Final Closing Date; (b) sewer charges, utility charges (utility charges shall be prorated based on the last reading of meters prior to Closing performed at Seller’s request, if possible) and normally prorated operating expenses actually billed or paid as of the Final Closing Date; and (c) amounts owed by Seller or paid under the service contracts described in this Agreement as of the Final Closing Date.  Within one (1) year after the Closing, Purchaser and Seller will make a further adjustment for such rents or charges which may have accrued or been incurred prior to the Final Closing Date, but not billed or paid at that date.  Purchaser shall for a period of ninety (90) days after Closing use commercially reasonable efforts (not to include commencing any eviction action or other litigation to collect such delinquency) to collect all rent or other amounts owed for the period prior to Closing.  All rent received by Purchaser or Seller after the Final Closing Date shall be applied first to current rentals, then to delinquent rents accruing in the month of Closing and then, to the extent the applicable tenant identifies such rent as attributable to the period prior to Closing, to delinquent rentals accruing prior to the Final Closing Date.  The agreements of Seller and Purchaser set forth in this Section 17 shall survive the Closing.
 
(b)   Pass-Through Expenses .  Certain of the Leases contain tenant obligations to pay for taxes, common area expenses, operating expenses and/or additional charges for any other nature relating to the Property and/or certain portions thereof (collectively, the “ Charges ”).  Purchaser and Seller acknowledge and agree that Charges which Seller has heretofore collected from tenants at the Property for calendar year 2014 from January 1, 2014, through and including the Final Closing Date (“ Seller’s Reconciliation Period ”), have not yet been reconciled with the tenants to the extent Seller’s recovery of such expenses from the tenants for such period exceed or was less than the actual amount of such expenses for such period (the “ Tenant Reconciliation ”).  In connection with the Tenant Reconciliation, the parties agree that (a) within a reasonable time after Closing, Seller shall deliver to Purchaser the data reasonably supporting the Charges that Seller collected from the tenants during Seller’s Reconciliation Period and the amount of Charges actually paid by Seller during Seller’s Reconciliation Period, and (b) on or before March 31, 2015, Purchaser shall be responsible for preparing the final Tenant Reconciliation (subject to Seller’s reasonable approval with respect to Seller’s Reconciliation Period) strictly in accordance with the terms and conditions of the applicable Leases and, to the extent applicable, either reimbursing or billing tenants accordingly.  If the Tenant Reconciliation for Seller’s Reconciliation Period shows that amounts collected during Seller’s Reconciliation Period were more than the amount of charges actually paid by Seller during Seller’s Reconciliation Period, then Seller shall reimburse such tenant to the extent of any over-payment of such Charges actually received by Seller for Seller’s Reconciliation Period.  If it is determined that tenant has underpaid to Seller any portion of the Charges for Seller’s Reconciliation Period, Purchaser shall make good faith attempts to collect the amount of any under-payment of such Charges from such tenant, and shall, upon receipt, immediately deliver such amount to Seller.
 
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(c)   Leasing Costs .  Leasing commissions, finder’s fees, and tenant improvement costs shall be paid in full by Seller for each Lease, or any amendment, extension or renewals of any Lease, executed by Seller prior to the Contract Date.  Leasing commissions, finder’s fees and tenant improvement costs and legal fees for Leases, or any amendment, extension or renewals of Leases, in each case executed by Seller or otherwise entered into on or after the Contract Date in accordance with Section 6(d)(6), shall be paid in full by Purchaser, and Purchaser shall reimburse Seller to the extent Seller has paid such leasing commissions, finder’s fees, tenant improvement costs and/or legal fees prior to Closing.  In connection with the foregoing, to the extent that Purchaser is responsible for paying a leasing commission that will be payable after Closing, then at Closing, Seller shall assign the rights and benefits, and Purchaser shall assume the obligations, under the brokerage agreements related to the commissions.
 
(d)   Taxes and Assessments .  All non-delinquent real and personal property taxes, assessments and any other governmental or quasi-governmental impositions of any kind on or relating to the Property shall be prorated to the Final Closing Date based on the most recent and available assessed valuations, mill levies and taxes available; provided, however, if real or personal property taxes are estimated and not known, or supplemental taxes are assessed, then once known, after Closing, Seller and Purchaser promptly shall pay to the other any amount required as a result of such adjustments.  Prior to Closing, Seller shall pay all taxes and special assessments on the Property as and when they become due and prior to delinquency.  All assessments, for all special improvements installed and due and payable as of the Final Closing Date and any impact or similar fees imposed prior to the Final Closing Date shall, at Purchaser’s option, either be (i) paid by Seller at Closing, or (ii) credited against the Purchase Price.
 
(f)   Construction Costs .  Purchaser shall receive a credit at Closing in an amount equal to 110% of the then-remaining unfunded construction costs based upon the budgeted costs set forth on Exhibit E .
 
(g)   Other Deposits .  Seller shall be entitled to the return of all bonds, deposits, letters of credit, set aside letters or other similar items, if any, that are outstanding with respect to the Premises that have been provided by Seller or any of its affiliates, agents or advisors to any governmental agency, public utility or similar entity.  Purchaser shall be responsible for replacing and/or making any such required deposits.
 
(h)   Pro-rations Method .  If the Purchase Price is received by Seller’s depository bank in time to credit to Seller’s account on the Final Closing Date, the day of Closing shall belong to Purchaser and all pro-rations hereinafter provided to be made as of the Closing shall each be made as of the end of the day before the Final Closing Date.  If the cash portion of the Purchase Price is not so received by Seller’s depository bank on the Final Closing Date, then the day of Closing shall belong to Seller and such proration shall be made as of the end of the day that is the Final Closing Date.  In each such proration set forth above, the portion thereof applicable to periods beginning as of Closing shall be credited to Purchaser or charged to Purchaser as applicable and the portion thereof applicable to periods ending as of Closing shall be credited to Seller or charged to Seller as applicable.
 
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18.   Default; Termination .
 
(a)   If Purchaser defaults in its obligation to (i) make the Buyer Loan or (ii) consummate the Closing, then provided Seller is not in default under this Agreement or the Buyer Loan Documents, Seller’s sole remedy shall be to terminate this Agreement by giving written notice thereof to Purchaser, whereupon the Earnest Money shall be retained by Seller as Seller’s sole and exclusive remedy, subject to the provisions of this Agreement that expressly survive a termination, including the right to collect attorneys’ fees and costs in any action to enforce this provision under Section 22(k) below; provided, that if such default occurs after the closing of the Buyer Loan, then Seller’s right to retain the Earnest Money shall be subject to Seller’s obligation to repay the Buyer Loan in full.
 
(b)   If Seller defaults hereunder, then provided Purchaser is not in default, Purchaser may, at its sole election, either:
 
(1)   Terminate this Agreement, whereupon the Earnest Money shall be promptly returned to Purchaser, and neither party shall have any further liability or obligation to the other, except for the provisions of this Agreement which are expressly stated to survive the termination of this Agreement; and
 
(2)   Demand a prompt return of the Earnest Money, and assert and seek judgment against Seller for specific performance.
 
