Attached files
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| EXCEL - IDEA: XBRL DOCUMENT - VESTIN FUND III LLC | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2013
Or
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _________ to _________
Commission File Number: 000-51310
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VESTIN FUND III, LLC
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(Exact name of registrant as specified in its charter)
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NEVADA
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87-0693972
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(State or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification No.)
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8880 W. SUNSET ROAD, SUITE 200, LAS VEGAS, NEVADA 89148
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number: 702.227.0965
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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ X ] No [ ]
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer [ ]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
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Smaller reporting company [X]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of November 14, 2013, 2,024,424 membership units in the Company were outstanding.
TABLE OF CONTENTS
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Page
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| 3 | ||
PART I - FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL STATEMENTS
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VESTIN FUND III, LLC
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BALANCE SHEETS
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(UNAUDITED)
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September 30, 2013
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December 31, 2012
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ASSETS
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Assets
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Cash and cash equivalents
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$ | 288,000 | $ | 354,000 | ||||
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Notes receivable, net of allowance of $439,000 at September 30, 2013 and $871,000 at December 31, 2012
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-- | -- | ||||||
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Investment in MVP REIT, Inc.
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431,000 | -- | ||||||
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Real estate held for sale
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297,000 | 300,000 | ||||||
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Investment in equity method investee held for sale
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1,014,000 | 1,103,000 | ||||||
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Due from related parties
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928,000 | 928,000 | ||||||
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Other assets
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6,000 | 2,000 | ||||||
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Total assets
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$ | 2,964,000 | $ | 2,687,000 | ||||
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LIABILITIES AND MEMBERS' EQUITY
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Liabilities
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Accounts payable and accrued liabilities
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$ | 6,000 | $ | 13,000 | ||||
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Deferred income
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935,000 | 935,000 | ||||||
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Due to related parties
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2,000 | 97,000 | ||||||
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Total liabilities
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943,000 | 1,045,000 | ||||||
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Commitments and contingencies
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Members' equity
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Members' units - authorized 10,000,000 units, 2,024,424 units issued and outstanding at September 30, 2013 and December 31, 2012
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2,021,000 | 1,642,000 | ||||||
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Total members' equity
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2,021,000 | 1,642,000 | ||||||
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Total liabilities and members' equity
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$ | 2,964,000 | $ | 2,687,000 | ||||
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VESTIN FUND III, LLC
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STATEMENTS OF OPERATIONS
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(UNAUDITED)
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For the Three Months
Ended September 30,
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For the Nine Months
Ended September 30,
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2013
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2012
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2013
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2012
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Revenues
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Interest income from investment in real estate loans
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$ | -- | $ | -- | $ | -- | $ | 6,000 | ||||||||
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Gain related to pay off of real estate loan, including recovery of allowance for loan loss
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-- | -- | -- | 17,000 | ||||||||||||
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Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
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431,000 | 4,000 | 433,000 | 20,000 | ||||||||||||
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Total revenues
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431,000 | 4,000 | 433,000 | 43,000 | ||||||||||||
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Operating expenses
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Provision for loan losses
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-- | -- | -- | 46,000 | ||||||||||||
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Professional fees
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24,000 | 34,000 | 90,000 | 139,000 | ||||||||||||
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Other
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3,000 | 10,000 | 18,000 | 31,000 | ||||||||||||
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Total operating expenses
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27,000 | 44,000 | 108,000 | 216,000 | ||||||||||||
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Income (loss) from operations
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404,000 | (40,000 | ) | 325,000 | (173,000 | ) | ||||||||||
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Non-operating income
Gain on sale of marketable securities- related party
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2,000 | 29,000 | ||||||||||||||
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Recovery from settlement with loan guarantor
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-- | 42,000 | -- | 156,000 | ||||||||||||
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Total non-operating income, net
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-- | 44,000 | -- | 185,000 | ||||||||||||
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Discontinued Operations
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Write-down of real estate held for sale
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-- | -- | -- | (66,000 | ) | |||||||||||
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Gain on sale of building
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-- | -- | -- | 50,000 | ||||||||||||
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Gain on sale of marketable securities – related party
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-- | -- | -- | -- | ||||||||||||
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Income from equity method investee held for sale
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20,000 | 20,000 | 63,000 | 30,000 | ||||||||||||
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Net gain on sale of real estate held for sale
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4,000 | -- | 4,000 | 3,000 | ||||||||||||
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Expenses related to real estate held for sale
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(2,000 | ) | (5,000 | ) | (13,000 | ) | (45,000 | ) | ||||||||
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Total income (loss) from discontinued operations
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22,000 | 15,000 | 54,000 | (28,000 | ) | |||||||||||
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NET INCOME (LOSS)
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$ | 426,000 | $ | 19,000 | $ | 379,000 | $ | (16,000 | ) | |||||||
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Net income (loss) allocated to members
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$ | 426,000 | $ | 19,000 | $ | 379,000 | $ | (16,000 | ) | |||||||
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Net income (loss) allocated to members per weighted average membership units
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$ | 0.21 | $ | 0.01 | $ | 0.19 | $ | (0.01 | ) | |||||||
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Weighted average membership units
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2,024,424 | 2,024,424 | 2,024,424 | 2,024,424 | ||||||||||||
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VESTIN FUND III, LLC
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STATEMENT OF MEMBERS' EQUITY AND OTHER COMPREHENSIVE LOSS
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013
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(UNAUDITED)
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Units
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Amount
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Members' equity at December 31, 2012
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2,024,424 | $ | 1,642,000 | |||||
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Comprehensive loss:
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Net income
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379,000 | |||||||
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Total comprehensive income
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379,000 | |||||||
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Members' equity at September 30, 2013 (unaudited)
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2,024,424 | $ | 2,021,000 | |||||
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VESTIN FUND III, LLC
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STATEMENTS OF CASH FLOWS
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(UNAUDITED)
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For the Nine Months
Ended September 30,
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2013
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2012
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Cash flows from operating activities:
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Net income (loss)
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$ | 379,000 | (16,000 | ) | ||||
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Adjustments to reconcile net income (loss) to net cash used in operating activities:
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Provision for loan loss
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-- | 46,000 | ||||||
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Gain on sale of marketable securities – related party
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-- | (29,000 | ) | |||||
