☒

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

☐

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

Delaware

26-3541068

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

177 Bovet Road, Suite 520, San Mateo, CA

94402

(Address of principal executive offices)

(Zip Code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

none

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

Units of Limited Liability Company Interests

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☐   

Smaller reporting company

☒

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.                                                          ☐

Part I

Item 1 – Business

1

Item 1A – Risk Factors

9

Item 1B – Unresolved Staff Comments

28

Item 2 – Properties

28

Item 3 – Legal Proceedings

29

Item 4 – Mine Safety Disclosures

29

Part II

Item 5 – Market for the Registrant’s Units, Related Unitholder Matters and Issuer Purchases of Equity Securities

30

Item 6 – Selected Financial Data

33

Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

Item 7A – Quantitative and Qualitative Disclosures About Market Risk

43

Item 8 – Financial Statements and Supplementary Data

43

Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

70

Item 9A – Controls and Procedures

70

Item 9B – Other Information

70

Part III

Item 10 – Directors, Executive Officers and Corporate Governance

71

Item 11 – Executive Compensation

72

Item 12 – Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters

72

Item 13 – Certain Relationships and Related Transactions, and Director Independence

73

Item 14 – Principal Accountant Fees and Services

73

Part IV

Item 15 – Exhibits and Financial Statement Schedules

74

Item 16 – Form 10-K Summary

-

74

SIGNATURES

75

•

changes in California real estate markets, economic conditions, and/or interest rates;

•

the impact of competition on pricing for mortgage loans;

•

the manager’s capability to arrange loans that fit our investment criteria;

•

the credit risks to which we are exposed;

•

increases in payment delinquencies and/or defaults on our mortgage loans;

•

changes in government regulation and legislative actions affecting our business; and

•

the timing and dollar amount of the decreasing financial support from the manager and the corresponding impact on the net income, cash available for distributions and net distribution rate to members.

•

yield a favorable rate of return from the company’s business of making and/or investing in loans;

•

preserve and protect the company’s capital by making and/or investing in loans secured by California real estate, preferably income-producing properties geographically situated in the San Francisco Bay Area and the coastal metropolitan regions of Southern California; and,

•

generate and distribute cash flow from these mortgage lending and investing activities.

•

loan payoffs;

•

borrowers’ monthly principal and interest payments, net of operating expenses;

•

a line of credit;

•

loan sales to unaffiliated 3^rd parties and loan transfers by executed assignment to affiliated mortgage funds;  

•

payments from RMC on the outstanding balance of the formation loan; and,

•

sale of units to members participating in the dividend reinvestment plan and – prior to May 2019 – sale of units net of reimbursement to RMC of organization and offering expenses (“O&O expenses”) and net of amounts advanced for the formation loan to RMC.

•

loan origination volume and the balance of capital available to lend;

•

the current and future interest rates negotiated with borrowers;

•

the timing and amount of gains received from loan sales, if any;

•

payment of fees and cost reimbursements to RMC;

•

the amount and timing of other operating expenses, including expenses for professional services;

•

financial support, if any, from RMC;

•

payments from RMC on the outstanding balance of the formation loan; and,

•

a line of credit.

•

charging less than the maximum allowable fees;

•

not requesting reimbursement of qualifying costs attributable to the company (“Costs from RMC” on the Statements of Income); and/or,

•

absorbing some, and in certain periods, all of the company’s direct expenses, such as professional fees.

•

after one year, 92% of the purchase price or of the capital account balance, whichever is less;

•

after two years, 94% of the purchase price or of the capital account balance, whichever is less;

•

after three years, 96% of the purchase price or of the capital account balance, whichever is less;

•

after four years, 98% of the purchase price or of the capital account balance, whichever is less;

•

after five years, 100% of the purchase price or of the capital account balance, whichever is less.

•

yield a favorable rate of return from our business of making and/or investing in loans;

•

preserve and protect our capital by making and/or investing in loans secured by California real estate, preferably income-producing properties geographically situated in the San Francisco Bay Area and the coastal metropolitan regions of Southern California; and

•

generate and distribute cash flow from these mortgage lending and investing activities.

•

monthly payments of either (i) interest only with a balloon payment at maturity or (ii) principal and interest based on a 30-year amortization schedule with a balloon payment at maturity; and

•

having maturities of 5 years or less.

•

the conduct of a mortgage lending business by a licensed California real estate broker or lender under state and federal law;

•

real estate settlement procedures;

•

fair lending;

•

truth in lending;

•

federal and state loan disclosure requirements;

•

the establishment of maximum interest rates, finance charges and other charges;

•

loan-servicing procedures;

•

secured transactions and foreclosure proceedings;

•

privacy regulations providing for the use and safeguarding of non-public personal financial information of borrowers; and

•

with respect to the company and the offering of member units, required filings with the Securities and Exchange Commission (“SEC”) pursuant to federal securities laws, including periodic reports such as Form 10-K and Form 10-Q, and with the States’ securities agencies.

•

California Real Estate Law.

•

Dodd-Frank Wall Street Reform and Consumer Protection Act.

•

Real Estate Settlement Procedures Act (“RESPA”).

•

Truth in Lending Act (“TILA”).

•

Home Ownership and Equity Protection Act (“HOEPA”) and California Covered Loan Law.

•

Mortgage Disclosure Improvement Act.

•

Home Mortgage Disclosure Act (“HMDA”).

•

Red Flags Rule.

•

Gramm-Leach-Bliley Act (aka Financial Services Modernization Act of 1999).

•

The California Homeowner Bill of Rights (“HOBR”).