Provided that the foregoing shall be Purchaser’s sole and exclusive remedies, and the exercise of one of such remedies by Purchaser shall be deemed an election of remedies, and shall preclude Purchaser from the exercise of the other such remedy.  Notwithstanding the foregoing, if specific performance of Seller’s obligation to convey the Property is not available to Purchaser due to an intentional act of Seller, or if, upon the exercise of its right to specific performance, Purchaser would not receive substantially the benefit of its bargain due to an intentional act of Seller, then in either such case, in addition to terminating this Agreement and getting its Earnest Money returned, Purchaser may seek actual and documented out-of-pocket damages.  This Section 18(b) shall survive the Closing or termination of this Agreement.
 
19.   Expenses .
 
(a)   Seller .  Title insurance premiums for the Title Policy (except any endorsements Purchaser requests (including extended coverage) or any charges in connection with any loan policy required by Purchaser’s lender), prepayment, breakage or similar costs or expenses payable in connection with the payoff of the Existing Loan, the Loan Policy (including endorsements), all recording fees respecting the recordable Buyer Loan Documents, transfer taxes payable upon recording of the recordable Buyer Loan Documents, and one-half (½) of the escrow fee shall be borne and paid by Seller.
 
(b)   Purchaser .  Any endorsements Purchaser requests for its Title Policy, any updates or additions to, or re-certifications of, the Survey, any charges in connection with any loan policy required by Purchaser’s lender, one-half (½) of the escrow fee, all recording fees respecting the Deed, transfer taxes payable upon recording of the Deed, and any other expenses incurred by Purchaser or its representatives in inspecting or evaluating the Property (including appraisals, environmental studies or engineering reports) shall be borne and paid by Purchaser.
 
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(c)   Other .  All other costs, charges, and expenses shall be borne and paid as provided in this Agreement, or in the absence of such provision, in accordance with local custom.
 
20.   Intermediaries .
 
(a)   Purchaser and Seller acknowledge and agree that CBRE, Inc., on behalf of Seller (“ Broker ”) has acted as broker in connection with this transaction.  Upon Closing, Seller agrees to pay all brokerage commissions due to Broker per Seller’s separate agreement with Broker.
 
(b)   Seller represents to Purchaser, and Purchaser represents to Seller, that except for Broker, there is no broker, finder, or intermediary of any kind with whom such party has dealt in connection with this transaction.  Except as expressly set forth above, if any claim is made for broker’s or finder’s fees or commissions in connection with the negotiation, execution or consummation of this Agreement or the transactions contemplated hereby, each party shall defend, indemnify and hold harmless the other party from and against any such claim based upon any statement, representation or agreement of such party, which obligation shall survive Closing.
 
21.   Destruction of Improvements .  If, prior to Closing, any of the improvements on the Premises are damaged or destroyed such that the cost of repair or replacement of such improvements is reasonably likely to exceed five percent (5%) of the Purchase Price, or would trigger the right of any Major Tenant to terminate its Lease (“ Material Damage ”) or a condemnation proceeding is commenced or threatened in writing by a governmental or quasi-governmental agency with the power of eminent domain which impairs the value of the Property by more than five percent (5%) of the Purchase Price, or would trigger the right of any Major Tenant to terminate its Lease (“ Material   Condemnation ”), then:
 
(1)   Purchaser may elect, within fourteen (14) days from and after said Material Damage, or notice of such Material Condemnation, by written notice to Seller, to terminate this Agreement, and if necessary the time of Closing shall be extended to permit such election.  In the event of an election to terminate, the Earnest Money shall be returned to Purchaser and, except for the provisions of this Agreement that expressly survive Closing or earlier termination of this Agreement, this Agreement shall be void and of no further force and effect, and neither party shall have any liability to the other by reason hereof; or
 
(2)   In the event Purchaser does not timely elect to terminate pursuant to subsection (1) above, the transaction contemplated hereby shall be closed without a reduction in the Purchase Price, and Seller shall assign to Purchaser Seller’s rights in any insurance proceeds or Material Condemnation award to be paid to Seller in connection with such Material Damage or Material Condemnation, and, in the case of Material Damage, Seller shall pay (or credit) to Purchaser an amount equal to the deductible under Seller’s policy of casualty insurance and Seller shall execute and deliver to Purchaser all required proofs of loss, assignments of claims and other similar items.  In such event, any title exception arising by reason of said damage, destruction or Material Condemnation shall be deemed a Permitted Exception.
 
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(3)   If, prior to Closing, any of the improvements on the Premises are taken, damaged or destroyed and such damage is not Material Damage or Material Condemnation, Purchaser shall remain obligated to close hereunder with no abatement in the Purchase Price.  At Closing, Seller shall assign to Purchaser Seller’s rights in any insurance or condemnation proceeds to be paid to Seller in connection with such damage or destruction, and Purchaser shall receive a credit against the Purchase Price in an amount equal to the deductible amount under Seller’s casualty insurance policy.
 
22.   General Provisions .
 
(a)   Entire Agreement .  This written Agreement, including all Exhibits attached hereto and documents to be delivered pursuant hereto, shall constitute the entire agreement and understanding of the parties, and there are no other prior or contemporaneous written or oral agreements, undertakings, promises, warranties, or covenants not contained herein.
 
(b)   Amendments in Writing .  This Agreement may be amended only by a written memorandum subsequently executed by all of the parties hereto.
 
(c)   Waiver .  No waiver of any provision or condition of this Agreement by any party shall be valid unless in writing signed by such party.  No such waiver shall be taken as a waiver of any other or similar provision or of any future event, act, or default.
 
(d)   Time of the Essence .  Time is of the essence of this Agreement.  In the computation of any period of time provided for in this Agreement or by law, any date falling on a Saturday, Sunday or legal holiday when banks are not open for business in Chicago, Illinois shall be deemed to refer to the next day which is not a Saturday, Sunday, or legal holiday when banks are open for business in Chicago, Illinois.
 
(e)   Severability .  In the event that any provision of this Agreement shall be unenforceable in whole or in part, such provision shall be limited to the extent necessary to render the same valid, or shall be excised from this Agreement, as circumstances require, and this Agreement shall be construed as if said provision had been incorporated herein as so limited, or as if said provision has not been included herein, as the case may be.
 
(f)   Headings .  Headings of sections are for convenience of reference only, and shall not be construed as a part of this Agreement.
 
(g)   Successors and Assigns .  This Agreement shall be binding upon and shall inure to the benefits of the parties hereto, and successors, and assigns, provided, however, that this Agreement may not be assigned by Purchaser without the prior express written consent of Seller.  Notwithstanding the foregoing, Purchaser may assign this Agreement, upon not less than two (2) business days prior written notice, but without Seller’s consent, to an affiliated entity controlled by or under common control with Parent Company, in which case, upon the assumption by such assignee of the obligations of Purchaser hereunder, Purchaser shall be released from all of its obligations under this Agreement.
 