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Gain related to sale of real estate held for sale
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-- | (3,000 | ) | |||||
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Gain related to recovery of allowance for loan loss
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-- | (17,000 | ) | |||||
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Recovery of allowance for doubtful notes receivable
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(433,000 | ) | (20,000 | ) | ||||
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Gain related to recovery of allowance from settlement with loan guarantor
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-- | (156,000 | ) | |||||
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Gain on sale of building
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-- | (50,000 | ) | |||||
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Write-downs on real estate held for sale
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-- | 66,000 | ||||||
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Income from equity method investee held for sale
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(63,000 | ) | (30,000 | ) | ||||
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Change in operating assets and liabilities:
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Accounts payable and accrued liabilities
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(7,000 | ) | (17,000 | ) | ||||
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Due to/from related parties
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(95,000 | ) | 128,000 | |||||
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Deferred income
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-- | (50,000 | ) | |||||
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Other assets
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(4,000 | ) | -- | |||||
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Net cash used in operating activities
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(223,000 | ) | (148,000 | ) | ||||
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Cash flows from investing activities:
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Investment in real estate held for sale
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-- | (20,000 | ) | |||||
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Proceeds from loan payoff
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-- | 194,000 | ||||||
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Proceeds from sale of marketable securities – related party
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-- | 161,000 | ||||||
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Proceeds from settlement from loan guarantor
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-- | 156,000 | ||||||
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Proceeds related to sale of building
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-- | 50,000 | ||||||
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Proceeds from notes receivable
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2,000 | 37,000 | ||||||
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Proceeds related to real estate held for sale
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-- | 183,000 | ||||||
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Proceeds from distribution from investment in equity method investee
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152,000 | -- | ||||||
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Proceeds from nonrefundable earnest money deposit on real estate held for sale
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3,000 | 1,000 | ||||||
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Net cash provided by investing activities
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157,000 | 762,000 | ||||||
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Cash flows from financing activities:
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Liquidating distributions, net of reinvestments
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-- | (350,000 | ) | |||||
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Net cash used by financing activities
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-- | (350,000 | ) | |||||
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NET CHANGE IN CASH
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(66,000 | ) | 264,000 | |||||
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Cash, beginning of period
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354,000 | 101,000 | ||||||
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Cash, end of period
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$ | 288,000 | $ | 365,000 | ||||
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Non-cash investing and financing activities:
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Write-off of interest receivable and related allowance
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$ | -- | $ | 103,000 | ||||
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Reclassify loan and related allowance to note receivable
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$ | -- | $ | 622,000 | ||||
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Adjustment to note receivable and related allowance
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$ | 431,000 | $ | -- | ||||
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Investment in equity method investee – held for sale acquired through foreclosure, net of prior allowance
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$ | -- | $ | 1,049,000 | ||||
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Real estate held for sale acquired through foreclosure, net of prior allowance
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$ | -- | $ | 167,000 | ||||
VESTIN FUND III, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
(UNAUDITED)
NOTE A — ORGANIZATION
Vestin Fund III, LLC was organized in April 2003 as a Nevada limited liability company for the purpose of investing in commercial real estate loans (hereafter referred to as “real estate loans”) and income-producing real property. In this report, we refer to Vestin Fund III, LLC as “the Company,” “our Company,” the “Fund,” “we,” “us,” or “our”.
We commenced operations in February 2004. Prior to March 2007, we invested in revenue-generating commercial real estate and loans secured by real estate through deeds of trust or mortgages (hereafter referred to collectively as “deeds of trust” and as defined in our Operating Agreement as “Mortgage Assets”). On March 5, 2007, a majority of our members approved the Third Amended and Restated Operating Agreement, which limited the Company’s investment objectives to investments in real estate loans.
At a special meeting of our members held on July 2, 2009, a majority of the members voted to approve the dissolution and winding up of the Fund, in accordance with the Plan of Complete Liquidation and Dissolution (the “Plan”) as set forth in Annex A of the Fund’s proxy statement filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 14(a) of the Securities and Exchange Act of 1934 on May 11, 2009. The Plan became effective upon its approval by the members on July 2, 2009. As a result, we have commenced an orderly liquidation and we no longer invest in new real estate loans. We anticipate that the liquidation will be substantially completed by the second half of 2014. However, because of numerous uncertainties, the liquidation may be longer or shorter than expected. Because the liquidation of the Fund was not imminent, as of September 30, 2013, the financial statements are presented assuming the Fund will continue as a going concern. Pursuant to the Plan, we will make liquidating distributions to members as funds become available, subject to a reasonable reserve established to provide for payment of the Company’s ongoing expenses and contingent liabilities. Our members no longer have the right to have their units redeemed by us and we no longer honor any outstanding redemption requests effective as of July 2, 2009.
On January 26, 2010, April 8, 2010, September 17, 2010, May 25, 2011 and June 15, 2012, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million, $0.3 million, $0.3 million, and $0.4 million, respectively, in accordance with the Plan. The amounts distributed to each Member of the Fund were calculated based upon the percentage ownership interest of such Member in the Fund. See Note G – Members’ Equity.
We are not a mutual fund or an investment company within the meaning of the Investment Company Act of 1940, nor are we subject to any regulation thereunder.
Michael Shustek owns a significant majority of Vestin Mortgage, LLC, a Nevada limited liability company, which is our manager (the “manager” or “Vestin Mortgage”). On January 7, 2011, Vestin Mortgage converted from a corporation to a limited liability company. The business of brokerage and placement of real estate loans have been performed by affiliated or non-affiliated mortgage brokers, including Advant Mortgage, LLC (“MVP Mortgage”), a licensed Nevada mortgage broker, which is indirectly wholly owned by Michael V. Shustek.
Pursuant to our Operating Agreement and the Plan of Complete Liquidation and Dissolution approved by a majority of our members on July 2, 2009, our manager will continue to manage our operations during the liquidation process. Consequently, the orderly liquidation of our assets and our operating results are dependent upon our manager’s ability and performance in managing our liquidation. Because of numerous uncertainties, the liquidation may be longer or shorter than expected. Because the liquidation of the Fund was not imminent, as of September 30, 2013, the financial statements are presented assuming the Fund will continue as a going concern.
Vestin Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the successor by merger to Vestin Fund I, LLC, (“Fund I”) and Vestin Realty Mortgage II, Inc. (“VRM II”), as the successor by merger to Vestin Fund II, LLC, (“Fund II). These entities have been formed to invest in real estate loans.
During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services. Strategix Solutions also provides accounting and financial reporting services to VRM I and VRM II. The CFO of our manager and other members of our accounting staff are employees of Strategix Solutions. Strategix Solutions is managed by LL Bradford and Company, LLC ("LL Bradford"), a certified public accounting firm that has provided non-audit accounting services to us. The principal manager of LL Bradford was a former officer of our manager from April 1999 through January 1, 2005. Strategix Solutions is owned by certain partners of LL Bradford, none of whom are currently or were previously officers of our manager. On January 14, 2013, Eric Bullinger resigned his position as Chief Financial Officer of Vestin Realty Mortgage I, Inc., Vestin Realty Mortgage II, Inc and the equivalent of Chief Financial Officer of Vestin Fund III, LLC (hereafter referred to collectively as the “Vestin Entities”). On January 14, 2013, the Board of Directors appointed Tracee Gress as the Chief Financial Officer of the Vestin Entities.
NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented have been included. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the 2012 annual report filed on Form 10-K.
Management Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include interest-bearing and non-interest-bearing bank deposits, money market accounts, short-term certificates of deposit with original maturities of three months or less, and short-term instruments with a liquidation provision of one month or less.
Revenue Recognition
Interest is recognized as revenue on performing loans when earned according to the terms of the loans, using the effective interest method. We do not accrue interest income on loans once they are determined to be non-performing. A loan is non-performing when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due. Cash receipts will be allocated to interest income, except when such payments are specifically designated by the terms of the loan as principal reduction. Interest is recognized on impaired loans on the cash basis method.