•

  California Consumer Privacy Act of 2018 (“CCPA”)

•

Federal Securities Laws: The Securities Act of 1933 and The Exchange Act of 1944

•

Sarbanes-Oxley Act of 2002

•

Financial Industry Regulatory Authority Regulatory Notice 15-02

•

Blue Sky Laws

Our units are not listed on an exchange or quoted through a quotation system, and will not be for the foreseeable future, if ever and there are substantial restrictions on the transferability of units.

Investors will have limited ability to sell their units. Our units are not listed on an exchange or quoted through a quotation system, and there is no secondary market nor do we expect that any will develop in the foreseeable future. Units are not freely transferable, and they may not be acceptable by a lender as security for borrowing. Our operating agreement also imposes substantial restrictions upon your ability to transfer units. Therefore, an investment in our units is not suitable for investors who expect to require short-term liquidity from their investments.

You are limited in your ability to have your units redeemed under our unit redemption program.

Our unit redemption program contains significant restrictions and limitations that limit your ability to redeem your units. Our operating agreement makes no provision for members to withdraw from the company or to obtain the return on their capital accounts for a one-year period from the date of the purchase of units. In addition, the number of units you may redeem per quarter is subject to a maximum of the greater of 100,000 units or 25% of your units outstanding. Also, we will not, in any calendar year, redeem from all of our members a total of more than 5% (or in any calendar quarter, redeem more than 1.25%) of the weighted average number of all units outstanding during the 12-month period immediately prior to the date of the redemption.

Moreover, our manager reserves the right, in its sole discretion, at any time, to reject any request for redemption, or to suspend or terminate the acceptance of new redemption requests without prior notice, or to terminate, suspend or amend the unit redemption program upon 30-day notice.

We fund redemptions solely from available company cash flow and do not have a working capital reserve from which to fund redemptions. For this purpose, cash flow is considered to be available only after all current company expenses have been paid (including compensation to our manager), adequate provision has been made for payment of our current and future debt, and adequate provision has been made for the payment of all monthly cash distributions to members who do not reinvest distributions pursuant to our distribution reinvestment plan. Accordingly, we cannot guarantee that we will have sufficient funds to accommodate all redemption requests made in any given year.

There is no assurance you will receive cash distributions.

Although our manager has provided significant financial support, our manager is entitled to be paid for certain services performed for us and to be reimbursed by us for expenses paid on our behalf. We bear all direct expenses incurred in our operations. These fees and expenses are deducted from cash funds generated by our operations prior to computing the amount that is available for distribution to you. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Performance overview.”

Also, our manager, in its discretion, may retain a portion of cash funds generated from operations for working capital purposes. Thus, there is no assurance as to when or whether cash will be available for distributions to you.

In the event we do not have enough cash flow from operating activities to fund our distributions, we may need to defer or reduce distributions. Our manager has provided significant financial support that improved net income, and the return to investors.

Our manager intends to cease providing support by the fourth quarter of 2020. Depending on our future cash flow from operating activities, we may be required

to reduce our distributions as the manager’s support is reduced. It is unlikely that we could maintain the existing distribution level through our investment activity.

In addition, increased competition and new entrants in the market for mortgage loan originations could adversely impact our ability to originate and acquire real estate-related loans at attractive risk-adjusted returns, which in turn could have an adverse effect on our distributions to you.

You will have no control over our operations, including the loans we make or sell; you must rely on the judgment of our manager in making loans.

You have no right or power to take part in our management. All decisions with respect to our management will be made exclusively by our manager. Our success will, to a large extent, depend on the judgment of our manager as it relates to lending decisions and sales of loans to third parties, if any. You should carefully evaluate our manager’s capabilities to perform such functions.

Our manager has broad discretion to implement our investment objectives and can change investment strategies without member consent.

Our operating agreement contains investment objectives, but our manager has broad discretion to implement those objectives. A change in our investment strategy may, among other things, increase our exposure to real estate market fluctuations, default risk and interest rate risk, all of which could materially affect our results of operations and financial condition.

Our manager has various conflicts of interest.

We are managed by our manager which has various conflicts of interest in connection with its management of us, including but not limited to the following:

•Our manager has legal and financial obligations with respect to other entities that are similar to its obligations to us.

•Our manager has to allocate its time between us and other activities, including other entities with which it is involved.

•The fees of our manager are not determined based on arm’s-length negotiations.

•The same legal counsel currently represents us and the manager.

•Our manager has the right to conduct other business and to compete with our business.

•Our manager is responsible for originating or arranging substantially all of the loans invested by us and can place loans in our portfolio or other funds that are also managed by our manager. Loan brokerage commissions on loans originated by our manager for our portfolio are retained by our manager.

•In the event our manager defaults on the repayment of the formation loan, a conflict of interest would arise on the manager’s part in connection with the enforcement of the formation loan and continued payment of other fees and compensation to our manager, including, but not limited to, the loan servicing fees, loan administrative fees and asset management fees, while such default is continuing.

•See “Our manager’s selection of loans for sale to third parties may involve

conflicts of interest between us and our manager.”

We have no board of directors.

As is customary for a limited liability company, we do not have a board of directors or any independent directors. In addition, we are not subject to certain of the corporate governance rules under the federal securities laws or under rules established by the national securities exchanges because our units are not registered for trading under the Exchange Act of 1934, as amended. Among other things, these rules relate to:

•independent director standards;

•audit and compensation committees standards; and

•the use of an audit committee financial expert.

Accordingly, our members do not receive the protections these rules and standards were enacted to provide, such as protections against interested director transactions, conflicts of interest and similar matters.