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(h)   Notices .  All notices and other communications required or permitted hereunder shall be in writing and shall be mailed, or sent by Federal Express, UPS or other recognized overnight courier service for next business day delivery, or sent by electronic mail or facsimile transmission, to the parties as follows:
 
If to Seller:

720 University LLC
1801 Oakland Blvd, Suite 310
Walnut Creek, CA  94596
Attn:  John G. Waterbury
Phone:     (925) 932-5300
Facsimile:  (925) 932-5820
Email: john@johnwaterbury.com
 

with copy to:
 
Clark Williams and Matsunaka, LLC
2881 No. Monroe Ave.
Loveland, CO  80539
Attn:  Randy L. Williams, Attorney at Law
Phone:     (970) 669-8668
Facsimile:  (970) 667-7524
Email: rlwatty1@mindspring.com
 
If to Purchaser:
 
c/o Alberta Development Partners, LLC
5750 DTC Parkway, Suite 210
Greenwood Village, CO 80111
Attn:  Donald G. Provost
Facsimile:  (303) 771-4086
Email:  dgp@albdev.com
 
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with copy to:
 
Michael J. Baum
Greenberg Traurig LLP
77 W. Wacker Drive, Suite 3100
Chicago, Illinois  60601
Telephone: (312) 476-5043
Facsimile:  (312) 899-0414
Email: baumm@gtlaw.com
 
or to such additional or other persons, at such other address or addresses as may be designated by notice from Purchaser or Seller, as the case may be, to the other.  Notices by mail shall be sent by United States certified or registered mail, return receipt requested, postage prepaid, and shall be deemed given and effective three (3) business days following posting in the United States mails.  Notices by electronic mail or facsimile shall be deemed given and effective upon the delivery thereof.  Notices by overnight courier shall be deemed given and effective on the first business day following the delivery thereof to Federal Express, UPS or another recognized overnight courier service.
 
(i)   Governing Law .  This Agreement shall be governed in all respects by the internal laws of the State of Colorado.
 
(j)   Counterparts . This Agreement may be executed in any number of identical counterparts, any or all of which may contain the signatures of less than all of the parties, and all of which shall be construed together as but a single instrument. Signatures to this Agreement transmitted by fax or electronic transmission shall be valid and effective to bind the parties so signing and transmitting.
 
(k)   Attorneys Fees .  In the event of any action or proceeding brought by either party against the other under this Agreement, the prevailing party shall be paid all costs and expenses including its attorneys’ fees in such action or proceeding in such amount as the court may adjudge reasonable.  The prevailing party shall be determined by the court based upon an assessment of which party’s major arguments made or positions taken in the proceedings could fairly be said to have prevailed over the other party’s major arguments or positions on major disputed issues in the court’s decision.  If the party which shall have commenced or instituted the action, suit or proceeding shall dismiss or discontinue it without the concurrence of the other party, such other party shall be deemed the prevailing party.
 
(l)   Construction .  This Agreement shall not be construed more strictly against Seller merely by virtue of the fact that the same has been prepared by Seller or its counsel, it being recognized both of the parties hereto have contributed substantially and materially to the preparation of this Agreement.  All words herein which are expressed in the neuter gender shall be deemed to include the masculine, feminine and neuter genders and any word herein which is expressed in the singular or plural shall be deemed, whenever appropriate in the context, to include the plural and the singular.
 
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(m)   Reporting Obligations .  Seller and Purchaser hereby designate the Title Insurer to act as and perform the duties and obligations of the “reporting person” with respect to the transaction contemplated by this Agreement for purposes of 26 C.F.R. Section 1.6045-4(e)(5) relating to the requirements for information reporting on real estate transaction closed on or after January 1, 1991.  Seller, Purchaser and Title Insurer shall execute at Closing a Designation Agreement designating the Title Insurer as the reporting person with respect to the transaction contemplated by this Agreement.
 
(n)   Recording of Agreement .  A memorandum of this Agreement (the “ PSA Memorandum ”) shall be recorded in the appropriate public records on the Initial Closing Date immediately prior to the closing of the Buyer Loan, the form of which is attached hereto as Exhibit L .
 
(o)   Full Performance .  The delivery of the Deed by Seller and the delivery of possession of the Property to Purchaser, shall be deemed the full performance and discharge of every obligation on the part of the Seller to be performed hereunder, except those obligations of Seller which are expressly stated in this Agreement to survive the Closing.
 
(p)   1031 Exchange .  Seller and/or Buyer may, for the purpose of treating all or part of its sale or acquisition of the Property as a like-kind exchange of property under Section 1031 of Code, assign certain rights that it has under this Agreement, including its right to sell or acquire the Property pursuant to this Agreement, to one or more qualified intermediaries, and to provide notice of such assignment to the other party, provided that no such assignment shall release the assigning party from its obligations hereunder and no such assignment shall delay the Closing hereunder.  The non-assigning party shall not incur any costs in connection with such exchange.  The assigning party agrees to save, indemnify, protect and defend the other party (with counsel reasonably satisfactory to such other party) from and against and hold the other party harmless from any and all expenses and/or liabilities arising from such assignment and exchange and the other party shall not be required to take title to any other property.  The provisions of this Section 22(p) shall survive the Closing.
 
[SIGNATURE PAGE FOLLOWS]
 
 

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IN WITNESS WHEREOF, each party hereto has caused this Agreement to be duly executed as of the date(s) set forth below to be effective as of the day and year first above written.


SELLER:

720 UNIVERSITY, LLC,
a Wyoming limited liability company

By: /s/ John G. Waterbury
 
Name:  John G. Waterbury
 
Its:  Manager
 


PURCHASER:

ALBERTA DEVELOPMENT PARTNERS, LLC,
a Colorado limited liability company


By: /s/ Donald G. Provost
 
Name:  Donald G. Provost
 
Its:  Manager


CHI 65295724v7
 
S-1
 

LIST OF EXHIBITS
 
EXHIBITS
 
DESCRIPTIONS
EXHIBIT A
LEGAL DESCRIPTION
EXHIBIT B
FORM OF DEED
EXHIBIT C
FORM OF BILL OF SALE
EXHIBIT D
FORM OF ASSIGNMENT OF LEASES
EXHIBIT E
CONSTRUCTION PROJECTS
EXHIBIT F
FORM OF FIRPTA AFFIDAVIT
EXHIBIT G
FORM OF ASSIGNMENT OF INTANGIBLE PROPERTY
EXHIBIT H
LEASES/RENT ROLL/SECURITY DEPOSITS
EXHIBIT I
SERVICE CONTRACTS
EXHIBIT J
LEASING COMMISSIONS AND MANAGEMENT AGREEMENTS
EXHIBIT K-1
FORM OF TENANT ESTOPPEL
EXHIBIT K-2
FORM OF REA ESTOPPEL
EXHIBIT L
FORM OF MEMORANDUM OF PURCHASE AND SALE AGREEMENT

 


CHI 65295724v7
   


 
 
 

EXHIBIT A
 
LEGAL DESCRIPTION OF PREMISES
 
Lot 1, Suburban Subdivision,
City of Greeley, County of Weld,
State of Colorado






CHI 65295724v7
Exhibit A – Page 1
 


 
 
 

EXHIBIT B
 
FORM OF DEED
 


SPECIAL WARRANTY DEED

Recording requested by
and when recorded please return to:

Brownstein Hyatt Farber Schreck, LLP
410 Seventeenth Street, Suite 2200
Denver, CO  80202
Attn:  Rob Kaufmann, Esq.
______________________________________________________________________________


THIS SPECIAL WARRANTY DEED is made this _____ day of, 20__, by 720 UNIVERSITY, LLC, a Wyoming limited liability company (“ Grantor ”), in favor of ALBERTA DEVELOPMENT PARTNERS, LLC, a Colorado limited liability company (“ Grantee ”), which has an office at 5750 DTC Parkway, Suite 210, Greenwood Village, CO 80111.
 