Deferred Revenue Recognition
Deferred income supports the amount of sales proceeds withheld on a sale of our building during November 2006, with which we were required to establish an irrevocable stand by letter of credit which was to expire August 31, 2014. See Note F – Related Party Transactions.
Real Estate Held for Sale
Real estate held for sale includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property's estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions. While pursuing foreclosure actions, we seek to identify potential purchasers of such property. It is not our intent to invest in or to own real estate as a long-term investment. We generally seek to sell properties acquired through foreclosure as quickly as circumstances permit. The carrying values of real estate held for sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.
Management classifies real estate held for sale when the following criteria are met:
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Management commits to a plan to sell the properties;
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The property is available for immediate sale in its present condition subject only to terms that are usual and customary;
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An active program to locate a buyer and other actions required to complete a sale have been initiated;
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The sale of the property is probable;
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The property is being actively marketed for sale at a reasonable price; and
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Withdrawal or significant modification of the sale is not likely.
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Classification of Operating Results from Real Estate Held for Sale
Generally, operating results and cash flows from long-lived assets held for sale are to be classified as discontinued operations as a separately stated component of net income. Our operations related to real estate held for sale are separately identified in the accompanying statements of operations.
Fair Value Disclosures
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. “the exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. The established hierarchy for inputs used, in measuring fair value, maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a company’s judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
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Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
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Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
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Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement, which utilize the Company’s estimates and assumptions.
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If the volume and level of activity for an asset or liability have significantly decreased, we will still evaluate our fair value estimate as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. In addition, since we are a public reporting company, we are required to make our fair value disclosures for interim reporting periods.
Net Income (Loss) Allocated to Members Per Weighted Average Membership Unit
Net income (loss) allocated to members per weighted average membership unit is computed by dividing net income (loss) calculated in accordance with GAAP by the weighted average number of membership units outstanding for the period.
Segments
We operate as one business segment.
Income Taxes
Limited liability companies (“LLCs”) are not liable for federal or state income taxes and, therefore, no provision for income taxes is made in the accompanying financial statements. Rather, a proportionate share of the LLC’s income, deductions, credits and tax preference items are reported to the individual members for inclusion in their tax returns.
NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments consist of cash, notes receivable, accounts payable and accrued liabilities, and due to/from related parties. The carrying value of these instruments approximates their fair values due to their short-term nature.
Financial instruments with concentration of credit and market risk include cash, notes receivable, accounts payable and accrued liabilities, and due to/from related parties.
We maintain cash deposit accounts and certificates of deposit, which, at times, may exceed federally insured limits. To date, we have not experienced any losses. As of September 30, 2013 and December 31, 2012, we had approximately $38,000 and $104,000, respectively, in excess of the federally insured limits.
NOTE D — REAL ESTATE HELD FOR SALE
At September 30, 2013, we held five properties with a total carrying value of approximately $0.3 million, which were acquired through foreclosure and recorded as investments in REO. Expenses incurred during the nine months ended September 30, 2013 and 2012 related to our REO totaled approximately $13,000 and $45,000, respectively. Our REO is accounted for at the lower of cost or fair value less costs to sell, with fair value based on appraisals and knowledge of local market conditions. We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.
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Beginning balance, January 1, 2013
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Real estate held for sale acquired through foreclosure
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$ | 300,000 | ||
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Additional investment in REO
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-- | |||
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Proceeds on nonrefundable earnest money deposit
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3,000 | |||
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Write down
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-- | |||
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Sale
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-- | |||
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Ending balance, September 30, 2013
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$ | 297,000 | ||
NOTE E – INVESTMENTS IN EQUITY METHOD INVESTEE HELD FOR SALE
During May 2012, we, VRM I and VRM II foreclosed on a loan with a balance of approximately $6.0 million, of which our portion was approximately $1.5 million. The property includes 23 cottage units in a retirement community located in Eugene, Oregon. The property includes operations, which are reported as an investment under the equity method from the date of this foreclosure. As our ownership percentage of the property is approximately 25%, the property is reported as an investment in equity method investee held for sale. During May 2013 we, VRM I and VRM II received a distribution in the amount of $600,000 of which our portion was $152,000.
We account for investments using the equity method of accounting if the investments give us the ability to exercise significant influence, but not control, over the investees. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of an incorporated investee of between 20% and 50%, although other factors, such as representation on an investee’s board of managers, specific voting and veto rights held by each investor and the effects of commercial arrangements, are considered in determining whether equity method accounting is appropriate. We record our respective interests in the losses or income of such investees within the equity-method investees held for sale category on our statements of operations for each period. The carrying amount of our equity-method investments held for sale is recorded on our balance sheets as investments in equity-method investees held for sale.
We evaluate our investments in the equity-method investees for impairment each quarter by comparing the carrying amount of each investment to its fair value. Because no active market exists for the investees’ limited liability company membership interests, we evaluate our investments in the equity-method investees for impairment based on our evaluation of the fair value of the equity-method investees’ net assets relative to their carrying values. If we were to determine that the carrying values of our investments in equity-method investees were greater than their fair values, we would write the investments down to their fair values.
The following is a summary of the results of operations related to the investment in equity method investee held for sale for the three and nine months ended September 30, 2013:
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For The Three Months Ended
September 30, 2013
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For The Nine
Months Ended
September 30, 2013
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Revenue
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$ | 172,000 | $ | 512,000 | ||||
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Expenses
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(93,000 | ) | (264,000 | ) | ||||
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Net Income
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79,000 | 248,000 | ||||||
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% of ownership
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25 | % | 25 | % | ||||
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Equity method income
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$ | 20,000 | 63,000 | |||||
NOTE F — RELATED PARTY TRANSACTIONS
Transactions with the Manager
Our manager is entitled to receive from us a management (acquisition and advisory) fee up to 2.5% of the gross offering proceeds and up to 3% of our rental income. No management fees were recorded during the three and nine months ended September 30, 2013 and 2012.
As of September 30, 2013 and 2012, our manager owned 54,863 of our units. There were no distributions in either period.
In 2006, in connection with the sale of an office building located in Las Vegas, Nevada, we arranged for a $985,000 letter of credit in favor of the purchaser of the building (the “Purchaser”), which could be drawn upon by the Purchaser should Vestin Group default on its lease obligations and was supported by our restricted cash. Vestin Group is currently engaged in litigation with the Purchaser and has not paid certain amounts allegedly due under its lease. In 2009, $285,000 of the letter of credit was drawn by the Purchaser. In November 2010, the Purchaser drew the final $700,000 from the letter of credit. In February 2011, the court granted a summary judgment to the Purchaser. Vestin Group and Michael Shustek have provided us with a written agreement to fully indemnify and hold us harmless for any such withdrawals, including the full amount of the $985,000 drawn to date under the letter of credit. Vestin Group’s obligation is to make us whole no later than August 2014. Mr. Shustek has assigned all future liquidating distributions for the 292,681 of our units which he holds directly and indirectly to the company to commence paying such obligation. In June 2012, we made distributions of approximately $50,000 directly and indirectly to Mr. Shustek, which we have recorded as revenue and decreased the receivable discussed below. For a discussion of litigation between us, Vestin Group and the building owner, see Note K - Legal Matters Involving The Manager.