We do not have an audit or compensation committee. As a result, members will have to rely on our manager, which is not independent, to perform these functions. Thus, there is a potential conflict in that our manager, which is engaged in management, will participate in decisions concerning management compensation and audit issues that may affect management performance.

We established the $1 per unit offering price on an arbitrary basis.

We arbitrarily determined the $1 per unit price for reinvestment of distributions. Such price is not necessarily the amount you may receive pursuant to your limited right to redeem units, subject to certain requirements. The amount that a redeeming member will receive is the lesser of the purchase price for the redeemed units or the redeeming member’s capital account balance as of the date of each redemption payment. The fair market value of your interest in the company will be irrelevant in determining amounts to be paid upon redemption.

Our manager may purchase units which generally will give our manager the same rights as members.

Our manager, in its discretion, may purchase units for its own account. Upon any such purchases of units, our manager will have the same rights as other members in respect of the units owned by them, including the right to vote on matters that are subject to the vote of members, subject to certain exceptions.

Your interest in us will be diluted if we issue additional units, which could reduce the value of your investment in us.

Our investors do not have any preemptive rights to any units we issue in the future. Pursuant to our operating agreement, we may issue additional units in the future without your consent or the consent of any other members. To the extent we issue additional equity interests after an investor purchases our units, an investor’s percentage ownership interest in us will be diluted. In addition, depending on the terms and pricing of any additional offerings and the value of our investments, an investor may also experience dilution in the book value of his or her units.

Our interests in our properties may not be insured or may be underinsured against certain types of losses.

We require comprehensive insurance, including fire and extended coverage, which is customarily obtained for or by a lender, on properties in which we acquire a security interest. Generally, such insurance will be obtained by and at the cost of the borrower. However, there are certain types of losses (generally of a catastrophic nature, such as civil disturbances or terrorism and acts of God such as earthquakes, floods and land or mud slides) which are either uninsurable or not economically insurable. Should such a disaster occur to, or cause the full or partial destruction of, any property serving as collateral for a loan, we could lose both our invested capital and anticipated profits from such investment, which would adversely affect our profitability.

Downturns in the economy and real estate market in the San Francisco Bay Area and the coastal metropolitan regions of Southern California or on a regional or national scale or changing conditions affecting the mortgage lending business could adversely affect our business.

We expect that most of our loans will continue to be secured by properties located in nine counties that comprise the San Francisco Bay Area (San Francisco, San Mateo, Santa Clara, Alameda, Contra Costa, Marin, Napa, Solano and Sonoma) and the coastal metropolitan regions of Southern California (Los Angeles, Orange, Ventura, and San Diego counties). Our concentration of loans in the San Francisco Bay Area and the coastal metropolitan regions of Southern California exposes us to greater risk of loss if the economy in the San Francisco Bay Area or the coastal metropolitan regions of Southern California weakens than would be the case if our loans were spread throughout California or the U.S.

Should a significant economic deterioration occur in the San Francisco Bay Area or the coastal metropolitan regions of southern California, or on a more wide scale basis, regionally or nationally, we could suffer increases in loan delinquencies and declines in cash flows.

Prolonged uncertainty with respect to COVID-19 (Coronavirus) in California and the United States could result in an economic downturn which in turn could have an adverse effect on our business, financial performance and results of operations.

COVID-19 is a new strain of the novel coronavirus that causes illness ranging from the common cold to more severe symptoms including fever, cough, breathing difficulties, and in more severe cases, pneumonia, acute respiratory syndrome, kidney failure and death.   COVID-19, which is highly contagious, was first publicly reported in Wuhan, China on December 31, 2019 and has since been reported in over 170 countries and territories including the United States and both Northern and Southern California.  In response to the COVID-19 outbreak, federal, state and local governments as well as the business community have implemented voluntary and increasingly mandatory “social distancing” polices including quarantines, travel bans, work from home initiatives, cancellation or postponement of public events and school closures, among others.  On March 4, 2020, California Governor Gavin Newsom declared a State of Emergency to exist in California with respect to the COVID-19.  On March 19, 2020 Governor Newsom issued Executive Order N-33-20 ordering all California residents to stay at home except as needed to maintain continuity of operations of the federal critical infrastructure sectors and other sectors designated by the Governor. These measures and the general uncertainty around the COVID-19 virus have recently caused increased volatility in the United States financial markets and economic uncertainty at the state, local and national level.  The overall impact of COVID-19 on the California economy and the California real estate markets is not known at this time. The company's revenues and financial results depend upon the ability of borrowers to make payments of principal and interest in a timely manner and on the interest rates charged on loans. In addition, the company's loans are secured by real properties located in Northern and Southern California and the overall impact of COVID-19 on the California real estate market cannot be predicted at this time. If there is  prolonged uncertainty with respect to COVID-19  in California and the United States, it could result in an economic downturn or recession in national and local economies including but not limited to increases in unemployment rates and disruptions to businesses, which could have a negative impact on the ability of borrowers to make principal and interest payments, as well as the company's volume of loan originations. These factors combined with a decline in California real estate values could have a short or long term material adverse impact on the company’s business, financial performance and results of operations.

You will be bound by the actions taken by the majority voting

power.

Subject to certain limitations, members holding a majority of units may vote to, among other things:

•dissolve and terminate the company;

•amend the operating agreement, subject to certain limitations;

•approve or disapprove the sale of all or substantially all of our assets; and

•remove or replace our manager or elect additional or new managers.

If you do not vote with the majority in interest of the other members, you nonetheless will be bound by the majority vote.

If payments are not made on the formation loan under certain circumstances, such as our manager’s removal, it may reduce your rate of return or affect our capital available to fund new loans.

