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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended September 30, 2016

Or

For the transition period from _________ to _________

Commission File Number: 000-51892

(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.

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, 2016, there were 2,384,179 shares of the Company's Common Stock outstanding.

TABLE OF CONTENTS
		Page
Item 1.	Condensed Consolidated Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	2
	Condensed Consolidated Statements of Other Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended Nine 30, 2016 and 2015 (unaudited)	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 4.	Controls and Procedures	37
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6.	Exhibits	40
	SIGNATURES	41
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32

 

 

 

PART I - FINANCIAL INFORMATION

ITEM 1

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

VESTIN REALTY MORTGAGE II, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

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

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

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

VESTIN REALTY MORTGAGE II, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

NOTE A — ORGANIZATION

Vestin Realty Mortgage II, Inc. ("VRM II", the "Company", "we", "us" or "our"), formerly Vestin Fund II, LLC ("Fund II"), invests in loans secured by real estate through deeds of trust or mortgages; hereafter referred to collectively as "deeds of trust" and as defined in our management agreement ("Management Agreement") as mortgage assets ("Mortgage Assets").  In addition, we invest in, acquire, manage or sell real property and acquire entities involved in the ownership or management of real property.  We commenced operations in June 2001.  References in this report to the "Company," "we," "us," or "our" refer to Fund II with respect to the period prior to April 1, 2006 and to VRM II with respect to the period commencing on April 1, 2006.

We operated as a real estate investment trust ("REIT") through December 31, 2011.  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.  As a REIT, we were required to have a December 31 fiscal year end.  We announced on March 28, 2012 that we have terminated our election to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), effective for the tax year ending December 31, 2012.  Under the Code, we will not be able to make a new election to be taxed as a REIT during the four years following December 31, 2012.  Pursuant to our charter, upon the determination by the Board of Directors that we should no longer qualify as a REIT, the restrictions on transfer and ownership of shares set forth in Article VII of our charter ceased to be in effect and, accordingly, shares of the Company's stock will no longer be subject to such restrictions.  In connection with the termination of our REIT status, we also amended our stockholders' rights plan to provide that a stockholder, other than Michael Shustek, may own up to 20% of outstanding shares of common stock, and that Michael Shustek may own up to 35% of outstanding shares of common stock.

Michael Shustek owns a significant majority of Vestin Mortgage, LLC, a Nevada limited liability company, which is our manager (the "manager" or "Vestin Mortgage"). 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 Mr. Shustek.

Pursuant to a management agreement, our manager is responsible for managing our operations and implementing our business strategies on a day-to-day basis.  Consequently, our operating results are dependent to a significant extent upon our manager's ability and performance in managing our operations and servicing our loans.

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").  VRM I has investment objectives similar to ours.

In April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC ("Strategix Solutions"), a Nevada limited liability company from which our former CFO and other members of our accounting staff were employed.  As of March 1, 2016, our CFO and certain members of our accounting staff were no longer employed by Strategix Solutions and became employed by MVP Realty Advisors.  On June 1, 2016, Tracee Gress resigned as the Chief Financial Officer of the Company which resignation became effective as of June 14, 2016.  Also on June 1, 2016, the Board of Directors of the Company appointed Edwin H. Bentzen IV as the new Chief Financial Officer of the Company effective as of June 14, 2016. Mr. Bentzen and the accounting staff also provide accounting and financial reporting services to MVP REIT, Inc. ("MVP REIT"), MVP REIT II, Inc. ("MVP REIT II") and VRM I.

In December 2013, we entered into a membership interest transfer agreement with MVP Capital Partners, LLC ("MVP Capital") pursuant to which we increased our ownership interest from 40% to 60% in MVP Realty Advisors, LLC ("MVP Advisors"), the advisor of MVP REIT. At the same time, VRM I acquired from MVP Capital the remaining 40% interest in MVP Advisors.  We and VRM I have agreed to fund certain costs and expenses of MVP REIT through MVP Advisors in proportion to our respective ownership interest.

During May 2015, our Board of Directors and the Board of Directors of VRM I agreed to form MVP CP II. We own 60% and VRM I owns 40%.  The purpose of MVP CP II is to act as the sponsor of MVP REIT II, a Maryland corporation, which was formed as a publicly registered non traded REIT ("MVP REIT II"). MVP REIT II's registrations statement for its initial public offering has been declared effective by the Securities and Exchange Commission on October 22, 2015.  MVP REIT II is a proposed $550,000,000 offering with the proceeds raised from the offering being used primarily to acquire parking assets in the United States and Canada. MVP REIT II has engaged MVP Advisors as its advisor.

We and VRM I have agreed to fund certain costs and expenses of MVP REIT II through MVP CP II in proportion to our respective ownership interest.  As consideration for the initial investment of $0.2 million MVP CP II received 8,000 shares of common stock in MVP REIT II.

Through our interest in MVP Advisor and MVP CP II, we have directed, and continue to direct, a portion of our cash towards development of the businesses of MVP REIT and MVP REIT II.

Reverse Stock Split

On September 15, 2016, the Company filed a Schedule 13E-3 and related preliminary proxy statement with the Securities and Exchange Commission (the "SEC") in connection with a proposed transaction that is intended to result in the voluntary delisting of the Company's common stock from NASDAQ and the voluntary deregistration from the Company's public reporting obligations under the Securities and Exchange Act of 1934 (the "Exchange Act"). The proposed transaction, if approved by the stockholders, is expected to permit the Company to forego many of the expenses associated with operating as a public reporting company, including the costs of preparing and filing periodic reports with the SEC, related accounting and legal fees and costs, and the ongoing expenses for compliance with the Sarbanes-Oxley Act of 2002 and other SEC requirements.

The suspension of reporting obligations would be accomplished by a reverse 1:1,000 stock split of the Company's common stock. All stockholders owning fewer than 1,000 shares prior to the reverse stock split would be cashed out by the Company and would no longer be stockholders of the Company. The cash out price will be not less than $2.70 per share, which is the average per-share closing price of the Company's common stock on NASDAQ for the ten consecutive trading days ending on the last trading day prior to September 15, 2016, or the date of the first public disclosure of the reverse stock split proposal in the form of the initial filing of the preliminary proxy statement with the SEC (the "Cash-Out Price"). If, however, the average per share closing price of the Company's common stock for the ten consecutive trading days ending on the last trading day prior to the effective date of the reverse stock split (the "Closing Trading Price") exceeds the Cash-Out Price, then fractional shares will be paid out at the Closing Trading Price rather than the Cash-Out Price.

If, after completion of the reverse stock split, the Company has fewer than 300 stockholders of record, the Company intends to delist from NASDAQ by filing a Form 25 and suspend its reporting obligations under the Exchange Act by filing a Form 15 with the SEC. Upon the effectiveness of such filings, the Company's common stock would no longer be listed on NASDAQ and the Company would be relieved of its requirements to file periodic reports with the SEC, including annual reports on Form 10-K and quarterly reports on Form 10-Q. After delisting from NASDAQ, the Company anticipates that its common stock would be quoted on the Pink Sheets, a centralized electronic quotation service for over-the-counter securities, after the reverse stock split. The Company, however, can give no assurance that trading in its stock will continue on the Pink Sheets or on any other securities exchange or quotation medium after the reverse stock split.

The consummation of the proposed transaction is subject to a number of conditions, including the filing of a definitive proxy statement with the SEC and approval by the Company's stockholders. The Company intends to include a proposal to amend the company's Certificate of Incorporation to effect the reverse stock split at its annual meeting of stockholders.