As of September 30, 2013 and December 31, 2012, we had receivables from our manager totaling approximately $0.9 million, primarily related to the withdrawal of the letter of credit referred to above.
Transactions with Other Related Parties
As of September 30, 2013, we owed VRM II approximately $2,000. As of December 31, 2012, we owed VRM II approximately $90,000.
As of December 31, 2012, we owed VRM I approximately $8,000. As of September 30, 2013, we had no receivables or payables.
The net changes in the amounts due to/from related parties have been classified as operating activities on the accompanying statements of cash flows. These activities are primarily related to expenses being incurred from operations and maintenance of investments which are co-owned by related parties. These balances are satisfied in subsequent periods under terms consistent with the underlying vendor terms.
As of September 30, 2013 we owned 48,999 of our common shares of MVP REIT common stock. For the three and nine months ended September 30, 2013 no dividend income was declared from MVP REIT.
As of September 30, 2013 and 2012, inVestin Nevada Inc., a company wholly owned by our manager’s CEO, (“inVestin”), owned 34,856 of our membership units representing approximately 1.72% of our total membership units. There were no distributions in the three month ended September 2013 or 2012.
As of September 30, 2013 and 2012, Shustek Investments, Inc., a company wholly owned by our manager’s CEO, owned 200,000 of our membership units representing approximately 9.88% of our total membership units. There were no distributions in the three month ended September 2013 or 2012.
As of September 30, 2013 and 2012, Mr. Shustek’s spouse owned 2,963 of our membership units, representing less than 1.0% of our total membership units. There were no distributions in the three month ended September 2013 or 2012.
See, also, Notes H and I regarding our interest in MVP REIT, an entity managed by a company which is majority-owned and controlled by Michael Shustek.
NOTE G — MEMBERS’ EQUITY
Allocations and Distributions
In accordance with our Operating Agreement, profits, gains and losses are to be credited to and charged against each member’s capital account in proportion to their respective capital accounts as of the close of business on the last day of each calendar month.
Distributions were paid monthly to members; however, on August 27, 2008, we suspended payment of distributions as a result of our current losses.
Contingency Reserve
In accordance with the Plan, we attempt to maintain a contingency reserve of approximately $300,000 for the payment of ongoing expenses, any contingent liabilities or to account for loan or other investment losses: however, the amount of the reserve may fluctuate based on cash expenditure requirements. Our manager has the discretion to increase or decrease the amount of the reserve, but will endeavor to ensure that the reserve is adequate to pay our outstanding obligations. The amount of the contingency reserve is based upon estimates and opinions of our manager or through consultation with an outside expert, if our manager determines that it is advisable to retain such expert. In determining the size of the reserve, our manager reviewed among other things, the value of our non-performing assets and the likelihood of repayment, our estimated contingent liabilities and our estimated expenses, including without limitation, estimated professional, legal and accounting fees, rent, payroll and other taxes, miscellaneous office expenses, facilities costs and expenses accrued in our financial statements.
Value of Members’ Capital Accounts
In accordance with Section 7.8 of our Operating Agreement, our manager reviewed the value of our assets during the nine months ended September 30, 2013. Based on this review, the value of members’ capital accounts was adjusted from $0.79 per unit to $1.00 per unit, as of October 1, 2013. The change in valuation is primarily for tax and capital account purposes and does not reflect the change in the value of the units calculated in accordance with GAAP. Accordingly, unit prices calculated under GAAP may be different than the adjusted price per unit.
Liquidating Distributions
On January 26, 2010, April 8, 2010, September 17, 2010, May 25, 2011 and June 15, 2012, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million, $0.3 million, $0.3 million and $0.4 million, respectively, in accordance with the Plan. The amounts distributed to each Member of the Fund were calculated based upon the percentage ownership interest of such Member in the Fund.
Redemption Limitation
In accordance with the Plan, our members no longer have the right to have their units redeemed by us and we no longer honor any outstanding redemption requests effective as of July 2, 2009.
NOTE H— NOTES RECEIVABLE
As of November 30, 2010, we had five loans totaling approximately $19.0 million, of which our portion is approximately $0.9 million, before allowances totaling approximately $7.3 million, of which our portion was approximately $0.5 million, and were guaranteed by common guarantors. Pursuant to agreements entered into on March 16, 2009 and July 2, 2009, which modified these loans, three of these loans continued to be secured by real property and two became unsecured due to the permanent financing being obtained for less than the outstanding balance on the loans. On November 30, 2010, we entered into additional agreements to modify the terms related to these five loans in order to further enhance our investment. Pursuant to these additional agreements, we obtained an additional guarantor, interest in operating profits and any aggregate sales proceeds of approximately $542,000 less operating profits previously received related to these properties. The new guarantor is the managing member of the borrowing entities who is also the principal manager of L.L. Bradford and was a former officer of our manager from April 1999 through January 2005. As a result of releasing our deeds of trust we classified these loans as unsecured notes receivable for the same amount and recognized a full allowance on this balance.
During 2013, SERE, LLC (“SERE”), the loan guarantor whose managing member is also the principal manager of L.L. Bradford and was a former officer of our manager from April 1999 through January 2005, entered into a purchase agreement with MVP REIT, Inc. (“MVP REIT”) to sell six office buildings associated with the unsecured notes receivables mentioned above. Upon the closing of the sale of each office building, we will terminate the unsecured note receivable and receive from SERE MVP REIT shares of common stock which equate to the amount of our notes receivables pursuant to MVP REIT’s current offering. We have recorded these shares as Investment in MVP REIT on our balance sheet and recognized their receipt as a gain related to recovery of notes receivable previously written off on the consolidated statements of operations for the quarter ending September 30, 2013.
The following is a summary of the MVP REIT shares we have or will receive in consideration of cancelling the unsecured notes receivable:
|
Property Name
|
Date shares received
|
Approximate Receivable Balance
|
Price Per Share
|
Number of shares received
|
|||||||||
|
Wolfpack, LLC
|
August 2013
|
$ | 88,000 | 8.865 | 9,944 | ||||||||
|
Building C, LLC
|
August 2013
|
$ | 130,000 | 8.775 | 14,755 | ||||||||
|
Building A, LLC
|
September 2013
|
$ | 130,000 | 8.775 | 14,755 | ||||||||
|
Devonshire, LLC
|
September 2013
|
$ | 83,000 | 8.775 | 9,546 | ||||||||
|
SE Property, LLC
|
October 2013
|
$ | 39,000 | 8.775 | 4,396 | ||||||||
|
ExecuSuites, LLC
|
Estimated November 2013
|
$ | 73,000 | 8.775 | 8,318 | ||||||||
NOTE I — INVESTMENT IN MVP REIT, INC.