We have previously advanced to our manager funds in an amount equal to the sales commissions for our units and premiums paid to investors in connection with unsolicited sales of our units. The formation loan is an unsecured loan that does not bear interest and will be repaid in annual installments. If our manager was removed or unable to repay the formation loan when due, we would incur a significant loss in the amount of the formation loan then owing. See “Investment Risks – Our manager has various conflicts of interests.”

A portion of the amount we receive from redeeming members as early redemption penalties may first be applied to reduce the principal balance of the formation loan. This will have the effect of reducing the amount owed by our manager to us. If our manager is removed as a manager by the vote of a majority in interest of the members and a successor or additional manager, which is elected without the concurrence of the manager, begins using any other loan brokerage firm for the placement of loans or loan servicing, our manager will be immediately released from any further payment obligation under the formation loan. If the manager is removed, no other manager is elected, the company is liquidated or our manager is no longer receiving payments for services rendered, we will forgive the debt on the formation loan and our manager will be immediately released from any further obligations under the formation loan.

In addition, if we and our manager agree to suspend formation loan payments for a period of time, then as a result of such suspended payments we would have less capital to invest in loans during that period, which could adversely affect our profitability.

Upon liquidation, you may experience delays in receiving distributions, you may not be able to fully recover your investment or you may not receive any distributions.

Under our operating agreement, we will continue to operate until October 8, 2028, unless our term is extended by the vote of a majority in interest of the members. We do not currently intend to cease operations prior to the end of our term. We could be dissolved and terminated earlier by operation of law or upon the occurrence of various events described in our operating agreement. Upon our dissolution, our manager will seek to promptly liquidate our assets for the best price reasonably obtainable, to use any proceeds to satisfy our debts and to distribute any remaining proceeds to our members and manager in accordance with the terms of our operating agreement. Accordingly, your ability to recover all or any portion of your investment under such circumstances will depend on the amount of funds so realized and claims to be satisfied from those proceeds. Our manager may not be successful in liquidating us regardless of whether it occurs on our anticipated termination date or on an earlier dissolution date. Delays in liquidation could arise due to market conditions and other factors beyond the control of our manager. In the event we are unable to liquidate on or prior to the end of our anticipated term and depending on the amount of liquidation proceeds the manager is able to obtain, you and other members may not receive distributions of remaining proceeds, if any, in a timely manner or at all.

We cannot precisely determine compensation to be paid to our manager that

may not be commensurate with your rate of return.

Our manager is unable to predict the amounts of its compensation to be paid to it. Any such prediction would necessarily involve assumptions of future events and operating results which cannot be made at this time. As a result, there is a risk that members will not have the opportunity to judge ahead of time whether the compensation realized by our manager is commensurate with the return generated by the loans. Payment of fees to our manager will reduce the amount of cash available for investment in loans or distributions to members.

Insufficient working capital reserves may require borrowings or liquidating our loans which,

if not possible, may adversely affect us.

We intend to maintain a working capital reserve to meet our obligations, including our carrying costs and operating expenses. Our manager believes such reserves are reasonably sufficient for our contingencies. If for any reason those reserves are insufficient, we will have to borrow the required funds or liquidate some or all of our loans. In the event our manager deems it necessary to borrow funds, such borrowings may not be on acceptable terms or even available to us which could materially adversely affect our business.

Conflicts or limitations may arise as a result of our manager’s legal and financial obligations to itself and other mortgage programs.

Our manager and its affiliates are currently involved with other active mortgage programs with investment objectives similar to ours. Our manager may also organize other mortgage programs in the future with investment objectives similar to ours. Our manager has and may have legal and financial obligations with respect to these other mortgage programs that are similar to its obligations with respect to us. These obligations may at times conflict and may require or incentivize our manager to limit the resources allocated to us in favor of the other program or programs.

Conflicts may arise regarding the financial condition of our manager.

Our manager must maintain a sufficient net worth and cash flow in order to continue to provide services to us. This may require our manager to make decisions regarding investments and other aspects of our business to allow it to collect fees and expense reimbursements, which actions could negatively affect our net income and cash available from operations.

Conflicts may arise from our manager’s allocation of time between us and others and loan brokerage services.

Our manager has conflicts of interest in allocating the time of its personnel between us and other activities in which it is involved. Our manager also provides loan brokerage services to investors other than us. Since our manager originates loans or arranges for the purchase of loans for our loan portfolio, a conflict of interest may exist as to the loans our manager allocates to us and to other mortgage programs it manages or other investors with which it is affiliated at such time.

Conflicts may arise if we participate in loans with other programs organized by our manager.

In certain limited circumstances and subject to compliance with applicable regulations or guidelines, we may participate in loans or joint ventures with other programs organized by our manager, where we purchase a direct or indirect partial interest in a loan. Our portion of the total loan may be smaller or greater than the portion of the loan made by the other programs. Participating in loans or joint ventures with other programs organized by our manager could result in a conflict of interest between us and our manager as well as between us and such other programs, in the event that the borrower defaults on the loan and our manager protects the interests of other programs, which it has organized, in the loan and in the underlying security.

The amount of loan brokerage commissions and other compensation of our manager may adversely affect the rate of return to you.

None of the compensation payable to our manager was determined by arm’s-length negotiations. We anticipate that the loan brokerage commissions charged to borrowers by our manager, which are paid to our manager and not us, will average approximately 2% to 5% of the principal amount of each loan, but may be higher or lower depending upon market conditions. Any increase in the loan brokerage commission charged on loans may have a direct, adverse effect on the interest rates we charge on loans by reducing the interest rate we receive and thus the overall rate of return to you. This conflict of interest will exist in connection with every loan transaction and all compensation paid to our manager, and you must rely upon our manager to protect your interests.