WITNESSETH, That Grantor, for and in consideration of Ten and No/100 Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, has granted, bargained, sold and conveyed, and by these presents does grant, bargain, sell, convey and confirm, unto Grantee, its successors and assigns forever, all the real property, together with improvements, located in the County of Weld, State of Colorado, more particularly described on Exhibit 1 , attached hereto and incorporated herein by this reference.
 
TOGETHER with all and singular the hereditaments and appurtenances thereto belonging, or in anywise appertaining, and the reversion and reversions, remainder and remainders, rents, issues and profits thereof, and all the estate, right, title, interest, claim and demand whatsoever of Grantor, either in law or equity, of, in and to the above bargained premises, with the hereditaments, easements, rights of way and appurtenances, and with all of Grantor’s interest, if any, in and to any and all minerals, water, ditches, wells, reservoirs and drains, and all water, ditch, well, reservoir and drainage rights which are appurtenant to, located on, now or hereafter acquired under or above or used in connection with the property (collectively, the “ Property ”).
 
TO HAVE AND TO HOLD the said premises above bargained and described with the appurtenances, unto Grantee, its successors and assigns forever.  Grantor, for itself, and its successors and assigns, does covenant, grant, bargain and agree to and with the Grantee, its successors and assigns, that at the time of the ensealing and delivery of these presents, Grantor is well seized of the premises above conveyed, has good, sure, perfect, absolute and indefeasible estate of inheritance, in law, in fee simple, and has good right, full power and lawful authority to grant, bargain, sell and convey the same in manner and form as aforesaid, and that the same are free and clear from all former and other grants bargains, sales, liens, taxes, assessments, encumbrances and restrictions of whatever kind or nature whatsoever, except those matters set forth on Exhibit 2 , attached hereto and incorporated herein by this reference.
 
 
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Exhibit B – Page 1
 

 
 
 
The Grantor shall and will WARRANT AND FOREVER DEFEND the above-bargained premises in the quiet and peaceable possession of Grantee, its successors and assigns, against all and every person or persons claiming the whole or any part thereof BY, THROUGH OR UNDER Grantor, except those matters set forth on Exhibit 2 , attached hereto and incorporated herein by this reference.
 
IN WITNESS WHEREOF , Grantor has caused its name to be hereunto subscribed on the day and year first above written.

GRANTOR:


720 UNIVERSITY, LLC,
a Wyoming limited liability company

By:  _________________________                                                              
 
       John G. Waterbury
 
       Its: Manager
 


STATE OF                                            )
)  ss.
COUNTY OF                                        )

 
The foregoing instrument was acknowledged before me this _______ day of ________________, 201__, by John G. Waterbury, as Manager of 720 University, LLC, a Wyoming limited liability company.
 
WITNESS my hand and official seal.
 

My commission expires: ______________________________.

 
                _____________________________
 Notary Public
(NOTARIAL SEAL)


CHI 65295724v7
Exhibit B – Page 2
 

 
 
 

Exhibit 1 to Deed
 
LEGAL DESCRIPTION

Lot 1, Suburban Subdivision,
City of Greeley, County of Weld,
State of Colorado



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Exhibit B – Page 3
 

 
 
 

Exhibit 2 to Deed
 
PERMITTED EXCEPTIONS


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Exhibit B – Page 4
 


 
 
 

EXHIBIT C
 
FORM OF BILL OF SALE
 

BILL OF SALE


As of the ___ day of _______________, 2015, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, 720 UNIVERSITY, LLC, a Wyoming limited liability company (“ Seller ”), hereby sell, assign, transfer and set over to SPE, LLC, a Delaware limited liability company (“ Buyer ”), all of Seller’s right, title and interest, if any, in an to all Personal Property.  Seller warrants that it owns such Personal Property free and clear of liens and encumbrances of any persons claiming by, through or under Seller.    Except as expressly set forth in the immediately preceding sentence, Seller makes no warranties of any kind or nature whatsoever, express or implied, including without limitation any warranty of merchantability or fitness for a particular purpose, any and all such warranties being hereby expressly disclaimed .

This Bill of Sale is being delivered by Seller pursuant to that certain Real Estate Sale Agreement made and entered into as of November [__], 2014 (the “ Purchase Agreement ”). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Purchase Agreement.

[ The remainder of the page is intentionally blank; signature pages follow. ]


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Exhibit C – Page 1
 


 
 
 


IN WITNESS WHEREOF , the undersigned has duly executed and delivered this Bill of Sale as of the date first above written.


720 UNIVERSITY, LLC
a Wyoming Limited Liability Company


By:      _________________________           
Name: _________________________          
Title:   _________________________          


 


CHI 65295724v7
Exhibit C – Page 2
 


 
 
 

EXHIBIT D
 
FORM OF ASSIGNMENT OF LEASES

ASSIGNMENT AND ASSUMPTION OF LEASES
 AND SERVICE CONTRACTS

 
THIS ASSIGNMENT AND ASSUMPTION OF LEASES AND SERVICE CONTRACTS, made as of the _____ day of _____________, 2015 (the “ Closing Date ”), by and between 720 UNIVERSITY, LLC, a Wyoming limited liability company (“ Assignor ”), having an address at [c/o _________________], and [SPE, LLC], a Delaware limited liability company (“ Assignee ”), having an address at [_________________________].
 
W I T N E S S E T H :
 
WHEREAS, Assignor is the owner of certain real property located at 2604-2724 Eleventh Avenue, Greeley, Colorado, together with the Leases and the Personal Property (collectively, the “ Property ”).  All capitalized terms not defined herein shall have the meanings ascribed to them in that certain Real Estate Sale Agreement (the “ Agreement ”), dated as of November [   ], 2014 between Assignor, as seller, and [_______], an affiliate of Assignee, as purchaser; and
 
WHEREAS, in connection with the transfer and conveyance of the Property to Assignee:  (a) Assignor desires to assign to Assignee all of Assignor’s right, title and interest in and to (i) the leases set forth on Exhibit A attached hereto and made a part hereof (including any amendments, modifications, extensions and guaranties in relation to such leases, the “ Leases ”), (ii) the security deposits deposited by the tenants under the Leases (the “ Security Deposits ”), and (iii) the service contracts set forth on Exhibit B attached hereto and made a part hereof (the “ Service Contracts ”), and (b) Assignee desires to accept such assignment and to assume and perform all of Assignor’s obligations under the Leases and Service Contracts and with respect to the Security Deposits arising from and after the Closing Date.
 