As of September 30, 2013, we owned 48,999 shares of common stock of MVP REIT, Inc. (“MVP REIT”), a non-traded REIT. The shares were assigned to us by SERE, LLC in consideration of the cancellation of certain unsecured notes, as described in Note H above. We recorded a gain of approximately $431,000 upon receipt of such shares and the shares are recorded on our balance sheet as Investment in MVP REIT valued at $431,000. Such amount was determined based upon the offer price for such shares in MVP REIT’s pending public offering.
NOTE J — RECENT ACCOUNTING PRONOUNCEMENTS
No new accounting pronouncements have been defined that would materially impact our financial statements.
NOTE K— LEGAL MATTERS INVOLVING THE MANAGER
The United States Securities and Exchange Commission (the “Commission”), conducted an investigation of certain matters related to us, our manager, Vestin Capital, VRM I, and VRM II. We fully cooperated during the course of the investigation. On September 27, 2006, the investigation was resolved through the entry of an Administrative Order by the Commission (the “Order”). Our manager, Vestin Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin Capital (collectively, the “Respondents”), consented to the entry of the Order without admitting or denying the findings therein.
In the Order, the Commission found that the Respondents violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 through the use of certain slide presentations in connection with the sale of our units and units in Fund II, the predecessor to VRM II. The Respondents consented to the entry of a cease and desist order, the payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s suspension from association with any broker or dealer for a period of six months, which expired in March 2007. In addition, the Respondents agreed to implement certain undertakings with respect to future sales of securities. We are not a party to the Order.
In addition to the matters described above, our manager is involved in a number of other legal proceedings concerning matters arising in connection with the conduct of its business activities. Our manager believes it has meritorious defenses to each of these actions and intends to defend them vigorously. Our manager believes that it is not a party to any other pending legal or arbitration proceedings that would have a material adverse effect on our manager’s financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on the manager’s net income in any particular period.
NOTE L — LEGAL MATTERS INVOLVING THE COMPANY
From time to time, we may become involved in litigation in the ordinary course of business. We do not believe that any pending legal proceedings are likely to have a material adverse effect on our financial condition or results of operations or cash flows. It is not possible to predict the outcome of any such proceedings.
NOTE M — SUBSEQUENT EVENTS
The following subsequent events have been evaluated through the date of this filing with the SEC.
During November 2013, we, VRM I and VRM II sold a REO property to an unrelated third party for approximately $0.2 million, of which our portion was approximately $58,000. This property is fully allowed for and a net gain will be recorded for the full amount.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following is a financial review and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2013 and 2012. This discussion should be read in conjunction with our financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this report on Form 10-Q and our report filed on Form 10-K, Part II, Item 7 for the year ended December 31, 2012.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, including, without limitation, matters discussed under this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” should be read in conjunction with the financial statements, related notes, and other detailed information included elsewhere in this report on Form 10-Q. We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described in this Quarterly Report on Form 10-Q and in our other securities filings with the Securities and Exchange Commission (“SEC”). Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and involve inherent risks and uncertainties. Our estimates of the value of collateral securing our loans may change, or the value of the underlying property could decline subsequent to the date of our evaluation. As a result, such estimates are not guarantees of the future value of the collateral. The forward-looking statements contained in this report are made only as of the date hereof. We undertake no obligation to update or revise information contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
OVERVIEW
At a special meeting of our members held on July 2, 2009, a majority of the members voted to approve the dissolution and winding up of the Fund, in accordance with the Plan of Complete Liquidation and Dissolution (the “Plan”) as set forth in Annex A of the Fund’s proxy statement filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 14(a) of the Securities and Exchange Act of 1934 on May 11, 2009. The Plan became effective upon its approval by the members on July 2, 2009. As a result, we have commenced an orderly liquidation and we no longer invest in new real estate loans. Our historical operating results should not be viewed as indicative of future results as we implement the Plan. We currently anticipate that the liquidation will be substantially completed by the second half of 2014. However, because of numerous uncertainties, the liquidation may be longer or shorter than expected. Because the liquidation of the Fund was not imminent, as of September 30, 2013, the financial statements are presented assuming the Fund will continue as a going concern.
We currently have no outstanding loans and our future operations will be focused on disposition of five properties acquired through foreclosure. In addition, we will attempt to convert our other non-cash assets into cash which may be distributed under the Plan. Pursuant to the Plan, we will make liquidating distributions to members as funds become available, subject to a reasonable reserve established to provide for payment of the Company’s ongoing expenses and contract liabilities. Our manager has established a reserve to cover our ongoing expenses and future obligations. As of September 30, 2013, our cash was approximately $0.3 million.
On January 26, 2010, April 8, 2010, September 17, 2010, May 25, 2011 and June 15, 2012, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million, $0.3 million, $0.3 million and $0.4 million, respectively, in accordance with the Plan. The amounts distributed to each Member of the Fund were calculated based upon the percentage ownership interest of such Member in the Fund. See Note G – Members’ Equity of the Notes to the Financial Statements included in Part I, Item I Financial Statements of this Quarterly Report on Form 10-Q.
Under the terms of the Plan adopted by a majority of our members, our members no longer have the right to have their units redeemed by us and we no longer honor any outstanding redemption requests effective as of July 2, 2009.
Prior to the approval of the Plan, our primary business objective was to generate income while preserving principal by investing in loans secured by real estate. The loan underwriting standards utilized by our manager and Vestin Originations were less strict than those used by many institutional real estate lenders. In addition, one of our competitive advantages was our ability to approve loan applications more quickly than many institutional lenders. As a result, in certain cases, we made real estate loans that were riskier than real estate loans made by many institutional lenders such as commercial banks. However, in return, we sought a higher interest rate and our manager took steps to mitigate the lending risks such as imposing a lower loan-to-value ratio. While we may have assumed more risk than many institutional real estate lenders, in return, we sought to generate higher yields from our real estate loans.
Our historical operating results were affected primarily by: (i) the amount of capital we invested in real estate loans, (ii) the level of real estate lending activity in the markets we serviced, (iii) the interest rates we were able to charge on our loans and (iv) the level of non-performing assets, foreclosures and related loan losses that we experienced.
Our operating results have been adversely affected by increases in allowances for loan losses and increases in non-performing assets. This negative trend accelerated sharply during the year ended December 31, 2008 and continues to affect our operations. See Note D – Real Estate Held for Sale of the Notes to the Financial Statements included in Part I, Item I Financial Statements of this Quarterly Report on Form 10-Q.
We believe that the significant level of our non-performing assets is a direct result of the deterioration of the economy and credit markets. As the economy weakened and credit became more difficult to obtain, many of our borrowers who develop and sell commercial real estate projects have been unable to complete their projects, obtain takeout financing or have been otherwise adversely impacted. While the general economy has recovered from the 2008 – 2009 recession, commercial real estate values in our principal markets have not fully recovered. Our exposure to the negative developments in the credit markets and general economy has likely been increased by our business strategy, which, until the approval of the Plan, entailed more lenient underwriting standards and expedited loan approval procedures. Moreover, real estate values in the principal markets in which we operate declined dramatically, which in many cases eroded the current value of the security underlying our loans.