Certain officers and other key personnel of our manager will face competing demands relating to their time and this may cause our operations and our investors’ investments to suffer.

We rely on the executive officers and key personnel of our manager to provide services to us for the day-to-day operation of our business. In particular, as to Mr. Michael Burwell, President, Director, and Secretary/Treasurer of RMC, if he was to terminate his employment the manager’s capacity/capability to continue business operations and maintain loan origination volumes could be impacted adversely.

As a result of executive officers’ and key personnel’s interests in other programs, their obligations to other investors and the fact that they engage in and will continue to engage in other business activities on behalf of themselves and others, these individuals face conflicts of interest in allocating their time between us and other programs sponsored by our manager and other business activities in which they are involved. Should our manager devote insufficient time or resources to our business, our returns on our direct or indirect investments, and the value of our units, may decline.

We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect our liquidity, financial condition or results of operations.

Our business is dependent on third party communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control. There could be:

•sudden electrical or telecommunications outages;

•natural disasters such as earthquakes, tornadoes and hurricanes;

•disease pandemics;

•events arising from local or larger scale political or social matters, including terrorist acts; and

•cyber attacks.

These events, in turn, could have a material adverse effect on our operating results and negatively affect the value of our units and our ability to pay distributions.

Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include:

•disrupted operations;

•misstated or unreliable financial data;

•liability for stolen assets or information;

•increased cybersecurity protection and insurance costs;

•litigation; and

•damage to our investor relationships.

As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those we have outsourced. Third parties with which we do business (including those that provide services to us) also may be targets of cyber-attacks or sources of other technological risks. We outsource certain functions and these relationships allow for the storage and processing of our information and assets, as well as certain investor, counterparty, employee and borrower information. While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or other cybersecurity incidents, with increased costs and other consequences, including those described above. Privacy and information security laws and regulation changes, and compliance with those changes, may also result in cost increases due to system changes and the development of new administrative processes.  

Our processes and controls to mitigate cyber security risks may not be efficient in preventing a cyber incident.

We have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that our financial results, operations, business relationships or confidential information will not be negatively impacted by such an incident.

As a public company, we are subject to regulations not applicable to private companies, such as provisions of the Sarbanes-Oxley Act. Efforts to comply with such regulations have and will involve significant expenditures.

As a public company, we are subject to regulations not applicable to private companies, including provisions of the Sarbanes-Oxley Act and the related rules and regulations promulgated by the SEC. Our management is required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and rules and regulations of the SEC thereunder. We are required to review on an annual basis our internal control over financial reporting, and on a quarterly and annual basis, to evaluate and disclose changes in our internal control over financial reporting. We may be required to spend significant amounts in the future to remain in compliance. Such expenditures may reduce amounts available for distribution and may have a material adverse effect on our financial condition and results of operations.

A weak economy or real estate market could adversely affect us and your rate of return.

The ability to find suitable loans is more difficult when the economy is weaker and there is less activity in the real estate market. We may be unable to find a sufficient number of suitable loans, which could leave us with excess cash. In such event, we will make short-term, interim investments in government obligations, certificates of deposit, money market or other liquid-asset accounts, with the offering proceeds pending investment in suitable loans. Interest returns on these investments are usually lower than on mortgage loans, which would reduce our profits and return to members.

Our lending decisions are based on the real estate securing the loans. Significant decline in the fair value of the collateral may impact the performance of the loans and their ultimate collectability.

For loans secured by real property other than owner-occupied personal residences, our lending decisions are based primarily on a determination that the value of the real property is sufficient, in and of itself, as a source of repayment. Other considerations such as the cash flow and the income generated by the real property that is to secure the loan and the general creditworthiness, experience and reputation of the borrower are secondary considerations.

This may result in a higher incidence of loan payment delinquencies that would be experienced by conventional lenders.

For any loan, the amount of the loan combined with the outstanding debt and claims secured by a senior deed of trust on the real property generally will not exceed the specified percentage (per the Operating Agreement) of the appraised value of the property as determined by an independent written appraisal at the time the loan is made. The LTV generally will not exceed 80% for residential properties (including multi-family), 75% for commercial properties, and 50% for land. The excess of the value of the collateral securing the loan over our secured loan and any senior debt and/or claims on the property is the “protective equity.”

Declines in real estate values may reduce the protective equity provided by the collateral securing our outstanding loans and were we to foreclose on loans with respect to properties that have declined in value, we may ultimately recover less than the amount of such loans.

If borrowers default, and/or economic circumstances increase defaults, we may have to foreclose on the loan beginning the legal process of acquiring the collateral property. Foreclosure proceedings and/or workout agreements may slow our collection efforts and delay ultimate satisfaction of the loan.

We are engaged in the business of lending and, as such, we are subject to the risk that borrowers may be unable to repay the loans we have made to them in accordance with the terms of the loan agreement. Mortgage loans are secured by commercial and residential real property and are subject to risks of delinquency, foreclosure and loss. The ability of a borrower to repay a loan secured by commercial real property is dependent on the income of the real property. The ability of a borrower to repay a loan secured by a residential property is dependent upon the income or assets of the borrower. A number of factors, including a general economic downturn, natural disasters, terrorism, social unrest and civil disturbances, may impair borrowers’ abilities to repay their loans. Our loans are not insured by the Federal Housing Administration or guaranteed by the Veterans Administration or otherwise guaranteed or insured by a government agency. Our loans require monthly interest-only payments or monthly payments of interest and principal. This means:

•Some loans are structured to provide for relatively small monthly payments, typically interest-only, with a large “balloon” payment of principal due at the end of the term. These borrowers may be unable to repay such loans at maturity out of their own funds and may be compelled to refinance or sell their property.