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows:
 
Assignor hereby assigns, conveys and sets over unto Assignee all of Assignor’s right, title and interest in, to and under the Leases, the Security Deposits and Service Contracts from and after the Closing Date.
 
Assignee hereby accepts the foregoing assignment, acknowledges receipt of the Security Deposits (if any) and assumes and agrees to perform all of the obligations of Assignor under the Leases and Service Contracts and with respect to the Security Deposits arising from and after the Closing Date.

CHI 65295724v7
Exhibit D–Page 1
 


 
 
 
Assignor agrees to and hereby does defend, indemnify and hold Assignee harmless from and against any and all losses, claims, demands, suits, expenses (including, without limitation, reasonable attorneys’ fees and disbursements (whether or not incident to litigation) and court costs), damages, obligations and liabilities (including, without limitation, claims for personal injury, wrongful death or Property damage), direct, contingent or consequential, of any kind or nature, incurred by Assignee, caused by Assignor and arising or accruing with respect to the Leases, the Security Deposits and the Service Contracts for the period prior to the Closing Date during Assignor’s ownership of the Property, except as shall arise from the willful misconduct or gross negligence of Assignee, its agents or employees.
 
Assignee agrees that, from and after the Closing Date, Assignee shall and hereby does defend, indemnify and hold Assignor harmless from and against any and all losses, claims, demands, suits, expenses (including, without limitation, reasonable attorneys’ fees and disbursements (whether or not incident to litigation) and court costs), damages, obligations and liabilities (including, without limitation, claims for personal injury, wrongful death or Property damage), direct, contingent or consequential, of any kind or nature, incurred by Assignor, caused by Assignee and arising or accruing with respect to the Leases, the Security Deposits and the Service Contracts for the period from and after the Closing Date during Assignee’s ownership of the Property, except as shall arise from the willful misconduct or gross negligence of Assignor, its agents or employees.
 
Nothing contained herein shall affect (expressly or by implication) the rights and obligations of Assignee and Assignor under the Agreement.
 
The provisions of this Assignment and Assumption of Leases and Service Contracts shall be governed by, and construed in accordance with, the laws of the State in which the Property is located. This Assignment may be executed in counterparts, each of which shall constitute an original, but all together shall constitute one and the same Agreement.
 
[ The remainder of the page is intentionally blank. ]
 


CHI 65295724v7
Exhibit D–Page 2
 


 
 
 


IN WITNESS WHEREOF, the parties hereto have duly executed this Assignment and Assumption of Leases and Service Contracts as of the day and year first written above.
 

ASSIGNOR :

720 UNIVERSITY, LLC ,
a Wyoming limited liability company

By:      _________________________                                                            
Name: _________________________                                                               
Title:   _________________________                                                             


CHI 65295724v7
Exhibit D–Page 3
 


 
 
 



ASSIGNEE :
 
[SPE, LLC],
a Delaware limited liability company


By:       ___________________________    
Name:  ___________________________        
Its:       ___________________________ 


CHI 65295724v7
Exhibit D–Page 4
 


 
 
 

EXHIBIT A

LEASES

[To be added]


CHI 65295724v7
Exhibit D–Page 5
 


 
 
 


EXHIBIT B

CONTRACTS

[To be added]



CHI 65295724v7
Exhibit D–Page 6
 


 
 
 


EXHIBIT E
 
CONSTRUCTION PROJECTS

NONE


CHI 65295724v7
Exhibit E – Page 1                                 
 


 
 
 

EXHIBIT F
 
FIRPTA AFFIDAVIT
 
CERTIFICATE OF NON-FOREIGN STATUS


Section 1445 of the Internal Revenue Code provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person.  For U.S. tax purposes (including Section 1445), the owner of a disregarded entity (which has legal title to a U.S. real property interest under local law) will be the transferor of the property and not the disregarded entity.  To inform [●], a [●] (“ Transferee ”), that withholding of tax is not required upon the disposition of a U.S. real property interest by [●], a [●] [that for U.S. federal income tax purposes is disregarded as separate from [●], a [●]] (“ Transferor ”), the undersigned hereby certifies to the following on behalf of Transferor:

1.  Transferor is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations);

2.  Transferor is not a disregarded entity as defined in Section 1.1445-2(b)(2)(iii) of the Income Tax Regulations;

3.  Transferor’s U. S. employer identification number is [●]; and

4.  Transferor’s office address is:



Transferor understands that this certification may be disclosed to the Internal Revenue Service by Transferee and that any false statement contained herein could be punished by fine, imprisonment, or both.

Under penalties of perjury I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of Transferor.

Executed as of the ____ day of ______, 201_, at ___________, ____.


[Signature set forth on following page]


CHI 65295724v7
Exhibit F–Page 1
 


 
 
 

IN WITNESS WHEREOF , Transferor has executed and delivered this FIRPTA Affidavit as of _____, 2014.
 
By:       ____________________________                                                         
Name:  ____________________________
Its:       ____________________________
 


STATE OF                                           }
} SS.
COUNTY OF                                      }
 
I, the undersigned a Notary Public in and for the County and State aforesaid, DO HEREBY CERTIFY, that the above named _________________, being the ________________of ________________, personally known to me to be the same person whose name is subscribed to the foregoing instrument as such _________________________, appeared before me this day in person and acknowledged that he/she signed and delivered the said instrument as his/her own free and voluntary act and as the free and voluntary act of said corporation for the uses and purposes therein set forth.
 
Given under my hand and Notary Seal, this ___________________ day of ________, 2014.
 
                                                
Notary Public
My Commission Expires:
 
                                                                                      
 


CHI 65295724v7
Exhibit F–Page 2
 


 
 
 

SCHEDULE A
TO
FIRPTA AFFIDAVIT
 
LEGAL DESCRIPTION
 
Lot 1, Suburban Subdivision,
City of Greeley, County of Weld,
State of Colorado



CHI 65295724v7
Exhibit F–Page 3
 


 
 
 

EXHIBIT G
 
FORM OF ASSIGNMENT OF INTANGIBLE PROPERTY
 
[NONE] [TO BE CONFIRMED DURING DUE DILIGENCE PERIOD]



 
 
CHI 65295724v7
  Exhibit G-Page 1
 


 
 
 

EXHIBIT H

LEASES/RENT ROLL/SECURITY DEPOSITS




 
 
CHI 65295724v7
  Exhibit H-Page 1
 


 
 
 
 
 
 
 
 

EXHIBIT H
 
UNIVERSITY SQUARE
 
RENT ROLL
 
10/01/14
 
Page 1
                     
     
BASE
BASE
CAM
 
TOTAL
LEASE
LEASE
SECURITY
NO.
TENANT
 
SQ FT
RENT
REIMB
UTILITY
MONTHLY
COMMENCE
TERMINATE
DEPOSIT
                     
2604
Starbuck's
1,500
2.00
       3,000.00
          285.00
 
       3,285.00
8/21/03
8/31/18
              -
2608
Red's Dogs & Donuts
1,400
1.66
       2,323.00
          394.00
 