Stockholders are advised not to put undue reliance on the description of the reverse stock split provided in this Form 10-Q and in the preliminary proxy statement. The Company has filed a preliminary proxy statement and Schedule 13E-3 concerning the proposed reverse stock split, which are subject to SEC review. STOCKHOLDERS ARE URGED TO READ CAREFULLY AND IN THEIR ENTIRETY THE PRELIMINARY PROXY STATEMENT AND SCHEDULE 13E-3 FILED WITH THE SEC, AND, WHEN THEY BECOME AVAILABLE, THE DEFINITIVE PROXY STATEMENT AND OTHER RELEVANT MATERIALS, BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT THE COMPANY AND THE PROPOSED REVERSE STOCK SPLIT. The definitive proxy statement and Schedule 13E-3 will be mailed to stockholders as of a record date to be established for voting on the proposed transaction. Stockholders may obtain free copies of the Company's preliminary proxy statement, Schedule 13E-3, definitive proxy statement (when available) and its other SEC filings electronically by accessing the SEC's home page at http://www.sec.gov. Copies can also be obtained, free of charge, upon written request to the Company, attention: Investor Relations.

The Company and its directors, executive officers, and advisors may be deemed to be participants in the solicitation of proxies from the holders of the Company's common stock in respect of the proposed reverse stock split. Stockholders may obtain additional information regarding the interest of those participants by reading the Company's preliminary proxy statement and, when they become available, the Company's definitive proxy statement and other relevant proxy materials, and the Company's Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q as filed with the SEC.

The information set forth above is not a proxy statement or solicitation of a proxy, consent or authorization with respect to any securities or in respect of the proposed reverse stock split and shall not constitute an offer to sell or a solicitation of an offer to buy the securities of the Company, nor shall there be any sale of any such securities in any state or jurisdiction in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of such state or jurisdiction.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The accompanying unaudited condensed consolidated financial statements of the Company are prepared by management on the accrual basis of accounting and in accordance with principles generally accepted in the United States of America ("GAAP") for interim financial information as contained in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"), and in conjunction with rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited condensed consolidated financial statements include accounts and related adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the interim period.

Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

The condensed consolidated balance sheet as of December 31, 2015 contained herein has been derived from the audited consolidated financial statements as of December 31, 2015, but do not include all disclosures required by GAAP.

Management Estimates

The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Investments in Real Estate Loans

We may, from time to time, acquire or sell investments in real estate loans from or to our manager or other related parties pursuant to the terms of our Management Agreement without a premium.  The primary purpose is to either free up capital to provide liquidity for various reasons, such as loan diversification, or place excess capital in investments to maximize the use of our capital.  Selling or buying loans allows us to diversify our loan portfolio within these parameters.  Due to the short-term nature of the loans we make and the similarity of interest rates in loans we normally would invest in, the fair value of a loan typically approximates its carrying value.  Accordingly, discounts or premiums typically do not apply upon sales of loans and therefore, generally no gain or loss is recorded on these transactions, regardless of whether to a related or unrelated party.

Investments in real estate loans are secured by deeds of trust or mortgages.  Generally, our real estate loans require interest only payments with a balloon payment of the principal at maturity.  We have both the intent and ability to hold real estate loans until maturity and therefore, real estate loans are classified and accounted for as held for investment and are carried at amortized cost.  Loans sold to or purchased from affiliates are accounted for at the principal balance and no gain or loss is recognized by us or any affiliate.  Loan-to-value ratios are initially based on appraisals obtained at the time of loan origination and are updated, when new appraisals are received or when management's assessment of the value has changed, to reflect subsequent changes in value estimates.  Such appraisals are generally dated within 12 months of the date of loan origination and may be commissioned by the borrower.

The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The Company's impaired loans include troubled debt restructuring, and performing and non-performing loans in which full payment of principal or interest is not expected.  The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price or the fair value of its collateral.

Loans that have been modified from their original terms are evaluated to determine if the loan meets the definition of a Troubled Debt Restructuring ("TDR") as defined by ASC 310-40.  When the Company modifies the terms of an existing loan that is considered a TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement.  If the modification calls for deferred interest, it is recorded as interest income as cash is collected.

Allowance for Loan Losses

We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment.  Our manager's estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower's ability to repay, prevailing economic conditions and the underlying collateral securing the loan.  Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans.  Actual losses on loans are recorded first as a reduction to the allowance for loan losses.  Generally, subsequent recoveries of amounts previously charged off are recognized as income.

Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property.  As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the real estate lending industry.  We and our manager generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process; there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.

Additional facts and circumstances may be discovered as we continue our efforts in the collection and foreclosure processes.  This additional information often causes management to reassess its estimates.  In recent years, we have revised estimates of our allowance for loan losses.  Circumstances that have and may continue to cause significant changes in our estimated allowance include, but are not limited to:

·

Declines in real estate market conditions, which can cause a decrease in expected market value;

·

Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;

·

Lack of progress on real estate developments after we advance funds.  We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances.  After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances;

·

Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed property; and

·

Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.

Discontinued Operations

We have reclassified for all periods presented in the accompanying consolidated statements of operations, the amounts related to discontinued operations and real estate held for sale, in accordance with the applicable accounting criteria.  In addition, the assets and liabilities related to the discontinued operations are reported separately in the accompanying consolidated balance sheets as real estate held for sale, assets held for sale, and liabilities related to assets 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 REO are separately identified in the accompanying consolidated statements of operations.

Real Estate Owned Held for Sale

Real estate owned held for sale ("REO") 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.  We generally seek to sell properties acquired through foreclosure as quickly as circumstances permit, taking into account current economic conditions.  The carrying values of REO are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.

Management classifies real estate as REO when the following criteria are met:

·

Management commits to a plan to sell the properties;

·

The property is available for immediate sale in its present condition subject only to terms that are usual and customary;

·

An active program to locate a buyer and other actions required to complete a sale have been initiated;

·

The sale of the property is probable;

·

The property is being actively marketed for sale at a reasonable price; and

·

Withdrawal or significant modification of the sale is not likely.

Acquisitions

The Company records the acquired tangible and intangible assets and assumed liabilities of acquisitions of all operating properties and those development and redevelopment opportunities that meet the accounting criteria to be accounted for as business combinations at fair value at the acquisition date. The Company assesses and considers fair value based on estimated cash flow projections that utilize available market information and discount and/or capitalization rates that the Company deems appropriate. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. The acquired assets and assumed liabilities for an operating property acquisition generally include but are not limited to: land, buildings and improvements, construction in progress and identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, leasing costs, value of above-market and below-market operating leases and ground leases, acquired in-place lease values and tenant relationships, if any.

The fair value of land is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings and improvements, tenant improvements, and leasing costs are based upon current market replacement costs and other relevant market rate information.

The fair value of the above-market or below-market component of an acquired in-place operating lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining non-cancellable lease term and (ii) management's estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition measured over the remaining non-cancellable term of the lease for above-market operating leases and the initial non-cancellable term plus the term of any below-market fixed rate renewal options, if applicable, for below-market operating leases. The amounts recorded for above-market operating leases are included in deferred leasing costs and acquisition-related intangibles, net on the balance sheet and are amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable leases.

The amounts recorded for below-market operating leases are included in deferred revenue and acquisition-related liabilities, net on the balance sheet and are amortized on a straight-line basis as an increase to rental income over the remaining term of the applicable leases plus the term of any below-market fixed rate renewal options, if applicable. Our below-market operating leases generally do not include fixed rate or below-market renewal options.

The fair value of acquired in-place leases is derived based on management's assessment of lost revenue and costs incurred for the period required to lease the "assumed vacant" property to the occupancy level when purchased. This fair value is based on a variety of considerations including, but not necessarily limited to: (1) the value associated with avoiding the cost of originating the acquired in-place leases; (2) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period; and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period. Factors considered by us in performing these analyses include an estimate of the carrying costs during the expected lease-up periods, current market conditions, and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand at market rates. In estimating costs to execute similar leases, the Company considers leasing commissions, legal and other related expenses. The amount recorded for acquired in-place leases is included in deferred leasing costs and acquisition-related intangibles, net on the balance sheet and amortized as an increase to depreciation and amortization expense over the remaining term of the applicable leases. If a lease were to be terminated or if termination were determined to be likely prior to its contractual expiration (for example resulting from bankruptcy), amortization of the related unamortized in-place lease intangible would be accelerated.

The determination of the fair value of any debt assumed in connection with a property acquisition is estimated by discounting the future cash flows using interest rates available for the issuance of debt with similar terms and remaining maturities.