•Defaults and foreclosures may increase if the economy weakens or if interest rates increase, which may make it more difficult for borrowers to refinance their loans at maturity or sell their property.

•If a borrower is unable to repay the loan and defaults, we may be forced to acquire the property at a foreclosure sale, or we may be forced to sell the property for less than the amount owed on the loan. If we cannot quickly sell or refinance such property, and the property does not produce income in excess of expenses, our profitability will be adversely affected.

•Recently enacted consumer protection laws, both Federal and in California, impose additional notice and disclosure requirements on lenders which may slow or limit a lender’s ability to exercise remedies against residential real property collateral (principally 1-4 units), including rights to sell the property in a foreclosure sale and certain rights of tenants residing in the properties. Additional federal and state legislation may be proposed in the future which, if enacted, may further limit a lender’s ability to exercise remedies against residential real property collateral following a borrower’s default in the performance of its loan obligations.

In addition, any litigation instituted by a defaulting borrower or the operation of the federal bankruptcy laws may have the effect of delaying enforcement of the lien on a defaulted loan and may in certain circumstances reduce the amount realizable from the sale of a foreclosed property. A “lien” is a charge against the property of which the holder may cause the property to be sold and use the proceeds in satisfaction of the lien. In the event our right to foreclose is contested, the legal proceedings necessary to resolve the issue can be time-consuming and costly. A judicial foreclosure may be subject to most of the delays and expenses of other litigation, sometimes requiring up to several years to complete. If we acquire a property from a borrower, there many factors that are beyond our control that affect the real estate market and could affect our ability to sell properties for the price, on the terms or within the time frame that we desire. These factors include general economic conditions, the availability of financing, interest rates and other factors, including supply and demand. Further, before we can sell a property on the terms we want, it may be necessary to expend funds to correct defects or to make improvements. However, we can give no assurance that we will have the funds available to correct such defects or to make such improvements. We may be unable to sell our properties at a profit. Our inability to sell properties at the time and on the terms we want could reduce our cash flow and limit our ability to make distributions and could reduce the value of our units.

We may periodically enter into workout agreements with borrowers who are past maturity or delinquent in their regular payments. Typically, a workout allows the borrower to extend the due date of the balloon payment and/or defer past-due payments, often while continuing to make current monthly payments, which allows the borrower time to seek alternative means of paying the loan in full.

We rely on appraisals to determine the fair market value (FMV) of the underlying property securing our loans. These appraisals may be inaccurate or not reflect subsequent events affecting FMV which could increase our risk of loss.

We will rely on appraisals prepared by unrelated third parties to determine the fair market value of real property used to secure our loans. We rely on such appraisals for, among other matters, determining our loan-to-value ratio (“LTV”). In the case of a loan made in connection with a pending property purchase, an appraisal may, for various reasons, reflect a higher or lower value than the purchase amount; we may nevertheless base our LTV on the appraised value, rather than on such purchase amount. We cannot guarantee that such appraisals will, in any or all cases, be accurate or that the appraisals will reflect the actual amount buyers will pay for the property. If an appraisal is not accurate, our loan may not be as secure as we anticipated. In the event of foreclosure, we may not be able to

recover our entire investment. Additionally, since an appraisal fixes the value of real property at a given point in time, subsequent events could adversely affect the value of the real property used to secure a loan. For example, if the value of the property declines to a value below the amount of the loan, the loan could become under-collateralized. This would result in a risk of loss for us if the borrower defaults on the loan.

Increased competition and new entrants in the market for mortgage loan originations could adversely impact our ability to originate and acquire real estate-related loans at attractive risk-adjusted returns.

New entrants in our target markets for mortgage loan originations could adversely impact our ability to execute our investment strategy on terms favorable to us. In originating our loans, we may compete with REITs, numerous regional and community banks, specialty finance companies, savings and loan associations, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, other lenders and other entities, and we expect that others may be organized in the future. The effect of the existence of other institutions may be an increase in competition for the available supply of loans suitable for investment by us, which may cause us to reduce the interest rate that can be charged on our loans. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of real estate-related loans and establish more relationships than us. We cannot assure you that the competitive pressures we may face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, desirable loans may be limited in the future and we may not be able to take advantage of attractive lending opportunities from time to time, as we can provide no assurance that we will be able to identify and make loans that are consistent with our investment objectives.

Some of our loans are junior in priority to first and second liens that may make it more difficult and costly to protect our junior security interest.

We anticipate that our loans will eventually be diversified as to priority approximately as follows:

•first mortgages – 40 to 60%;

•second mortgages (junior to first mortgages) – 40 to 60%; and

•third mortgages (junior to other two mortgages) – 0 to 10%.

There is no assurance that we will be able to diversify our loans as set forth above or that this diversification strategy, if successfully implemented, will provide us with the best risk adjusted returns and/or decrease our risk of loss.

The lien securing each loan will not be junior to more than two other encumbrances (a first and, in some cases, a second deed of trust) on the real property which is to be used as security for the loan. In the event of foreclosure under a second or third deed of trust, the debt secured by a senior deed(s) of trust must be satisfied before any proceeds from the sale of the property can be applied toward the debt owed to us. As a result, we may not recover some or all of our investment. To protect our junior security interest, we may be required to make substantial cash outlays for such items as loan payments to

senior lien holders to prevent their foreclosure, property taxes, insurance, repairs, maintenance and any other expenses associated with the property. These expenditures could have an adverse effect on our profitability.