       2,717.00
2/19/08
2/28/18
     1,900.00
                     
2612
PC Cirkit
1,180
0.93
       1,100.00
          266.00
 
       1,366.00
9/20/10
9/30/15
     1,100.00
                     
2616
Liberty Tax
900
1.37
       1,237.00
          231.00
10.00
       1,478.00
11/1/03
4/30/16
     1,125.00
                     
2620
King Soopers Fuel Station
2,880
0.57
       1,653.75
Qtrly
         -
       1,653.75
4/10/02
4/30/22
0.00
                     
2622
Big City Burrito
2,400
1.06
       2,550.00
618.00
 
       3,168.00
11/12/05
M-M
     2,400.00
                     
2624
Rocky Mt. Paw Spa
2,400
0.17
          400.00
                -
         -
          400.00
6/5/08
M-M
        800.00
                     
2626
Ace Hardware
       17,376
0.67
      11,584.00
       3,819.00
 
     15,403.00
9/1/04
8/31/24
0.00
2626B
Victory Outreach Church
         6,605
0.52
       3,418.00
          283.00
 
       3,701.00
4/16/06
4/30/16
2000.00
                     
 
2nd Floor
         3,659
               
2628
Big Lots
       34,440
0.38
      12,915.00
       5,488.78
 
     18,403.78
8/15/04
1/31/20
0.00
2630
Ben's Furniture Galleries
25,021
0.10
       2,500.00
                -
 
       2,500.00
2/1/05
M-M
     5,212.00
                     
2638A
Grandslam
4,480
0.43
       1,913.00
       1,148.00
         -
       3,061.00
12/1/13
11/30/17
     3,000.00
                     
2638B
All Risk Insurance
1,296
1.04
       1,350.00
          332.00
         -
       1,682.00
2/27/03
M-M
     1,512.00
2638C
GNC
1,450
1.13
       1,631.25
          291.00
 
       1,922.25
5/16/14
5/31/19
 
2640
Conditioning Spa
28,022
0.50
      13,874.00
       5,856.00
         -
     19,730.00
8/23/02
10/31/15
              -
2642
CATO
4,005
       0.79
       3,170.63
          366.15
         -
       3,536.78
3/23/05
1/31/15
              -
                     
2644A
Papa John's
1,800
1.19
       2,144.00
          461.00
         -
       2,605.00
2/1/97
9/30/17
     1,500.00
                     
                     
2644B
Jimmy John's
1,280
1.80
       2,300.00
          328.00
 
       2,628.00
3/1/04
2/28/19
     1,600.00
                     
2644C
Sav On Cigarettes
1,200
1.71
       2,050.00
          342.00
 
       2,392.00
1/28/06
1/31/19
     1,400.00
                     
2644D
Fashion Nails
840
1.40
       1,175.00
          250.00
      6.00
       1,431.00
3/1/02
2/28/17
        900.00
2644E
Cost Cutters
1,660
1.48
       2,459.00
          384.00
         -
       2,843.00
3/1/02
3/1/17
              -
                     
2644F
Wells Fargo ATM
500
3.20
       1,600.00
                -
         -
       1,600.00
2/1/89
1/31/15
              -
                     
                     
SUBTOTAL PAGE 1
  146,294
0.52
$76,347.63
$21,142.93
$16.00
$97,506.56
       24,449.00
 
 
 
 
 
 
   
 
                     
                     
                     

c1:Rent roll  11:07 AM 10/29/14


 
 
 

EXHIBIT H
 
UNIVERSITY SQUARE
 
RENT ROLL
 
10/01/14
 
Page 2
                     
     
BASE
BASE
CAM
 
TOTAL
LEASE
LEASE
SECURITY
NO.
TENANT
SQ FT
SQ FT
RENT
REIMB
UTILITY
MONTHLY
COMMENCE
TERMINATE
DEPOSIT
                     
2650
Jo Ann Fabrics
12,080
0.50
       6,040.00
                -
         -
          6,040.00
7/1/86
1/31/17
                  -
                     
2656
Vacant
2,800
0.00
 
0.00
         -
                   -
     
                     
2660
RadioShack
1,920
1.30
       1,600.00
          197.67
         -
          1,797.67
 
3/31/17
 Ø
                     
2664
Scrub Tub
2,048
1.22
       2,500.00
          410.00
         -
          2,910.00
10/1/99
9/30/17
         1,500.00
                     
2666
Rent-A-Center Storage
1,980
0.10
          200.00
 
 
            200.00
10/1/14
M-M
                  -
2668
Advance America
1,038
    1.25
       1,300.00
          266.00
     15.00
          1,581.00
3/1/99
3/31/17
 
                     
2672-B                                      Panda Buffet
4,420
0.34
       1,500.00
       1,340.00
         -
          2,840.00
6/16/97
6/1/18
         2,000.00
                     
2672A
Rent-A-Center
4,330
1.08
       4,690.83
          842.46
         -
          5,533.29
1/1/93
2/28/17
                  -
                     
2674
Sally Beauty
1,875
1.21
       2,265.63
          376.00
         -
          2,641.63
6/1/90
12/31/16
                  -
2676
Vacant
2,800
0.00
 
                -
         -
                   -
6/1/13
   
                     
                     
2708
Burger King
2,693
0.91
       2,441.41
          341.00
         -
          2,782.41
5/20/80
5/19/15
                  -
                     
2712
King Soopers
46,966
0.32
      14,850.00
Qtrly
         -
        14,850.00
1/17/71
3/31/26
                  -
                     
2716
Vacant
3,600
0.00
     
                   -
     
2718
Vacant
2,160
0.00
             
                     
2722
Mile High Mobile (Cricket)
1,200
1.17
       1,400.00
          342.00
 
          1,742.00
12/13/10
12/31/14
         1,250.00
                     
2724
Lone Star Liquors
3,540
1.31
       4,645.00
          907.00
 
          5,552.00
10/5/02
9/30/16
         1,500.00
                     
  Mineral Resources Royalty Agreement    
  Variable
           
                     
 
Vacant (upstairs)
5,761
               
 
Storage
1,175
0.00
             
 
Not Used
567
0.00
             
 
*2nd Floor Victory Outreach not included in CAM
       
                     
 
 
 
 
 
 
   
 
SUBTOTAL PAGE 2
   102,953   0.42   43,432.87
5,022.13
15.00
48,470.00
   
 $      6,250.00
                     
 
TOTAL
    249,247
    0.48
    119,780.50
     26,165.06
     31.00
      145,976.56
   
       30,699.00
                     
                     
                     
 
 
c1:Rent roll  11:07 AM 10/29/14
 

 
 
 
EXHIBIT I

SERVICE CONTRACTS

1.  
Backflow Testing – Freedom Fire Protection
2.  
Fire Alarm Monitoring – Dicto Guard Security Alarm Systems
3.  
Fire Phone Lines – Qwest
4.  
Grease Pumping – Slim’s Sanitation
5.  
Hood Cleaning – American Professional Services
6.  
HVAC – Greeley Furnace
7.  
Landscaping – Deibel Lawn Service
8.  
Monthly Maintenance – Victory Outreach
9.  
Parking Lot Sweeping – Victory Outreach
10.  
Pest Control - Enviropest
11.  
Pressure Washing – Top Gun
12.  
Roof Maintenance – CMC Roofing, United Materials
13.  
Security – Victory Outreach
14.  
Snow Removal – Fisher Landscaping
15.  
 Trash Removal – Northern Colorado Disposal