The determination of the fair value of the acquired tangible and intangible assets and assumed liabilities of operating property acquisitions requires us to make significant judgments and assumptions about the numerous inputs discussed above. The use of different assumptions in these fair value calculations could significantly affect the reported amounts of the allocation of our acquisition related assets and liabilities and the related amortization and depreciation expense recorded for such assets and liabilities. In addition, because the value of above and below market leases are amortized as either a reduction or increase to rental income, respectively, our judgments for these intangibles could have a significant impact on our reported rental revenues and results of operations.

Costs directly associated with all operating property acquisitions and those development and redevelopment acquisitions that meet the accounting criteria to be accounted for as business combinations are expensed as incurred. Our acquisition expenses are directly related to our acquisition activity and if our acquisition activity was to increase or decrease, so would our acquisition costs. Costs directly associated with development acquisitions accounted for as asset acquisitions are capitalized as part of the cost of the acquisition. During the nine months ended September 30, 2016, the Company did not capitalize any such acquisition costs.

Impairment of Long Lived Assets

When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.

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

The Company recognizes interest income from loans on an accrual basis over the expected terms of the loans using the effective interest method.  The Company may recognize fees, discounts, premiums, anticipated exit fees and direct cost over the terms of the loans as an adjustment to the yield.  The Company may recognize fees on commitments that expire unused at expiration.  The Company may recognize interest income from available-for-sale securities on an accrual basis over the life of the investment on a yield-to-maturity basis.  Interest is fully allowed for on impaired loans and is recognized on a cash basis method.  The receipt of previous loan or note receivable allowances or impairments are recognized as revenue.

Advertising Costs

Advertising costs incurred in the normal course of operations are expensed as incurred.  The Company had no advertising expense for the three and nine months ended September 30, 2016 and 2015.

Investments in Real Estate and Fixed Assets

Investments in real estate and fixed assets are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are primarily 3 to 40 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).

The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.

Investment in Marketable Securities

Investment in marketable securities consists of stock in VRM I and MVP REIT II, related parties.  The securities are stated at fair value as determined by the closing market prices as of September 30, 2016 and December 31, 2015.  All securities are classified as available-for-sale.

We are required to evaluate our available-for-sale investment for other-than-temporary impairment charges.  We will determine when an investment is considered impaired (i.e., decline in fair value below its amortized cost), and evaluate whether the impairment is other than temporary (i.e., investment value will not be recovered over its remaining life).  If the impairment is considered other than temporary, we will recognize an impairment loss equal to the difference between the investment's cost and its fair value.

Basic and Diluted Earnings Per Common Share

Basic earnings per share ("EPS") is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding.  Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been exercised.  We had no outstanding common share equivalents during the periods ended September 30, 2016 and December 31, 2015.

Common Stock Dividends

During June 2008, our Board of Directors decided to suspend the payment of dividends.  Our Board of Directors will closely monitor our operating results in order to determine when dividends should be reinstated; however, we do not expect our Board of Directors to reinstate dividends in the foreseeable future.

Treasury Stock

On March 21, 2007, our Board of Directors authorized the repurchase of up to $10 million worth of our common stock. On November 17, 2014, our Board of Directors authorized the repurchase of an additional $500,000 in common stock.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.  We are not obligated to purchase any shares.  Subject to applicable securities laws, including SEC rule 10b-18, repurchases may be made at such times and in such amounts, as our management deems appropriate.  The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share repurchase program.  The repurchases will be funded from our available cash.

We record our treasury stock using the cost method.  Under the Maryland General Corporation Law, shares of its own stock acquired by a corporation constitute authorized but unissued shares.

Segments

We currently are authorized to operate three reportable segments, investments in real estate loans, investments in real property and investment in a real estate management company.  During the nine months ended September 30, 2016, the Company operated in all segments.

Our objective is to invest approximately 97% of our assets in real estate loans and real estate related investments, while maintaining approximately 3% as a working capital cash reserve.

Principles of Consolidation

Our consolidated financial statements include the accounts of VRM II; Building A, LLC, Building C, LLC, Wolfpack Properties, LLC; Devonshire, LLC; SE Properties, LLC; ExecuSuites, LLC; MVP Advisors; and MVP Capital Partners II, LLC.  All significant intercompany transactions and balances have been eliminated in consolidation.

Business Combinations

 

In December 2007, the Financial Accounting Standards Board (FASB) revised the authoritative guidance for business combinations, establishing principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired (including goodwill), the liabilities assumed, and any non-controlling interest in the acquiree. Subsequently, on April 1, 2009, the FASB amended and clarified certain aspects of its authoritative guidance on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. We apply the FASB authoritative guidance to all business combinations for which the acquisition date is on or after January 1, 2009, and to certain future income tax effects related to our prior business combinations, should they arise.

Non-controlling Interests

The FASB issued authoritative guidance for non-controlling interests in December 2007, which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as an unconsolidated investment, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, the guidance requires consolidated net income (loss) to be reported at amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income (loss) attributable to the parent and to the non-controlling interest.

Income Taxes

The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements.  Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized.  In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.  A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition.  In the event the Company was to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods.  Also, included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Reclassifications

In conjunction with the adoption of new accounting standards, certain debt or loan issuance costs for the three and nine months ended September 30, 2015 as well as certain amounts as of December 31, 2015, have been reclassified to conform to the current year's presentation.

NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

Financial instruments consist of cash, interest and other receivables, notes receivable, accounts payable and accrued liabilities, due to/from related parties and notes payable.  The carrying values of these instruments approximate their fair values due to their short-term nature.  Marketable securities – related party and investment in real estate loans are further described in Note K – Fair Value.

Financial instruments with concentration of credit and market risk include cash, interest and other receivables, marketable securities - related party, notes receivable, accounts payable and accrued liabilities, due to/from related parties, notes payable, and loans secured by deeds of trust.

We maintain cash deposit accounts and certificates of deposit that, at times, may exceed federally-insured limits.  To date, we have not experienced any losses.  As of September 30, 2016 and December 31, 2015 we had approximately $3.4 million and $3.9 million of funds, respectively, in excess of the federally-insured limits.

As of September 30, 2016, 100% of our loans were loans in which we participated with other lenders, most of whom are our affiliates.

As of September 30, 2016, 48% and 48% of our loans were in Nevada and California, respectively, compared to 93% in Nevada at December 31, 2015.

As of September 30, 2016, the loan to our largest borrower represented approximately 48% of our total investment in real estate loans.  This real estate loan is an acquisition and development loan secured by property located in California, with a first lien position.  The interest rate is 8.5% per annum, the outstanding balance is approximately $3.8 million and the loan is considered a performing loan.  As of December 31, 2015, the loan to our largest borrower represented approximately 53% of our total investment in real estate loans.  This real estate loan was a commercial loan secured by property located in Nevada, with a first lien position.  The interest rate is 15% per annum, the outstanding balance is approximately $2.5 million and the loan is considered a non-performing loan.

The success of a borrower's ability to repay its real estate loan obligation in a large lump-sum payment may be dependent upon the borrower's ability to refinance the obligation or otherwise raise a substantial amount of cash.  With the weakened economy, credit continues to be difficult to obtain and as such, 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.  In addition, an increase in interest rates over the loan rate applicable at origination of the loan may have an adverse effect on our borrower's ability to refinance.

Common Guarantors

As of December 31, 2015, two loans totaling approximately $1.7 million, representing approximately 38% of our portfolio's total value, have a common guarantor.  As of September 30, 2016, these loans were paid in full.

As of September 30, 2016 and December 31, 2015, three loans totaling approximately $0.3 million, representing approximately 3.9% and 7%, respectively, of our portfolio's total value, have a common guarantor.  These loans were considered performing loans as of September 30, 2016.

As of September 30, 2016, three loans totaling approximately $0.9 million, representing approximately 11.6% of our portfolio's total value, had a common guarantor.  These loans were considered performing loans as of September 30, 2016.