SUMMARY OF FINANCIAL RESULTS
Comparison of Operating Results for the three months ended September 30, 2013, to the three months ended September 30, 2012.
|
Total Revenue:
|
2013
|
2012
|
$ Change
|
% Change
|
||||||||||||
|
Recovery of allowance for doubtful notes receivable
|
$ | 431,000 | $ | 4,000 | $ | 427,000 | 10675 | % | ||||||||
|
Total
|
$ | 431,000 | $ | 4,000 | $ | 427,000 | 10675 | % | ||||||||
Our revenue from interest income was historically dependent upon the balance of our investment in real estate loans and the interest earned on these loans. Since May 2012, we have had no investments in real estate loans in our portfolio. Accordingly, our future revenues will be derived primarily from the disposition of our remaining assets and income from properties held for sale.
Our revenues for the three month period ended September 30, 2013 consisted entirely of a non-cash gain realized upon the receipt of 48,999 shares of common stock of MVP REIT, Inc. (“MVP REIT”) in consideration of cancellation of certain unsecured notes guaranteed by SERE, LLC. The unsecured notes had previously been written off. The value of the gain was based upon the price charged by MVP REIT for its shares in its pending public offering. The managing member of SERE, LLC is also the principal manager of L.L. Bradford and was a former officer of our manager from April 1999 through January 2005. For further information on this transaction, see Note H to our Financial Statements. As we have liquidated all of our loans and/or or foreclosed on the underlying properties, we do not expect any future interest income from loans.
|
Total Operating Expenses:
|
2013
|
2012
|
$ Change
|
% Change
|
||||||||||||
|
Professional fees
|
$ | 24,000 | $ | 34,000 | $ | (10,000 | ) | (29 | %) | |||||||
|
Other
|
3,000 | 10,000 | (7,000 | ) | (70 | %) | ||||||||||
|
Total
|
$ | 27,000 | $ | 44,000 | $ | (17,000 | ) | 39 | % | |||||||
Operating expenses decreased as a result of a decrease in pending litigation and a reduction in accounting fees due to change of auditors.
See Note L – Legal Matters Involving The Company of the Notes to the Financial Statements included in Part I, Item I Financial Statements of this Quarterly Report on Form 10-Q.
|
Total Non-operating income:
|
2013
|
2012
|
$ Change
|
% Change
|
||||||||||||
|
Gain on sale of marketable securities, related party
|
$ | -- | $ | 2.000 | $ | (2,000 | ) | (100 | %) | |||||||
|
Recovery from settlement with loan guarantor
|
-- | 42,000 | (42,000 | ) | (100 | %) | ||||||||||
|
Total
|
$ | -- | $ | 44,000 | $ | (44,000 | ) | (100 | %) | |||||||
During January 2011, we, VRM I and VRM II were awarded unsecured claims up to $3.6 million from a bankruptcy settlement with a guarantor of certain loans. Pursuant to the terms of the settlement we received payment of approximately $42,000 during the three months ended September 30, 2012. No such transaction occurred during the same time period in 2013.
|
Total Discontinued Operations
|
2013
|
2012
|
$ Change
|
% Change
|
||||||||||||
|
Net gain on sale of real estate held for sale
|
$ | 4,000 | $ | -- | $ | 4,000 | 100 | % | ||||||||
|
Income from equity method investee held for sale
|
20,000 | 20,000 | -- | -- | ||||||||||||
|
Expenses related to real estate held for sale
|
(2,000 | ) | (5,000 | ) | 3,000 | 60 | % | |||||||||
|
Total
|
$ | 22,000 | $ | 15,000 | $ | 7,000 | 46 | % | ||||||||
During the three months ended September 30, 2013, we recorded net gains of $4,000 from settlement received on real estate held for sale. There were no similar gains recorded during the three months ended September 30, 2012.
For additional information see Note D – Real Estate Held for Sale and Note E – Investment in Equity Method Investee Held for Sale of the Notes to the Financial Statements included in Part I, Item I Financial Statements of this Quarterly Report on Form 10-Q.
Comparison of Operating Results for the nine months ended September 30, 2013, to the nine months ended September 30, 2012.
|
Total Revenue:
|
2013
|
2012
|
$ Change
|
% Change
|
||||||||||||
|
Interest income from investment in real estate loans
|
$ | -- | $ | 6,000 | $ | (6,000 | ) | 100 | %) | |||||||
|
Recovery of allowance for loan loss
|
-- | 17,000 | (17,000 | ) | (100 | %) | ||||||||||
|
Recovery of allowance for doubtful notes receivable
|
433,000 | 20,000 | 413,000 | 2065 | % | |||||||||||
|
Total
|
$ | 433,000 | $ | 43,000 | $ | 390,000 | 906 | % | ||||||||
Our revenue from interest income was historically dependent upon the balance of our investment in real estate loans and the interest earned on these loans. Since May 2012, we have had no investments in real estate loans in our portfolio. Accordingly, our future revenues will be derived primarily from the disposition of our remaining assets and income from properties held for sale.
Our revenues for the three month period ended September 30, 2013 consisted entirely of a non-cash gain realized upon the receipt of 48,999 shares of common stock of MVP REIT, Inc. (“MVP REIT”) in consideration of cancellation of certain unsecured notes guaranteed by SERE, LLC. The unsecured notes had previously been written off. The value of the gain was based upon the price charged by MVP REIT for its shares in its pending public offering. The managing member of SERE, LLC is also the principal manager of L.L. Bradford and was a former officer of our manager from April 1999 through January 2005. For further information on this transaction, see Note H to our Financial Statements. As we have liquidated all of our loans and/or or foreclosed on the underlying properties, we do not expect any future interest income from loans. During May 2012, we, VRM I and VRM II sold our portions of a fully reserved loan of $14.0 million, of which our portion was $0.2 million to a third party. We received a payment of approximately $17,000.
|
Total Operating Expenses:
|
2013
|
2012
|
$ Change
|
% Change
|
||||||||||||
|
Provision for loan loss
|
$ | -- | $ | 46,000 | $ | (46,000 | ) | 100 | % | |||||||
|
Professional fees
|
90,000 | 139,000 | (49,000 | ) | (35 | %) | ||||||||||
|
Other
|
18,000 | 31,000 | (13,000 | ) | (42 | %) | ||||||||||
|
Total
|
$ | 108,000 | $ | 216,000 | $ | (108,000 | ) | (50 | %) | |||||||
Operating expenses decreased as a result of a decrease in the provision for loan loss due to currently having no loans in our portfolio and by a decrease in professional fees due to a decrease in pending litigation and a reduction in accounting fees due to change of auditors.