We may make construction loans which may subject us to greater risks.

Construction loans are those loans made to borrowers constructing entirely new structures or dwellings, whether residential, commercial or multi-family properties. We may make construction loans up to a maximum of 10% of our then gross offering proceeds. Investing in construction loans subjects us to greater risk than loans related to properties with operating histories. If we foreclose on property under construction, construction generally will have to be completed before the property can begin to generate an income stream or be sold. We may not have adequate cash reserves on hand with respect to junior encumbrances and/or construction loans at all times to protect our security. If we have inadequate cash reserves, we could suffer a loss of our investment. Additionally, we may be required to obtain permanent financing of the property in addition to the construction loan which could involve the payment of significant fees and additional cash obligations for us. As of December 31, 2019, we did not have any construction loans.

Owning real estate following foreclosure will subject us to additional risks.

If a borrower is unable to pay our loan or refinance it when it is due, it may be in our best interest to institute foreclosure proceedings against the borrower, and we may sometimes be required to own the property for a period of time. We will be subject to certain economic and liability risks attendant to property ownership which may affect our profitability. The risks of ownership will include the following:

•If the property is a rental property we will be required to find and keep tenants.

•We will be required to maintain and oversee and control operating expenses of the property.

•We will be subject to general and local real estate and economic market conditions which could adversely affect the value of the property.

•We will be subject to any change in laws or regulations regarding taxes, use, zoning and environmental protection and hazards.

•We will be required to maintain insurance for property and liability exposures such as environmental risks and potential liability for any injury that occurs on or to the property.

•We will be subject to state and federal laws and local municipal codes and penalties relating to tenant retention and the maintenance and upkeep of lender-owned properties.

•We may be subject to federal and state tax laws and regulations with respect to the tax treatment of items of our

income, gain, loss or deductions for real estate held for investment, rental and/or sale, which in turn may result in federal and state tax payment and filing exposure for our members.

•We will be subject to municipal ordinances, where they have been enacted, applicable to foreclosed and/or distressed properties which require the payment of additional costs and registration fees and may obligate us to secure and maintain, at our expense, real property securing our loans upon the filing of a notice of default or after we acquire ownership of real property through foreclosure.

Bankruptcy and legal limitations on personal judgments may affect our ability to enforce the loans and increase our costs.

Any borrower has the ability to delay a foreclosure sale by us for a period ranging from several months to several years or more by filing a petition in bankruptcy. The filing of a petition in bankruptcy automatically stops or “stays” any actions to enforce the terms of the loan. The length of this delay and the costs associated with it may have an adverse impact on our profitability.

If we make high-cost mortgage loans, we will be required to comply with additional federal and state regulations and our non-compliance could adversely affect us.

Although we anticipate making relatively few loans that would qualify as “high-cost mortgages,” as defined by regulations, the failure to comply with these regulations could adversely affect us. Section 1026.32 of Regulation Z defines a “high-cost mortgage” as any consumer loan secured by a primary residence where either (i) the annual percentage rate (“APR”), measured as of the date the rate is set, exceeds the average prime offer rate (“APOR”) for a comparable transaction on that date by more than 6.5% on a first mortgage or 8.5% on a junior mortgage; or (ii) the total fees payable by the consumer exceed 5% for a loan of more than or equal to $20,000, or 8.5% or $1,000 (whichever is less) on a loan of less than $20,000.

The failure to comply with the regulations, even if the failure was unintended, will render the loan rescindable for up to three years. If the loan is rescinded, interest and fees paid by the borrower must be refunded by the lender. The lender could also be held liable for attorneys’ fees, finance charges and fees paid by the borrower and certain other money damages.

In addition, under California law consumer loans secured by liens on primary residences in amounts less than the Fannie Mae/Freddie Mac conforming loan limit may be considered to be “high-cost loans” under certain circumstances. While it is unlikely that we would make many high-cost loans, the failure to comply with California law regarding such loans could have significant adverse effects on us. The reckless or willful failure to comply with any provision of this law, including the mandatory disclosure provisions, could result in, among other penalties, the imposition of administrative penalties of $25,000, loss or suspension of the offending broker’s license, as well as exposure to civil liability to the consumer/borrower (including the imposition of actual and punitive damages).

We operate in a heavily regulated industry and compliance with regulations could increase our costs of doing business and

lower your return.

The mortgage business has traditionally been heavily regulated. The costs of complying with these regulations could adversely affect our profitability, and violations of these regulations could materially adversely affect our business and financial results. For example, the company’s lending activity is subject to regulations promulgated by the Consumer Finance Protection Bureau (“CFPB”), and further, the company may be subject to examination by the CFPB, as well as the California Department of Real Estate and the California Department of Business Oversight. Such examinations, as well as regulations that may be issued in the future, could ultimately increase our administrative burdens and our costs and could adversely affect the return to our members.

Since we are not regulated as a bank, our members and borrowers may have fewer protections.

Although we are engaged in mortgage lending, we and our affiliates are not banks and, accordingly, are not generally subject to the federal and state banking regulations, policies and oversight applicable to banks. For example, banks are subject to federal regulation and examination by the Federal Deposit Insurance Corporation, which insures bank deposits up to applicable limits. The operations of banks are also subject to the regulation and oversight of the Federal Reserve Board and state banking regulators. Banks are required to maintain a minimum level of regulatory capital in accordance with stringent guidelines established by federal law. Federal and state banking agencies also regulate the lending practices, capital structure, investment practices and dividend policy of banks, among other things.

Because we and our affiliates are generally not subject to the capital requirements and other regulations and oversight applicable to banks, our members and borrowers do not have the same level of protections and safeguards afforded to owners and customers of banks.