NOTE D — INVESTMENTS IN REAL ESTATE LOANS

As of September 30, 2016 and December 31, 2015, most of our loans provided for interest only payments with a "balloon" payment of principal payable and any accrued interest payable in full at the end of the term.  As of September 30, 2016 and December 31, 2015, three loans had variable interest rates adjusted quarterly at a rate of prime plus 3.30% (6.8% as of September 30, 2016 and December 31, 2015). The balance on these loans was approximately $0.3 million as of September 30, 2016 and December 31, 2015.

In addition, we may invest in real estate loans that require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time.  At September 30, 2016 and December 31, 2015, we had one and three investments in real estate loans that had interest reserves.

Loan Portfolio

As of September 30, 2016, we had five available real estate loan products consisting of commercial, construction, acquisition and development, land and residential.  The effective interest rates on all product categories range from 8% to 15% which includes performing and non performing loans that are being fully or partially accrued and will be payable at maturity.  Revenue by product will fluctuate based upon relative balances during the period.

Investments in real estate loans as of September 30, 2016, were as follows:

Investments in real estate loans as of December 31, 2015, were as follows:

*	Please see Balance Sheet Reconciliation below.

The "Weighted Average Interest Rate" as shown above is based on the contractual terms of the loans for the entire portfolio including non-performing loans.  The weighted average interest rate on performing loans only, as of September 30, 2016 and December 31, 2015, was 10.69% and 11.79%, respectively.  Please see "Non-Performing Loans" and "Asset Quality and Loan Reserves" below for further information regarding performing and non-performing loans.

Loan-to-value ratios are generally based on the most recent appraisals and may not reflect subsequent changes in value and include allowances for loan losses.  Recognition of allowance for loan losses will result in a maximum loan-to-value ratio of 100% per loan.

The following is a schedule of priority of real estate loans:

*	Please see Balance Sheet Reconciliation below.

The following is a schedule of contractual maturities of investments in real estate loans as of September 30, 2016:

The following is a schedule by geographic location of investments in real estate loans:

*	Please see Balance Sheet Reconciliation below.

Balance Sheet Reconciliation

The following table reconciles the balance of the loan portfolio to the amount shown on the accompanying Consolidated Balance Sheets.

(a)

Please refer to Specific Reserve Allowance below.

Non-Performing Loans

As of September 30, 2016 and December 31, 2015, we had one loan considered non-performing (i.e., 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).  This loan has been placed on non-accrual of interest status and is currently carried on our books at a value of $0, net of allowance for loan losses of approximately $2.5 million.

At September 30, 2016 and December 31, 2015, the following loan types were non-performing:

Asset Quality and Loan Reserves

Losses may occur from investing in real estate loans.  The amount of losses will vary as the loan portfolio is affected by changing economic conditions and the financial condition of borrowers.

The conclusion that a real estate loan is uncollectible or that collectability is doubtful is a matter of judgment.  On a quarterly basis, our manager evaluates our real estate loan portfolio for impairment.  The fact that a loan is temporarily past due does not necessarily mean that the loan is non-performing.  Rather, all relevant circumstances are considered by our manager to determine impairment and the need for specific reserves.  Such evaluation, which includes a review of all loans on which full collectability may not be reasonably assured, considers among other matters:

·

Prevailing economic conditions;

·

Historical experience;

·

The nature and volume of the loan portfolio

·

The borrowers' financial condition and adverse situations that may affect the borrowers' ability to pay;

·

Estimated net realizable value of any underlying collateral in relation to the loan amount.

Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses on an individual loan basis; we do not have a general allowance for loan losses.  Additions to the allowance for loan losses are made by charges to the provision for loan loss.  As of September 30, 2016, our ratio of total allowance for loan losses to total loans with an allowance for loan loss was 100%.

The following is a breakdown of allowance for loan losses related to performing loans and non-performing loans:

**	Please refer to Specific Reserve Allowances below.

Our manager evaluated our loans and, based on current estimates with respect to the value of the underlying collateral, believes that such collateral is sufficient to protect us against further losses of principal.  However, such estimates could change or the value of the underlying real estate could decline.  Our manager will continue to evaluate our loans in order to determine if any other allowance for loan losses should be recorded.

Specific Reserve Allowances

As of September 30, 2016 and December 31, 2015, we have provided a specific reserve allowance for one non-performing loan in the amount of $2,450,000 based on updated appraisals of the underlying collateral and/or our evaluation of the borrower.  We will continue to evaluate our position in this loan.

Extensions

As of September 30, 2016 and December 31, 2015, our manager had granted extensions on one outstanding loan totaling approximately $2.5 million, pursuant to the terms of the original loan agreements, which permit extensions by mutual consent, or as part of a TDR.  Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing.  Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower's obligation to make interest payments on the loan.  In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal.

NOTE E —INVESTMENTS IN DELAWARE STATUTORY TRUST

As of September 30, 2016, we had investments in two Delaware Statutory Trusts ("DST") for a total of approximately $3.1 million which have mandatory repurchase agreements which, for accounting purposes, are accounted for in a manner similar to loans. The DST's hold commercial properties located in Illinois and Florida respectively, which we consider to be the collateral on these loans. Additionally, each DST is guaranteed by a third party Broker Dealer who has a selling agreement with MVP REIT and MVP REIT II.  Certain members of the Broker Dealer's management also guaranteed these loans.  During the three and nine months ended September 30, 2016, we earned approximately $0.1 million and $0.4 million in interest, respectively.

NOTE F —ASSETS HELD FOR SALE

During April 2015, we committed to a plan to sell all interests in our six office buildings, at which point we began classifying the related assets as assets held for sale, and the related liabilities as liabilities related to assets held for sale. Additionally, we have classified the six office building's operating results of operations as discontinued operations.

Assets and groups of assets and liabilities which comprise disposal groups are classified as "held for sale" when all of the following criteria are met: a decision has been made to sell, the assets are available for sale immediately, the assets are being actively marketed at a reasonable price in relation to the current fair value, a sale has been or is expected to be concluded within twelve months of the balance sheet date, and significant changes to the plan to sell are not expected. Assets held for sale are not depreciated.

Additionally, the operating results and cash flows related to these assets and liabilities are included in discontinued operations in the consolidated statements of operations and consolidated statements of cash flows for the nine months ended September 30, 2016.

We and VRM I, through its subsidiaries, have the right, for a period of one year from the closing dates of the building sales, to repurchase the buildings at a price equal to (i) the sales price for each building, plus (ii) $65,000 for the 8930 Building, $65,000 for the 8880 building, $30,000 for the 8905 Building, $30,000 for the 8860 Building, $30,000 for the 8925 Building and $30,000 for the 8945 Building, plus (iii) twelve percent less any profit realized by the purchaser of the building being repurchased.  Stable Development, LLC, a limited liability company is the manager of and owns a 15% interest in each of the purchasers.  Due to this repurchase right, we have recorded the gain on sale as deferred revenue, to be recognized when the repurchase right is exercised or expires.  Lance Bradford, the former President of MVP REIT is an owner of Stable Development, LLC.

As of September 30, 2016 all assets previously held for sale have been sold.

The following is a summary of the results of operations related to the assets held for sale for the three and nine months ended September 30, 2016 and 2015.

NOTE G — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY

In December 2014, VRM I effected a 1 for 4 reverse split of its common stock. All share and per share information in VRM I's consolidated financial statements and its accompanying notes have been adjusted to retroactively reflect the 1 for 4 reverse stock split.

As of September 30, 2016, we owned 134,545 shares of VRM I's common stock, representing approximately 10.8% of the total outstanding shares. VRM I's common stock is listed on the OTC Pink Marketplace. The closing price of VRM I's common stock on September 30, 2016, was $3.49 per share.

During the nine months ended September 30, 2016, the trading price for VRM I's common stock ranged from $3.33 to $4.00 per share.  We will continue to evaluate our investment in marketable securities on a quarterly basis.

NOTE H — INVESTMENT IN MVP REIT II

During May 2015, our Board of Directors and the Board of Directors of VRM I agreed to form MVP CP II. We own 60% and VRM I owns 40%.  The purpose of MVP CP II is to act as the sponsor of MVP REIT II, a Maryland corporation, which was formed as a publicly registered non traded REIT ("MVP REIT II"). MVP REIT II's registration statement has been declared effective by the SEC on October 22, 2015.  MVP REIT II is a proposed $550,000,000 offering with the proceeds raised from the offering being used primarily to acquire parking assets in the United States and Canada. MVP REIT II has engaged MVP Advisors as its advisor.