See Note J – Legal Matters Involving The Company of the Notes to the Financial Statements included in Part I, Item I Financial Statements of this Quarterly Report on Form 10-Q.
|
Total Non-operating income:
|
2013
|
2012
|
$ Change
|
% Change
|
||||||||||||
|
Gain on sale of marketable security- related party
|
$ | -- | $ | 29,000 | $ | 29,000 | (100 | %) | ||||||||
|
Recovery from settlement with loan guarantor
|
-- | 156,000 | (156,000 | ) | (100 | %) | ||||||||||
|
Total
|
$ | -- | $ | 185,000 | $ | (185,000 | ) | (100 | %) | |||||||
During January 2011, we, VRM I and VRM II were awarded unsecured claims up to $3.6 million from a bankruptcy settlement with a guarantor of certain loans. Pursuant to the terms of the settlement we received payment of approximately $0.2 million during the nine months ended September 30, 2012. No similar transaction occurred in 2013. The decrease in gain on sale of marketable securities is primarily due to the sale of our 114,117 shares of VRM II’s common stock to our Chairman and Chief Executive Officer, Michael Shustek on June 11, 2012. No similar transaction occurred in 2013.
|
Total Discontinued Operations
|
2013
|
2012
|
$ Change
|
% Change
|
||||||||||||
|
Net gain on sale of real estate held for sale
|
$ | 4,000 | $ | 3,000 | $ | 1,000 | 33 | % | ||||||||
|
Gain on sale of building
|
-- | 50,000 | (50,000 | ) | (100 | %) | ||||||||||
|
Write-down of real estate held for sale
|
-- | (66,000 | ) | 66,000 | 100 | % | ||||||||||
|
Income from equity method investee held for sale
|
63,000 | 30,000 | 33,000 | 110 | % | |||||||||||
|
Expenses related to real estate held for sale
|
(13,000 | ) | (45,000 | ) | 32,000 | 71 | % | |||||||||
|
Total
|
$ | 54,000 | $ | (28,000 | ) | $ | 82,000 | 293 | % | |||||||
During the nine months ended September 30, 2013, we recorded net gains of $4,000 from settlement received on a real estate held for sale, while during the same period in 2012, we recorded net gains of $3,000 on sale of real estate held for sale. During the nine months ended September 30, 2012, we recorded gain on sale of building of approximately $50,000, which was partial recognition of deferred income in connection with the sale of an office building located in Las Vegas, Nevada, deferred pending recovery of our letter of credit from Vestin Group and Michael Shustek. In June 2012, we made distributions of approximately $50,000 to Mr. Shustek, which were assigned back to us as partial repayment of the letter of credit. As a result, we recorded this recovery as revenue. No such transaction occurred during the nine months ended September 30, 2013. Increase in income from equity method investee is due to property acquired in second quarter 2012, resulting in two quarters’ revenue recorded during the nine months ended September 30, 2012 and three quarters’ revenue recorded during the same period in 2013. The decrease in write-downs and expenses related to real estate held for sale is due to the stabilization of the markets where our real estate owned are located and a decrease in upkeep and litigation of the properties.
For additional information see Note D – Real Estate Held for Sale and Note E – Investment in Equity Method Investee Held for Sale of the Notes to the Financial Statements included in Part I, Item I Financial Statements of this Quarterly Report on Form 10-Q.
Stated Unit Value Adjustment: In accordance with Section 7.8 of our Operating Agreement, our manager reviewed the value of our assets during the three months ended September 30, 2013. Based on this review the value of members’ capital accounts was adjusted from $0.79 per unit to $1.00 per unit, as of October 1, 2013. The periodic review of the estimated net unit value includes an analysis of unrealized gains that our manager reasonably believes exist at the time of the review, but that cannot be added to net asset value under GAAP.
Redemptions: At a special meeting of our members held on July 2, 2009, a majority of the members voted to approve the dissolution and winding up of the Fund, in accordance with the Plan as set forth in Annex A of the Fund’s proxy statement filed with the SEC pursuant to Section 14(a) of the Securities and Exchange Act of 1934 on May 11, 2009. The Plan became effective upon its approval by the members on July 2, 2009. Our members no longer have the right to have their units redeemed by us and we no longer honor any outstanding redemption requests effective as of July 2, 2009. As of July 2, 2009, the total redemptions made from inception were approximately $10.4 million. For additional information regarding members redemptions, see Note G – Members’ Equity of the Notes to the Financial Statements included in Part I, Item I Financial Statements of this Quarterly Report on Form 10-Q.
CAPITAL AND LIQUIDITY
Liquidity is a measure of a company’s ability to meet potential cash requirements, including ongoing commitments to fund lending activities and general operating purposes. As a result of the decision to liquidate the Company, we no longer invest in new loans. Hence, subject to retaining sufficient funds to meet our obligations and conduct wind down operations, all available funds will be paid out to our members. We do not anticipate the need for hiring any employees, acquiring fixed assets such as office equipment or furniture, or incurring material office expenses during the next twelve months because our manager will manage our affairs.
During the nine months ended September 30, 2013, net cash flows used from operating activities totaled approximately $0.2 million. Operating cash flows were used for the payment of normal operating expenses such as accounting fees, legal bills and expenses related to real estate held for sale. Cash flows provided by investing activities for the nine months ended September 30, 2013 totaled approximately $0.2 million, in which $3,000 was from proceeds from a nonrefundable extension fee on real estate held for sale, $2,000 from proceeds from notes receivable and $152,000 from distributions from our investment in equity method investee.
At September 30, 2013, we had approximately $0.3 million in unrestricted cash and approximately $3.0 million in total assets. We believe we have sufficient working capital to meet our operating needs during the next 12 months.
Investments in Real Estate Loans Secured by Real Estate Portfolio
As of September 30, 2013 and December 31, 2012, we had no investments in real estate loans. In accordance with the Plan, we will no longer invest in new loans.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2013, we do not have any interests in off-balance sheet special purpose entities nor do we have any interests in non-exchange traded commodity contracts.
CRITICAL ACCOUNTING ESTIMATES
Real Estate Held for Sale
Real estate held for sale and other real estate owned includes real estate acquired through foreclosure or deed in lieu and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property’s estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions. The carrying values of real estate held for sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note H – Recent Accounting Pronouncements of the Notes to the Financial Statements included in Part I, Item I Financial Statements of this Quarterly Report on Form 10-Q.
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ITEM 4.
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CONTROLS AND PROCEDURES
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(a) Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer has evaluated the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the third quarter of 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
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ITEM 1.
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LEGAL PROCEEDINGS
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Please refer to Note I – Legal Matters Involving the Manager and Note J – Legal Matters Involving the Company in the notes to the financial statement under Part I, Item I Financial Statements of this Quarterly Report on Form 10-Q, for information regarding our legal proceedings, which are incorporated herein by reference.
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ITEM 2.
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UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS
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Market Information
There is no established public trading market for the trading of units.
Holders
As of November 14, 2013, approximately 509 unit holders held 2,024,424 units in the Company.
Liquidation Distribution Policy
On January 26, 2010, April 8, 2010, September 17, 2010, May 25, 2011 and June 15, 2012, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million, $0.3 million, $0.3 million and $0.4 million, respectively, in accordance with the Plan. The amount distributed to each Member of the Fund was calculated based upon the percentage ownership interest of such Member in the Fund. See Note G – Members’ Equity of the Notes to the Financial Statements included in Part I, Item I Financial Statements of this Quarterly Report on Form 10-Q.
We intend to make liquidating distributions in accordance with the Plan as set forth in Annex A of the Fund’s proxy statement filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 14(a) of the Securities and Exchange Act of 1934 on May 11, 2009. We will distribute to our members the net proceeds we receive from the sale of our real estate held for sale, less a reasonable reserve established to provide for payment of the Company’s ongoing expenses and contingent liabilities. A final liquidating distribution will be made after we have completed the winding up of our business operations and made appropriate provision for any remaining obligations.