 
 
CHI 65295724v7
  Exhibit I -Page 1
 


 
 
 

EXHIBIT K-1

FORM OF TENANT ESTOPPEL

 
TO:
  ________________________("Landlord")
  ________________________
  ________________________
 
and
  ________________________
  ________________________
  ________________________
  ("Purchaser")

Re:           ____________________________________ (Tenant d/b/a)
 
Ladies and Gentlemen:
 
The undersigned (" Tenant "), being the tenant under the Lease referred to in Paragraph 1 below, covering those certain premises demised therein (" Leased Premises ") understands that Landlord, the existing owner of the property on which the Leased Premises are located (" Property "), is contemplating a sale of the Property to Purchaser, and the Purchaser may now or hereafter be obtaining financing with respect to the Property.  Purchaser and any such lenders are requiring and will be relying upon this Certificate, and accordingly, the undersigned hereby certifies to Purchaser and any such lenders the following as of the date hereof:
 
1.           Tenant is the tenant under a lease with Landlord (or Landlord's predecessor in interest), dated _______________, demising the Leased Premises, as amended, modified, supplemented or extended by the following (if none, write "None" or leave blank, in which case the response will be deemed to be "None"):   (collectively, " Lease ").  A true, correct and complete list of all documents evidencing the Lease is set forth on Exhibit A attached hereto.
 
2.           The Tenant has not sublet or otherwise granted any use or possessory interest in the Leased Premises or assigned, transferred or encumbered any interest in the Lease except as follows (if none, write "None" or leave blank, in which case the response will be deemed to be "None"):  .
 
3           Exclusive of unexercised renewal options contained in the Lease, the Lease expires on _______________.  Tenant has ______ remaining option(s) to renew the term of the Lease for ______ year(s) each.

 
 
CHI 65295724v7
  Exhibit K-1 Page 1
 


 
 
 
4.           The Lease is in full force and effect and represents the entire agreement between Tenant and Landlord, and Tenant is in physical possession of the Leased Premises and is open and operating.
 
5.           The obligation of the Tenant to pay fixed minimum rent under the Lease has commenced, and the fixed minimum monthly rent currently payable under the Lease is $__________________.
 
6.           The Leased Premises comprise approximately _____ square feet of space.
 
7.           All rent concessions and abatements have expired and Tenant is not entitled to any rent credit, partial rent, rebates, rent abatements or rent concessions of any kind, except as follows (if none, write "None" or leave blank, in which case the response will be deemed to be "None"):                                                           .
 
8.           The fixed minimum rent, real estate taxes, common area maintenance costs, insurance premiums and all other charges due under the Lease have been paid up to and including the following date:  _______________.
 
9.           The security deposit held by Landlord under the Lease is $____________.
 
10.           No rents have been prepaid, other than as provided in the Lease.
 
11.           There are no existing defenses, offsets or counterclaims which the undersigned has against Landlord or the enforcement of the Lease by Landlord.
 
12.           All work required to be performed by Landlord have been satisfied or completed, except as follows (if none, write "None" or leave blank, in which case the response will be deemed to be "None"):                                                           .
 
13.           There are no defaults, claims thereof, or any condition which with the giving of notice and/or passage of time could become a default by either Landlord or Tenant with respect to their respective obligations under the Lease.
 
14.           Tenant has no right of first refusal or other right to purchase or expand the Leased Premises or any portion thereof.
 
15.           There are no actions, voluntary or involuntary, pending or, to the best of Tenant’s knowledge, threatened against Tenant or any guarantor of Tenant’s obligations under the Lease under any bankruptcy, reorganization, arrangement, moratorium, creditors’ rights or similar laws of the United States or any state thereof.
 
16.           The undersigned and the person(s) executing this Certificate on behalf of the undersigned have the power and authority to render this Certificate.
 

 
 
CHI 65295724v7
  Exhibit K-1 Page 2
 


 
 
 

 
[Signature Page Follows]
 


 
 
CHI 65295724v7
  Exhibit K-1 Page 3
 


 
 
 

This Certificate is for the benefit of and may be relied upon by (i)  Landlord and its successors and assigns, (ii) Purchaser and its successors and assigns, and (iii) any lender(s) of Purchaser (or Purchaser's successors and assigns) from time to time.
 
Date:______________ ___, 20___
 
 
TENANT :  __________________________                                                                
 
 
By:  _______________________________                                                                
Its: ___________________________                                                            
 


The undersigned, being the guarantor or other surety of the obligations of Tenant under the Lease, does hereby ratify and affirm the obligations of the undersigned as such guarantor (or surety) are binding and enforceable against the undersigned and that the guaranty set forth in (or executed and delivered in accordance with) the Lease is in full force and effect in accordance with its terms as of the date hereof.

Date:______________ ___, 20___
 
 
GUARANTOR :  _________________________                                                                
 
 
By:  ___________________________________                                                                
Its:  ______________________________                                                          
 

 




 
 
CHI 65295724v7
  Exhibit K-1 Page 4
 


 
 
 

EXHIBIT K-2

FORM OF REA ESTOPPEL

___________________, 20___

__________________________________
__________________________________
__________________________________
Attn: ______________________________

 
Re: Purchase by SPE, LLC of the property commonly known as “University Square Shopping Center” and  located at 2604-2724 Eleventh Avenue, Greeley, Colorado

Ladies and Gentlemen:

The above-referenced property (the “Property”) is subject to a certain ______________________________, dated ______________________, recorded in Book ___, Page ______ of the land records of _______ County, ________ (the “Agreement”).  The undersigned understands that you or one of your affiliates is in the process of purchasing the Property, and that you may be obtaining financing in connection with such acquisition; and, in connection therewith, the undersigned certifies to you and your lenders the following as of the date hereof:

1.           There are no defaults, claims thereof, or any condition which, with the giving of notice and/or passage of time, could become a default by the undersigned or, to the best of the undersigned’s knowledge, the owner of the Property, with respect to their respective obligations under the Agreement.

2.           The amount of unpaid [Common Area Maintenance Costs] (as defined in the Agreement) owed by the undersigned is $_______________________.

3.           To the best of the undersigned’s knowledge, the amount of unpaid [Common Area Maintenance Costs] (as defined in the Agreement) owed by the owner of the Property is $_______________.

4.           The undersigned’s present address for notices is: _______________________.

5.           There are no other agreements that modify, amend, supplement or terminate the Agreement, except the following (if none, write "None" or leave blank, in which case the response will be deemed to be "None"): ­______________________________.

 
6.           The undersigned is the owner of [Lot(s) _______ ] (as referenced in the Agreement), and the undersigned’s [Proportionate Share] (as defined in the Agreement) is ______%.
Exhibit K-2 – Page 1
CHI 65295724v7
 
 
 
 
7.           The undersigned and the person(s) executing this letter on behalf of the undersigned have the power and authority to render this letter.