We and VRM I have agreed to fund certain costs and expenses of MVP REIT II through MVP CP II in proportion to our respective ownership interest.  As consideration for the initial investment of $0.2 million MVP CP II received 8,000 shares of common stock in MVP REIT II.

As part of the advisory agreement, MVP Advisors will receive a 1% annual asset management fee and 2.25% of the purchase price on all acquisitions.  MVP Advisors will also receive the lesser of 3% of contract sale price or 50% of the brokerage commission paid on dispositions of MVP REIT II assets, which amount shall accrue until the MVP REIT II investors have a return of their net capital and a 6% annual cumulative non compounded return. In addition once the MVP REIT II investors have received a return of their net capital invested and a 6% annual cumulative, non-compounded return, then MVP Advisors will be entitled to receive 15% of the remaining proceeds. This fee will be payable under only one of the following events: (i) if MVP REIT II shares are listed on a national securities exchange;

(ii) if MVP REIT II assets are sold, other than single assets sold in the ordinary course, or liquidated; (iii) upon a merger, share exchange, reorganization or other transaction pursuant to which MVP REIT II investors receive cash or publicly traded securities in exchange for their shares; or (iv) upon termination of the advisory agreement. The operating agreement of the Advisor provides that once we and VRM I have been repaid in full for any capital contributions to the Advisor or for any expenses advanced on the Advisor's behalf, or capital investment, and once we and VRM I have received an annualized return on our capital investment of 7.5%, then Michael Shustek will receive 40% of the net profits of the Advisor.

As of September 30, 2016, we held 5,000 shares of MVP REIT II's outstanding common stock, purchased in December 2015, for $125,000. During the nine months ended September 30, 2016, we received approximately $2,000 in DRIP shares as dividend income.

NOTE I — RELATED PARTY TRANSACTIONS

Transactions with the Manager

Our manager is entitled to receive from us an annual management fee of up to 0.25% of our aggregate capital contributions received by us and Fund II from the sale of shares or membership units, paid monthly.  The amount of management fees earned by our manager for the three months ended September 30, 2016 and 2015 were approximately $274,000 and $274,000, respectively, during each period.  The amount of management fees earned by our manager for the nine months ended September 30, 2016 and 2015 were approximately $823,000 and $822,000, respectively, during each period.

As of September 30, 2016 and December 31, 2015, our manager owned 23,175 of our common shares, representing approximately 1.0% of our total outstanding common stock at the respective dates.

During the nine months ended September 2016 we paid the manager approximately $0.2 million in fees related to the investment in Delaware Statutory Trust.  During September 2015, we and VRM I paid the manager approximately $0.3 million in fees, of which our portion was approximately $0.2 million, related to the investment in Delaware Statutory Trust.

Transactions with Other Related Parties

During the three months ended September 30, 2016, the trading price for VRM I's common stock ranged from $3.33 to $4.00 per share.  For the three and nine months ended September 30, 2016 and 2015, we recognized no dividend income from VRM I.

As of September 30, 2016 and December 31, 2015, VRM I owned 134,270 of our common shares, representing approximately 5.6% of our total outstanding common stock for both periods.

During the three and nine months ended September 30, 2016, we paid Vestin Mortgage a disposition fee of approximately $0.2 million and $0.8 million, respectively, related to the sale of assets held for sale.

As of September 30, 2016 and December 31, 2015, MVP Advisors owed VRM I approximately $4.5 million.

As of September 30, 2016 and December 31, 2015, we owned a 60% interest in MVP Advisors, the advisor of MVP REIT and MVP REIT II, Inc.

MVP Advisors is entitled to receive a monthly asset management fee at an annual rate equal to 0.85% of the fair market value of (i) all assets then held by MVP REIT or (ii) MVP REIT's proportionate share thereof in the case of an investment made through a joint venture or other co-ownership arrangement, excluding (only for clause (ii)) debt financing obtained by MVP REIT or made available to MVP REIT. The fair market value of real property shall be based on annual "AS-IS", "WHERE-IS" appraisals, and the fair market value of real estate-related secured loans shall be equal to the face value of such loan, unless it is non-performing, in which case the fair market value shall be equal to the book value of such loan. The asset management fee will be reduced to 0.75% if MVP REIT is listed on a national securities exchange.  Asset management fees for the three months ended September 30, 2016 and 2015 were approximately $0.3 million and $0.1 million, respectively. Asset management fees for the nine months ended September 30, 2016 and 2015 were approximately $0.8 million and $0.3 million, respectively.

MVP Advisors receives a monthly debt financing fee at an annual rate equal to 0.25% of the aggregate debt financing obtained by MVP REIT or made available to MVP REIT, such as mortgage debt, lines of credit, and other term indebtedness, including refinancing's.  In the case of a joint venture, MVP REIT pays this fee only on MVP REIT's pro rata share.  Debt financing fees for the three months ended September 30, 2016 and 2015 were approximately $32,000, and $18,000, respectively. Debt financing fees for the nine months ended September 30, 2016 and 2015 were approximately $81,000, and $48,000, respectively.

MVP Advisors receives a 3% acquisition fee for all acquisitions of MVP REIT.  MVP Advisors received approximately $24,000 and $29,000 in acquisition fee income from MVP REIT during the three months ended September 30, 2016 and 2015.  MVP Advisors received approximately $0.9 million and $1.3 million in acquisition fee income from MVP REIT during the nine months ended September 30, 2016 and 2015, respectively.

MVP Advisors receives a 2.25% acquisition fee for all acquisitions of MVP REIT II.  MVP Advisors received approximately $0.4 million and $0.8 million in acquisition fee income from MVP REIT II during the three and nine months ended September 30, 2016.

As of September 30, 2016 we have made loans of approximately $12.9 million to MVP Advisors, the manager of MVP REIT.  We believe MVP Advisors has the opportunity to generate fees for the services it will render to MVP REIT. However, such fees may not be significant in the near term as MVP REIT only recently commenced operations in December 2012, and over the next 12 months, there may be a diminution of our liquid assets.  If MVP REIT is unable to deploy the capital and operate its business successfully, then our return on our investment in MVP Advisor and the ability of MVP Advisor to repay our loans could be adversely impacted.  We have not forgiven the balance due from MVP Advisor; however the decision by MVP Advisor to forgive certain amounts creates additional uncertainty as to when we will be repaid the amounts loaned to MVP Advisor. Based on these uncertainties, we have determined to fully impair the balance of this investment and note receivable.

As consideration for the initial investment of $0.2 million MVP CP II received 8,000 shares of common stock in MVP REIT II.  As of September 30, 2016 we have made loans of approximately $2.0 million to MVP CP II.  Similar to our investments in MVP Advisors in connection with MVP REIT, the return on our investment in MVP CP II in connection with MVP REIT II, including the ability of MVP CP II to repay its loans, will likely depend upon the success of the pending public offering of MVP REIT II and the ability of MVP CP II and MVP Advisor to successfully deploy the offering proceeds.  Based on uncertainties regarding repayment, during the nine months ended September 30, 2016, we have determined to fully impair the entire balance of this loan.

As of September 30, 2016 and December 31, 2015, MVP CP II owed VRM I approximately $3.2 million and $0.7 million, respectively.

From time to time, we may also jointly invest in real property or real estate loans with our affiliates, including VRM I, MVP REIT, Inc. and MVP REIT II, Inc.  These investments are described elsewhere in this report and incorporated herein by reference.

From time to time, we may also acquire or sell investments in real estate or in real estate loans from/to our manager or other related parties.  Pursuant to the terms of our Management Agreement, such acquisitions and sales are made without any mark up or mark down.  No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments.  The purpose is generally to diversify our portfolio by syndicating loans and real estate investments, thereby providing us with additional capital to make additional loans and investments in real estate.