We anticipate that the liquidation of the sale of foreclosed properties may take five or more years, with the Dissolution process being substantially completed by the second half of 2014. However, because of numerous uncertainties, the liquidation may take longer or shorter than expected. Because the liquidation of the Fund was not imminent, as of September 30, 2013, the financial statements are presented assuming the Fund will continue as a going concern.
There are a number of factors that could delay our anticipated timetable, including the following:
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•
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Delays in the sale of real estate held by us through foreclosures, which may take many years to complete due to the time required to resolve pending litigation and bankruptcy matters involving foreclosed properties and to identify suitable buyers and consummate the sale of such properties;
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•
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Delays in the disposition of other non-cash assets;
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•
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Lawsuits or other claims asserted by or against us;
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•
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Unanticipated legal, regulatory or administrative requirements; and
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•
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Delays in settling our remaining obligations.
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Recent Sales of Unregistered Securities
None.
Equity Compensation Plan Information
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
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ITEM 6.
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EXHIBITS
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EXHIBIT INDEX
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Exhibit No.
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Description of Exhibits
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2.1(1)
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Plan of Complete Liquidation and Dissolution
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3.1(2)
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Articles of Organization
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3.2(3)
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Certificate of Amendment to Articles of Organization
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3.3(4)
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Amended and Restated Operating Agreement (included as Exhibit A to the prospectus)
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4.4(5)
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Distribution Reinvestment Plan
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10.9(6)
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Office lease agreement dated March 31, 2003 by and between Luke Properties, LLC and Vestin Group, Inc.
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10.10(7)
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Indemnification agreement dated March 25, 2009 by and between Vestin Group, Inc. and Vestin Fund III, LLC
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10.11 (8)
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Agreement between Strategix Solutions, LLC and Vestin Fund III, LLC for accounting services.
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10.12 (9)
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Plan of Complete Liquidation and Dissolution
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10.13 (10)
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Deed in Lieu
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31.1
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Section 302 Certification of Michael V. Shustek
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31.2
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Section 302 Certification of Tracee Gress
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32
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Certification Pursuant to 18 U.S.C. Sec. 1350
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101
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The following material from the Company's quarterly report on Form 10-Q for the nine months ended September 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012, (ii) Statements of Operations for the three and nine months ended September 30, 2013 and 2012, (iii) Statement of Equity for the nine months ended September 30, 2013, (iv) Statements of Cash Flows for the nine months ended September 30, 2013 and the year ended December 31, 2012 and (v) Notes to the Financial Statements
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(1)
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Incorporated herein by reference to our Schedule 14A Definitive Proxy Statement filed on May 11, 2009 (File No. 000-51301)
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(2)
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Incorporated herein by reference to our Pre-Effective Amendment No. 3 to Form S-11 Registration Statement filed on September 2, 2003 (File No. 333-105017)
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(3)
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Incorporated herein by reference to our Form 10-Q filed on August 16, 2004 (File No. 333-105017)
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(4)
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Incorporated herein by reference to our Schedule 14A Definitive Proxy Statement filed on January 29, 2007 (File No. 000-51301)
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(5)
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Incorporated herein by reference to Exhibit 4.4 of our Post-Effective Amendment No. 5 to Form S-11 Registration Statement filed on April 28, 2006 (File No. 333-105017)
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(6)
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Incorporated herein by reference to our Form 10-KSB filed on March 30, 2005 (File No. 333-105017)
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(7)
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Incorporated herein by reference to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on March 27, 2009 (File No. 000-51301)
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(8)
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Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on May 14, 2009 (File No. 000-51301)
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(9)
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Incorporated herein by reference to the Proxy Statement dated May 11, 2009 (File No. 000-51301)
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(10)
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Incorporated herein by reference to the Annual Report on Form 10-K filed on May 16, 2012 (File No. 000-51301)
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Pursuant to the requirements 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.
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Vestin Fund III, LLC
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By:
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Vestin Mortgage, LLC., its sole Manager
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By:
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/s/ Michael V. Shustek
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Michael V. Shustek
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Chief Executive Officer and Sole Director of the Manager
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(Principal Executive Officer of Manager)
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By:
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/s/ Tracee Gress
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Tracee Gress
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Chief Financial Officer of the Manager
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(Principal Financial and Accounting Officer of the Manager)
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Date: November 14, 2013
Exhibit 31.1
I, Michael V. Shustek, certify that:
1. I have reviewed this Form 10-Q of Vestin Fund III, LLC;
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(s) 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:
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(a)
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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 subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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(b)
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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;
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(c)
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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
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(d)
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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
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5. The registrant's other certifying officer(s) 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):
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(a)
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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
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(b)
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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.
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Date: November 14, 2013
/s/ Michael V. Shustek
Michael V. Shustek
Chief Executive Officer and Director of the Manager*
Vestin Mortgage, LLC, sole Manager of Vestin Fund III, LLC
* Michael V. Shustek functions as the equivalent of the Chief Executive Officer of the Registrant.
Exhibit 31.2
I, Tracee Gress, certify that:
1. I have reviewed this Form 10-Q of Vestin Fund III, LLC;
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(s) 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:
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(a)
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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 subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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(b)
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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;
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(c)
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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
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(d)
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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
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5. The registrant's other certifying officer(s) 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):
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(a)
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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
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(b)
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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.
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Date: November 14, 2013
/s/ Tracee Gress
Tracee Gress
Chief Financial Officer of the Manager*
Vestin Mortgage, LLC, sole Manager of Vestin Fund III, LLC
*Tracee Gress functions as the equivalent of Chief Financial Officer for Vestin Fund III LLC pursuant to an accounting services agreement entered into between Vestin Fund III LLC and her employer, Strategix Solutions, LLC.
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
Michael V. Shustek, as Chief Executive Officer and Director of Vestin Mortgage, LLC., the sole manager of Vestin Fund III, LLC (the “Registrant”), and Tracee Gress, as Chief Financial Officer of Vestin Mortgage, LLC., hereby certify, pursuant to 18 U.S.C. Sec.1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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(1)
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The Registrant’s Report on Form 10-Q for the nine months ended September 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
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(2)
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
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Date: November 14, 2013
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/s/ Michael V. Shustek
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Michael V. Shustek
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Chief Executive Officer and Director*
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of Vestin Mortgage, LLC., sole Manager of the Registrant
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Date: November 14, 2013
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/s/ Tracee Gress
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Tracee Gress
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Chief Financial Officer**
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of Vestin Mortgage, LLC., sole Manager of the Registrant
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* Michael V. Shustek functions as the equivalent of the Chief Executive Officer of the Registrant for purposes of 18 U.S.C. Section 1350.
**Tracee Gress functions as the equivalent of Chief Financial Officer of the Registrant for purposes of 18 U.S.C. Section 1350, pursuant to an accounting services agreement entered into between Vestin Fund III LLC and her employer, Strategix Solutions, LLC.