[Signature Page Follows]



Exhibit K-2 – Page 2
CHI 65295724v7
 
 
 
 

This letter is being delivered to you with the understanding that you and your successors and assigns may rely on it in purchasing the Property and that your lenders and their successors and assigns may rely on it in making a loan for the Property.



Very truly yours,

__________________________________



By:_________________________________
                                                            Title:_______________________________




 


 
 
CHI 65295724v7
  Exhibit K-2 Page 3
 


 
 
 

EXHIBIT L

FORM OF MEMORANDUM OF PURCHASE AND SALE AGREEMENT

 
AFTER RECORDING RETURN TO:
 
BROWNSTEIN HYATT FARBER SCHRECK, LLP
410 17 TH ST., SUITE 2200
DENVER, CO  80202
ATTN: ROB KAUFMANN, ESQ.
 
 
 

 
MEMORANDUM OF PURCHASE AND SALE AGREEMENT
 
THIS MEMORANDUM OF PURCHASE AND SALE AGREEMENT (this “ Memorandum ”) is made and entered into as of the __ day of November, 2014 (the “ Effective Date ”), by and between 720 UNIVERSITY, LLC, a Wyoming limited liability company (“ Seller ”), and ALBERTA DEVELOPMENT PARTNERS, LLC, a Colorado limited liability company (“ Purchaser ”).
 
A.   Seller is the owner of the real property located at 2604-2724 Eleventh Avenue, Greeley, Colorado, County of Weld, as more particularly described on Exhibit “A” attached hereto and made a part hereof (the “ Property ”); and
 
B.   Seller and Purchaser have entered into that certain Purchase and Sale Agreement dated ____________ (as amended and assigned from time to time, the “ Purchase Agreement ”), whereby Seller has agreed to sell to Purchaser, and Purchaser has agreed to purchase from Seller, subject to the terms and conditions of the Purchase Agreement, the Property together with the Personal Property and Leases (both as defined in the Purchase Agreement).
 
1.   Purpose and Intention .  The purpose of this Memorandum is to notify all persons interested in the Property, that, for good and valuable consideration, Seller has agreed and does hereby agree to sell to Purchaser, and Purchaser has agreed and does hereby agree to purchase from Seller, subject to and pursuant to the terms, provisions and conditions set forth in the Purchase Agreement, the Property.  This Memorandum is executed for the purpose of recordation in the Office of the Clerk and Recorder of the County of Weld, State of Colorado (the “ Records ”), and is not intended, and shall not be construed, to define, limit or modify the Purchase Agreement.
 

 
 
CHI 65295724v7
  Exhibit L – Page 1
 
Memorandum of Purchase and Sale Agreement
2604-2724 Eleventh Avenue,
Greeley, Colorado


 
 
 
2.   Merger and Cancellation of Memorandum .
 
(a)   Merger Upon Recording of the Deed .  Unless sooner terminated by specific written agreement of Seller and Purchaser, upon the recording, if at all, of a deed (the “ Deed ”) in the Records from Seller to Purchaser (or Purchaser’s permitted assignee under the Purchase Agreement), this Memorandum shall, immediately and without further action, be deemed to have merged with and into such Deed; provided, however, such merger shall not be construed to define, limit or modify the Purchase Agreement.
 
(b)   Termination .  Unless sooner terminated by specific written agreement of Seller and Purchaser, this Memorandum may be unilaterally terminated by Seller in the event that a competent court has finally adjudicated that Purchaser defaulted on its obligation to close the transactions contemplated by the Purchase Agreement, in which case, this Memorandum shall expire and be of no further force or effect immediately, and without further action.  In the event of such termination pursuant to this Section 2(b), within ten (10) business days after the request of Seller, Purchaser shall execute and deliver to Seller an appropriate release and/or cancellation instrument, in proper form for recording in the Records, acknowledging the termination of this Memorandum (and Seller’s obligation to sell the Property to Purchaser) and releasing any and all right, title and interest of Purchaser in and to the Property (the “ Cancellation ”).  If Purchaser fails to timely deliver the Cancellation, Purchaser hereby appoints Seller as Purchaser’s attorney-in-fact to prepare, execute and record the Cancellation.  This appointment shall be coupled with an interest and is irrevocable.
 
3.   Binding Effect .  Subject to the terms and conditions of the Purchase Agreement, all of the provisions of this Memorandum shall inure to the benefit of and shall be binding upon the successors and assigns of Seller and Purchaser.
 
4.   Costs and Attorneys’ Fees .  In any action or proceeding under this Memorandum, the prevailing party in any such action shall be awarded all costs and expenses incurred therewith, including reasonable attorneys’ fees.
 
5.   Governing Law .  This Memorandum shall be construed and governed under the laws of the State of Colorado.
 
6.   Counterparts .  This Memorandum may be executed in any number of counterparts each of which, when taken together, shall constitute one agreement.  This Memorandum shall only be effective if a counterpart is signed by both Seller and Purchaser.
 
[signature pages follow]
 


 
 
CHI 65295724v7
  Exhibit L – Page 2
 
Memorandum of Purchase and Sale Agreement
2604-2724 Eleventh Avenue,
Greeley, Colorado


 
 
 

IN WITNESS WHEREOF , Seller and Purchaser have executed this Memorandum as of the Effective Date.
 
SELLER :
 
720 UNIVERSITY, LLC,
a Wyoming limited liability company

By: _____________________________                                                          
       John G. Waterbury
       Its: Manager
 


STATE OF COLORADO                                    )
   )  ss.
COUNTY OF ____________________              )
 
The foregoing instrument was acknowledged before me this ____ day of ________, 2014, John G. Waterbury, as the Manager of 720 University, LLC, a Wyoming limited liability company.
 
Witness my hand and official seal.
 
My commission expires:________________
 
_________________________________
Notary Public
 
[Purchaser’s signature page follows]
 


 
 
CHI 65295724v7
  Exhibit L – Page 3
 
Memorandum of Purchase and Sale Agreement
2604-2724 Eleventh Avenue,
Greeley, Colorado


 
 
 

PURCHASER:

ALBERTA DEVELOPMENT PARTNERS, LLC,
a Colorado limited liability company


By:  ________________________                                                                
       Donald G. Provost
       Its: Manager
 
STATE OF COLORADO                                  )
 
)  ss.
COUNTY OF ____________________            )
 
The foregoing instrument was acknowledged before me this ____ day of _______, 2014, by Donald G. Provost, as the Manager of Alberta Development Partners, LLC, a Colorado limited liability company.
 
Witness my hand and official seal.
 
My commission expires:________________
 
__________________________________
Notary Public


 
 
CHI 65295724v7
  Exhibit L – Page 4
 
Memorandum of Purchase and Sale Agreement
2604-2724 Eleventh Avenue,
Greeley, Colorado


 
 
 

EXHIBIT  “A”
 
LEGAL DESCRIPTION OF THE PROPERTY

Lot 1, Suburban Subdivision,
City of Greeley, County of Weld,
State of Colorado



 
 
CHI 65295724v7
  Exhibit L – Page 5
 
Memorandum of Purchase and Sale Agreement
2604-2724 Eleventh Avenue,
Greeley, Colorado