On November 25, 2014, Shustek Investments Inc., a company wholly owned by our CEO Mike Shustek, entered into a loan purchase contract with us to acquire a loan with a book value of approximately $2.4 million. The loan was originated during March 2009 with an original principal balance of $7.45 million earning interest at a rate of 11% per annum. The borrower made principal payments during the life of the loan; however, they also received extensions for the maturity of the note. As of the date of the loan purchase contract, the loan was extended through January 2015.  The purchase price of the loan was approximately $3.0 million, which includes the purchase of interest assigned to third parties. As additional consideration we may receive 50% of any amount collected in excess of the purchase price less any expenses incurred by Shustek Investments. After three years the 50% shall be reduced to 33%. This transaction resulted in a gain on sale of loan – related party totaling approximately $0.6 million for the year ended December 31, 2014.  During the nine months ended September 30, 2015, this loan was paid in full and we received approximately $1.6 million.

NOTE J — NOTES PAYABLE

In April 2015, we financed a 12-month insurance policy for Directors and Officers liability, with an annual interest rate of 2.9%.  The agreement required a down payment of $39,000 and nine monthly payments of $25,000 beginning on May 27, 2015.  During December 2015, the outstanding balance of the note was paid in full.

In April 2016, we financed a 12-month insurance policy for Directors and Officers liability, with an annual interest rate of 3.8%.  The agreement required a down payment of $37,000 and nine monthly payments of $21,000 beginning on May 27, 2016.  As of September 2016, the outstanding balance of the note was approximately $0.1 million.

During April 2014, through the acquisition of SE Properties, the Company assumed the liability on a loan with a balance of approximately $3.4 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 6.625%, and payable in monthly installment payments of principal and interest totaling approximately $25,000 maturing in January 2036.  During January 2016 this loan was assigned to the buyer and the Company was released from the debt through the sale of the property.

During April 2014, through the acquisition of ExecuSuites, the Company assumed the liability on a loan with a balance of approximately $3.1 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 5.875%, and payable in monthly installment payments of principal and interest totaling approximately $21,000 maturing in May 2037.  During January 2016 this loan was assigned to the buyer and the Company was released from the debt through the sale of the property.

During July 2014, through the acquisition of Building C, the Company assumed the liability on a loan with a balance of approximately $8.4 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 4.81%, and payable in monthly installment payments of principal and interest totaling approximately $49,000, with a lump sum payment of approximately $7.0 million due at maturity in April of 2021.  During January 2016 this loan was assigned to the buyer and the Company was released from the debt through the sale of the property.

On May 16, 2014, Wolfpack, LLC and Devonshire, LLC entered into a loan agreement with a financial institution in the amount of $7.8 million, collateralized by real property held in Las Vegas, Nevada. The loan bears an annual interest rate of 4.6% and is payable in monthly installment payments of principal and interest totaling approximately $50,000, with a lump sum payment of approximately $6.3 million due at maturity in June of 2024. This loan agreement replaces their previous loans which held balances of approximately $3.9 million and $3.9 million, respectively, at payoff. During April 2016 this loan was assigned to the buyer and the Company was released from the debt through the sale of the property.

During August 2014, through the acquisition of Building A, the Company assumed the liability on a loan with a balance of approximately $8.4 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 4.969%, and payable in monthly installment payments of principal and interest totaling approximately $46,000, with a lump sum payment of approximately $7.8 million due at maturity in April of 2019.  During May 2016 this loan was assigned to the buyer and the Company was released from the debt through the sale of the property.

As of September 30, 2016, future principal payments on the notes payable are as follows:

NOTE K— FAIR VALUE

As of September 30, 2016 and December 31, 2015, financial assets and liabilities utilizing Level 1 inputs included investment in marketable securities - related party and third party.  We had no assets or liabilities utilizing Level 2 inputs, and assets and liabilities utilizing Level 3 inputs included investments in real estate loans and investments in equity method investees, both held for sale and not held for sale.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  Accordingly, our degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, an asset or liability will be classified in its entirety based on the lowest level of input that is significant to the measurement of fair value.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure.  Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date.  We use prices and inputs that are current as of the measurement date, including during periods of market dislocation, such as the recent illiquidity in the auction rate securities market.  In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments.  This condition may cause our financial instruments to be reclassified from Level 1 to Level 2 or Level 3 and/or vice versa.

Our valuation techniques will be consistent with at least one of the three possible approaches: the market approach, income approach and/or cost approach.  Our Level 1 inputs are based on the market approach and consist primarily of quoted prices for identical items on active securities exchanges.  Our Level 2 inputs are primarily based on the market approach of quoted prices in active markets or current transactions in inactive markets for the same or similar collateral that do not require significant adjustment based on unobservable inputs.  Our Level 3 inputs are primarily based on the income and cost approaches, specifically, discounted cash flow analyses, which utilize significant inputs based on our estimates and assumptions.

The following table presents the valuation of our financial assets and liabilities as of September 30, 2016 and December 31, 2015, measured at fair value on a recurring basis by input levels:

The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2016 to September 30, 2016:

The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2015 to December 31, 2015:

NOTE L— EMPLOYEE BENEFIT PLAN

MVP Advisors maintains a 401(k) Plan (the "Plan"), which is a defined contribution plan covering all eligible employees. Under the provisions of the Plan, participants may direct the Company to defer a portion of their compensation to the Plan, subject to Internal Revenue Code limitations. The Company provides for an employer matching contribution equal to 100% of the first 3% of eligible compensation and 50% of the next 2% of eligible compensation contributed by each employee, which is funded in cash. All contributions vest immediately.

Total expense recorded for the matching 401(k) contribution in the three and nine months ended September 30, 2016 was approximately $12,000 and $39,000, respectively.

NOTE M — SEGMENT INFORMATION

Company management reviews financial and operating performance in the following three separate operating segments:  (1) investment in real estate loans, (2) investments in real property and (3) investment in a real estate management company.  Selling, general and administrative expenses, primarily consisting of compensation of employees, seminar expense, professional fees and overhead costs not directly related to a specific operating segment, are reflected in the table below as corporate activities.

Assets related to investments in real property are currently listed as held for sale. Revenues, net of expenses for this segment are reported in discontinued operations.

The following are certain financial data for the Company's operating segments for the periods:

NOTE N — RECENT ACCOUNTING PRONOUNCEMENTS

In February 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In accordance with the guidance, all legal entities are subject to reevaluation under the revised consolidation model. The guidance is effective in the first and second quarter of 2016, and early adoption is permitted. We are currently evaluating the potential impact of the adoption of ASU 2015-02 on our consolidated financial statements.

On April 17, 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability.  Currently, debt issuance costs are recorded as an asset and amortization of these deferred financing costs is recorded in interest expense.  Under the new standard, debt issuance costs will continue to be amortized over the life of the debt instrument and amortization will continue to be recorded in interest expense.  The new standard is effective for the Company on January 1, 2016 and will be applied on a retrospective basis.  The Company is currently evaluating ASU 2015-03, and anticipates a change in our presentation only since the standard does not alter the accounting for debt issuance costs.

NOTE O — LEGAL MATTERS INVOLVING THE COMPANY

On February 7, 2012, we, VRM I and Fund III entered into a Deed in Lieu Agreement with a borrower in lieu of the foreclosure of our subordinated secured loan which had matured on December 31, 2011, with a principal balance, net of allowance for loan loss, of approximately $9.9 million, of which our portion was approximately $9.0 million. Pursuant to the Deed in Lieu Agreement, our subsidiary 1701 Commerce, LLC ("1701 Commerce") received a deed to the secured property operated as the Sheraton Hotel and Spa Fort Worth, Texas (the "Hotel").  On March 26, 2012, 1701 Commerce filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of Texas, Ft. Worth Division, to seek relief from a pending foreclosure of the Hotel by the senior mortgage lien holder and to preserve and protect 1701 Commerce's equity and the interests of other Hotel creditors.  Due to the uncertainty and disputes involving the Hotel, we recorded this investment as Other Real Estate Owned on our balance sheet until August 23, 2012. On July 17, 2013 the Hotel was sold to a third party for the sum of $49.3 million.  The net proceeds of the sale and the cash on hand as of the date of the sale were used to pay all 1701 Commerce creditors 100% of their claim plus interest, with the balance distributed to us and our two partners, VRM I and Fund III. On February 4, 2015, the court entered its final decree closing the case.

We hold an interest of approximately 90%, VRM I holds an interest of approximately 8% and Fund III holds an interest of approximately 2% in 1701 Commerce.

In addition to the matters described above, we are involved in a number of other legal proceedings concerning matters arising in the ordinary course of our business activities.  We believe we have meritorious defenses to each of these actions and intend to defend them vigorously.  Other than the matters described above, we believe that we are not a party to any pending legal or arbitration proceedings that would have a material adverse effect on our 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 our operations in any particular period.

VOT Hawaii Management, Inc. ("VOT Hawaii") is preparing to bring claims in arbitration against Vestin Mortgage, LLC as the successor in interest to Vestin Mortgage, Inc., and several other Vestin entities, specifically Vestin Capital, Inc., Vestin Fund I, LLC, Vestin Fund II, LLC, Vestin Group, Inc., Vestin Mortgage, Inc., Vestin Realty Mortgage I, Inc., Vestin Realty Mortgage II, Inc., and Vestin Originations, Inc. 

Rightstar Hawaii Management, Inc., ("Rightstar"), a company that operated a funeral and cemetery business in Hawaii, had defaulted on a loan from certain Vestin entities.  In connection with foreclosing on Rightstar's assets, Vestin Capital, Inc., Vestin Fund I, LLC, Vestin Fund II, LLC, Vestin Group, Inc., Vestin Mortgage, Inc., Vestin Realty Mortgage I, Inc., Vestin Realty Mortgage II, Inc., and Vestin Originations, Inc. entered into an October 2008 Pre-Foreclosure Sale Management Services and Consulting Agreement (the "Agreement") with Rightstar (being operated under the authority granted to court-appointed receiver Marie N. Milks) and VOT Hawaii, under which VOT Hawaii was employed as a death care industry consultant to professionally manage, and attempt to improve operations of Rightstar, pending foreclosure of Rightstar's assets.

VOT Hawaii's arbitration claims are for amounts allegedly owed to VOT Hawaii (either directly or by assignment) under the Agreement.  Its first claim is a breach of contract claim intended to recover a $500,000 "Base Success Fee" and a contingent success fee that VOT Hawaii calculated to total $30,797,200, allegedly owed to VOT Hawaii's president, David Mickits.  VOT Hawaii's second claim is for tortious interference with a contract, alleging that the Vestin entities caused Hawaii Funeral Services, LLC, as successor to Rightstar, to not pay VOT Hawaii 2 1/3 months of a $22,500 base consulting fee ($52,500), to have been paid by Rightstar under the Agreement. VOT Hawaii also seeks attorneys' fees and pre- and post-judgment interest.  The Company believes the claims asserted are without merit and the Company intends to vigorously defend itself against such claims.

NOTE Q — COMMITMENTS AND CONTINGENCIES

Amended Income Tax Returns

Earlier this year we learned that our federal income tax return for 2013 reported income that we never recognized nor received.  The tax return, which was prepared by an outside tax accounting firm, reported income of approximately $11,137,000, which had the effect of erroneously reducing our reported net operating losses by approximately $11 million.  Our aggregate net operating losses are approximately $228.2 million; therefore, the incorrect reported income of approximately $11,137,000 did not result in us paying any federal income taxes for 2013.  We have filed amended tax returns for 2013 and 2014 to correct the error.  The outside tax accounting firm involved with this filing has been terminated.

Our financial statements never included the non-existent income and no restatement of our financial statements is necessary.

Our audit committee is currently investigating this matter.  In its investigation, the audit committee is reviewing, among other things, (i) the actions of our former outside tax accountants who prepared the tax return reporting non-existent income, (ii) what if any involvement or knowledge our officers or directors had with respect to the filing of the tax return in question and (iii) what if any internal control weaknesses may have contributed to the incorrect tax filing. While the audit committee's investigation is on-going and no final conclusions have been reached, we believe that we may have been victimized by a scheme to improperly reduce the taxes of an unrelated third party. Although we did not receive any benefit from the reporting of non-existent income on our tax return, it is possible the Internal Revenue Service could investigate the matter and seek to impose penalties upon us. We believe we have meritorious defenses to any such claim.

 

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, 2016 and 2015. This discussion should be read in conjunction with our financial statements and the notes thereto and Management's Discussion and Analysis of Financial Conditions and Results of Operations in our annual report on Form 10-K for the year ended December 31, 2015. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see "Forward-Looking Statements" below for a description of some of these risks and uncertainties.

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 consolidated 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 of this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K 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

Our investment strategy is to invest in a portfolio of real estate secured loans (including first and second mortgage loans, mezzanine loans, bridge loans, convertible mortgages, variable interest rate real estate secured loans, where a portion of the return is dependent upon performance-based metrics and other loans related to real estate), and direct investments in real property that meet our investment objectives.    In addition, we invest in companies that manage real estate or mortgage investment programs.  We have recently increased our investments in such companies.

During the nine months ended September 30, 2016, we funded one loan totaling approximately $3.7 million.  During the nine months ended September 30, 2015, we funded three loans totaling approximately $0.2 million.  As of September 30, 2016, our loan-to-value ratio was 46.97%, net of allowances for loan losses, on a weighted average basis, generally using updated appraisals.

Through our interest in MVP Advisor and MVP CP II, we have directed, and may continue to direct, a portion of our cash towards development of the businesses of MVP REIT and MVP REIT II.

As of September 30, 2016, we have made loans of approximately $12.9 million, which amount has been fully allowed for, to our 60% owned subsidiary, MVP Advisors, the manager of MVP REIT.  MVP REIT is a SEC-registered, non-traded REIT that seeks to invest predominantly in parking facilities located throughout the United States as its core assets.  We believe MVP Advisors has the opportunity to generate fees for the services it renders to MVP REIT.  However, MVP REIT recently completed its initial publicly registered offering in September 2015 and the fees paid to date to MVP Advisors have not been significant.  We may not realize interest income from the loan to MVP Advisors or any return on our investment in MVP Advisors until it is able to generate sufficient fees to service the interest on our loan and generate a return on our investment. We have recorded an impairment of this investment due to uncertainty as to if and when we will be repaid the amounts loaned.  To further support development of the business of MVP REIT, MVP Advisors also has agreed to waive certain fees and expense reimbursements it otherwise would have been entitled to receive under the terms of its advisory agreement with MVP REIT. MVP Advisors ability to repay the loans and the return on our investment in MVP Advisors will likely depend upon the success of MVP REIT's ability to successfully deploy the offering proceeds. We expect such investments to ultimately generate a return through management fees payable by MVP REIT to MVP Advisors.  If MVP REIT is unable to deploy the capital and operate its business successfully, then our return on our investment in MVP Advisors and the ability of MVP Advisors to repay our loans could be adversely impacted.

During May 2015, our Board of Directors and the Board of Directors of VRM I agreed to form MVP CP II. We own 60% and VRM I owns 40%.  The purpose of MVP CP II is to act as the sponsor of MVP REIT II. MVP REIT II has filed its initial registration statement with the SEC and all of the states.  MVP REIT II's registration statement was declared effective by the SEC on October 22, 2015.  MVP REIT II is offering up to $550,000,000 in shares of common stock.  Through September 30, 2016, MVP REIT II had raised an aggregate of approximately $44.9 million through the sale of its common stock.  On November 1, 2016, MVP REIT II also disclosed that it is offering up to $50,000,000 in shares of its Series A Convertible Redeemable Preferred Stock in a private placement to accredited investors. The proceeds raised from the offerings are being used primarily to acquire parking assets in the United States and Canada. MVP REIT II has engaged MVP Advisors as its advisor.

We and VRM I have agreed to fund certain costs and expenses of MVP REIT II through MVP CP II in proportion to our respective ownership interest.  As consideration for the initial investment of $0.2 million MVP CP II received 8,000 shares of common stock in MVP REIT II.  As part of the advisory agreement, MVP Advisors is entitled to receive a 1% annual asset management fee and 2.25% of the purchase price on all acquisitions.  MVP Advisors is also entitled to receive the lesser of 3% of contract sale price or 50% of the brokerage commission paid on dispositions of MVP REIT II assets which amount shall accrue until the MVP REIT II investors have a return of their net capital and a 6% annual cumulative non compounded return. In addition once the MVP REIT II investors have received a return of their net capital invested and a 6% annual cumulative, non-compounded return, then MVP Advisors will be entitled to receive 15% of the remaining proceeds. This fee will be payable under only one of the following events: (i) if MVP REIT II shares are listed on a national securities exchange; (ii) if MVP REIT II assets are sold, other than single assets sold in the ordinary course, or liquidated; (iii) upon a merger, share exchange, reorganization or other transaction pursuant to which MVP REIT II investors receive cash or publicly traded securities in exchange for their shares; or (iv) upon termination of the advisory agreement. The operating agreement of the Advisor provides that once we and VRM I have been repaid in full for any capital contributions to the Advisor or for any expenses advanced on the Advisor's behalf, or capital investment, and once we and VRM I have received an annualized return on our capital investment of 7.5%, then Michael Shustek will receive 40% of the net profits of the Advisor.

As of September 30, 2016 we have made loans of approximately $5.0 million to MVP CP II.  Similar to our investments in MVP Advisor in connection with MVP REIT, the return on our investment in MVP CP II in connection with MVP REIT II, including the ability of MVP CP II to repay its loans, will likely depend upon the success of the pending securities offerings by MVP REIT II and the ability of MVP CP II and MVP Advisor to successfully deploy the offering proceeds. As with our investment in MVP REIT, while we expect any such investments to ultimately generate a return through management fees payable by MVP REIT II to MVP CP II and MVP Advisor, the amount of fees may not be significant in the near term as MVP REIT II begins its operations. If MVP REIT II is unable to raise sufficient capital in its publicly registered offering or deploy the capital and operate its business successfully, then our return on our investment in MVP CP II and the ability of MVP CP II to repay our loans could be adversely impacted.  Based on this uncertainty, we have determined to fully impair the balance of our $1.1 million loan to MVP CP II.

During April 2015, we committed to a plan to sell all interests in our six office buildings, at which point we began classifying the related assets as assets held for sale, and the related liabilities as liabilities related to assets held for sale. Additionally, we have classified the six office building's results as discontinued operations.  On January 29, 2016, we closed on the sale of its interest in three office buildings that we owned with VRM I through various subsidiaries.  The first building was owned by Building C, LLC and is located at 8930 West Sunset Road, Las Vegas, Nevada (the "8930 Building").  The second building was owned by SE Property Investments, LLC and is located at 8905 West Post Road, Las Vegas, Nevada (the "8905 Building") and the third building was owned by ExecuSuite Properties, LLC and is located at 8945 West Post Road, Las Vegas, Nevada (the "8945 Building").

We and VRM I, through its subsidiaries, have the right, for a period of one year from the closing dates of the building sales, to repurchase one or more of the buildings at a price equal to (i) the sales price for each building, plus (ii) $65,000 for the 8930 Building, $65,000 for the 8880 building, $30,000 for the 8905 Building, $30,000 for the 8860 Building, $30,000 for the 8925 Building and $30,000 for the 8945 Building, plus (iii) twelve percent less any profit realized by the purchaser of the building being repurchased.  Stable Development, LLC, a limited liability company is the manager of and owns a 15% interest in each of the purchasers.  Due to this repurchase right, we have recorded the gain on sale as deferred revenue, to be recognized when the repurchase right is exercised or expires.  Lance Bradford, the former President of MVP REIT is an owner of Stable Development, LLC.

As of September 30, 2016, VRM II held 5,000 shares of MVP REIT II's outstanding common stock, purchased in December 2015, for $125,000.

Our financial results, including the sources of our revenues and expenses, for the three and nine months ended September 30, 2016 reflect, in significant part, the shift in our investment focus from real estate secured loans to direct investments in a real estate management company.  So long as such real estate investments remain part of our investment portfolio, we would expect that, in the near term, expenses relating to our investments in MVP REIT and MVP REIT II will continue to make up a greater portion of our total expenses.  Our advisor fee income and acquisition fee income related to our investment in MVP Advisors and MVP CP II also may become a more significant source of revenues in the future, depending upon the level of success achieved by MVP Advisors and MVP CP II in their management of MVP REIT and MVP REIT II. If we decide to make more direct investments in real estate, rental income may make up a greater portion of our total revenues. While we do not anticipate any near term change in the composition of our revenues, we may, from time to time, decide to sell one or more of our investments, including our real property investments, and redeploy those assets in investments in real estate secured loans, direct investments in real property or other real property related investments.

SUMMARY OF FINANCIAL RESULTS

Comparison of operating results for the three months ended September 30, 2016 and the three months ended September 30, 2015

Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans.  Acquisition fee and advisor fee income is related to MVP Advisors, which advises MVP REIT and MVP REIT II and earns certain fees for these services.  During the three months ended September 30, 2016, MVP REIT and MVP REIT II purchased properties which resulted in acquisition fee income of approximately $0.5 million.  During the three months ended September 30, 2016, MVP REIT and MVP REIT II paid a combined advisor fee income of approximately $0.4 million.

For additional information see Note D – Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item 1  Financial Statements  of this Quarterly Report on Form 10-Q.

Wages and benefits were lower during the three months ended September 30, 2016 due to decrease in staff compared to the three months ended September 30, 2015.  During the three months ended September 30, 2016, MVP Advisors incurred and paid a 5.25% commission, totally approximately $1.7 million, to third party brokers for all MVP REIT common shares sold in its in initial public offering (which closed in September 2015) compared to $1.5 million in 2015.

Discontinued operations related to properties that have entered into a purchase sales agreement and are recorded as assets held for sale.

For additional information see Note F – Assets Held for Sale of the Notes to the Financial Statements included in Part I, Item 1 Financial Statements  of this Quarterly Report on Form 10-Q.

Comparison of operating results for the nine months ended September 30, 2016 and the nine months ended September 30, 2015

Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans.

Acquisition fee and advisor fee income is related to MVP Advisors, which advises MVP REIT and MVP REIT II and earns certain fees for these services.  During the nine months ended September 30, 2016, MVP REIT and MVP REIT II purchased properties which resulted in acquisition fee income of approximately $1.7 million.  During the nine months ended September 30, 2016, MVP REIT and MVP REIT II paid a combined advisor fee income of approximately $0.9 million.

On November 25, 2014, Shustek Investments Inc., a company wholly owned by our CEO Mike Shustek, entered into a loan purchase contract with us to acquire a loan with a book value of approximately $2.4 million. The loan was originated during March 2009 with an original principal balance of $7.45 million earning interest at a rate of 11%.  The borrower made principal payments during the life of the loan; however, they also received extensions for the maturity of the note. As of the date of the loan purchase contract, the loan was extended through January 2015.

The purchase price of the loan was approximately $3.0 million, which includes the purchase of interest assigned to third parties. As additional consideration we may receive 50% of any amount collected in excess of the purchase price less any expenses incurred by Shustek Investments. After three years, the 50% shall be reduced to 33%. This transaction resulted in a gain on sale of loan – related party totaling approximately $0.6 million for the year ended December 31, 2014.  During the three months ended March 31, 2015 this loan was paid in full, and we received approximately $1.6 million.

For additional information see Note D – Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item 1  Financial Statements  of this Quarterly Report on Form 10-Q.

Wages and benefits were lower during the nine months ended September 30, 2016 due to decrease in staff compared to the nine months ended September 30, 2015. During the nine months ended September 30, 2016, MVP Advisors incurred and paid a 5.25% commission, totaling approximately $3.8 million, to third party brokers for all MVP REIT common shares sold in its in initial public offering (which closed in September 2015) compared to $2.8 million in 2015.