Larger loans or concentration of loans to one borrower may result in less diversity and may increase risk.

Investing in fewer, larger loans generally decreases diversification of the portfolio and may increase the risk of credit losses and the possible resultant reduction in profits and yield to our members. However, since larger loans generally will carry a somewhat higher interest rate, our manager may determine, from time to time, that a relatively larger loan is advisable for us. Our maximum investment in a loan will not exceed 10% of our then total gross offering proceeds.

We may invest in multiple secured loans that share a common borrower or principal. The aggregate of our loans, however, to any one borrower may not exceed 10% of the then total gross offering proceeds. The more concentrated our portfolio is with one or a few borrowers, the greater the credit risk we face.

Use of borrowed money to fund loans may reduce our profitability.

We are permitted to borrow funds for the purpose of making loans, for increased liquidity, reducing cash reserve needs, or developing or refinancing property that we acquired through foreclosure or for any other proper purpose on any terms commercially available. We may assign all or a portion of our loan portfolio and/or all or a portion of real estate that we own as security for such loans. Our manager may not leverage more than, and our total indebtedness may not at any time exceed, 50% of members’ capital.

If we have borrowed money to fund loans, a rise in the prevailing interest rate could result in our having to pay more in interest on the borrowed money than we make on loans to our borrowers. This may reduce our profitability, and, should we default on our debt, may result in additional losses through forced liquidation of loans. In addition,

payments of principal and interest made to service our debts may leave us with insufficient cash to pay distributions. Any of these results would have a significant negative impact on your investment.

Changes in interest rates may affect your return on your investment.

Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Rising interest rates generally reduce the demand for mortgage loans due to the higher cost of borrowing. Also, rising interest rates reduce the value of our existing loans that do not have adjustable rates. A reduction in the volume of mortgage loans originated may affect the amount of our distributions. Conversely, we expect that the majority of our loans will not include prepayment penalties for a borrower paying off a loan prior to maturity. The absence of a prepayment penalty in our loans may lead borrowers to refinance higher-interest rate loans in a market of falling interest rates. This would then require us to reinvest the prepayment proceeds in loans or alternative short-term investments with lower interest rates and a corresponding lower yield to members.

The values of our loans may decline without any general increase in interest rates for a number of reasons, such as increases or expected increases in defaults, or increases or expected increases in voluntary prepayments for those loans that are subject to prepayment risk or widening of credit spreads.

We expect that our loans will typically have fixed rates and the majority of our loans will be for terms of one to five years. Consequently, due to the terms of our loans, if interest rates rapidly increase, such interest rates may exceed the average interest rate earned by our loan portfolio. If prevailing interest rates rise above the average interest rate being earned by our loan portfolio, you may be unable to quickly redeem your units, as our unit redemption program is subject to significant restrictions and limitations, in order to take advantage of higher returns available from other investments. In addition, an increase in interest rates accompanied by a tight supply of mortgage funds may make refinancing by borrowers with balloon payments difficult or impossible. This is true regardless of the market value of the underlying property at the time such balloon payments are due. In such event, the property may be foreclosed upon.

We may experience fluctuations in our quarterly results.

We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability or inability to make loans that meet our investment criteria, the interest rate on loans in our portfolio, the level of our expenses, the volume and timing of loan sales to third parties, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods.

We may face potential liability for toxic or hazardous substances as a result of our lending activities or as a result of

foreclosure on properties that secure loans we make.

If we take an equity interest in, management control of, or foreclose on any of the loans, we may be considered the owner of the real property securing such loans. Under current federal and state law, the owner of real property contaminated with toxic or hazardous substances (including a mortgage lender that has acquired title through foreclosure) may be liable for all costs associated with any remedial action necessary to bring the property into compliance with applicable environmental laws and regulations. This liability may arise regardless of who caused the contamination or when it was caused. In the event of any environmental contamination, there can be no assurance that we would not incur full recourse liability for the entire cost of any such removal and cleanup, even if we did not know about or participate in the contamination. Full recourse liability means that any of our property, including the contaminated property, could be sold in order to pay the costs of cleanup in excess of the value of the property at which such contamination occurred.

In addition, we could incur liability to tenants and other users of the affected property, or users of neighboring property, including liability for consequential damages. Consequential damages are damages that are a consequence of the contamination but are not costs required to clean up the contamination, such as lost profits of a business. We would also be exposed to risk of lost revenues during any cleanup and to the risk of lower lease rates or decreased occupancy if the existence of such substances or sources on the property becomes known.

If we fail to remove the substances or sources and clean up the property, federal, state, or local environmental agencies could perform such removal and cleanup. Such agencies would impose and subsequently foreclose liens on the property for the cost thereof. We may find it difficult or impossible to sell the property prior to or following any such cleanup. If such substances are discovered after we sell the property, we could be liable to the purchaser thereof if our manager knew or had reason to know that such substances or sources existed. In such case, we could also be subject to the costs described above.

If we are required to incur such costs or satisfy such liabilities, this could have a material adverse effect on our profitability. Additionally, if a borrower is required to incur such costs or satisfy such liabilities, this could result in the borrower’s inability to repay its loan from us.

Our manager’s selection of loans for sale to third parties may involve conflicts of interest between us and our manager.

We may, on occasion, subject to applicable laws and regulations and our operating agreement, sell some of our loans. If we sell loans, we may be required to make customary representations and warranties about such loans to the loan purchaser. Our loan sale agreements may require us to repurchase or substitute loans in the event we breach a representation or warranty given to the loan purchaser.

Also, there is a conflict of interest between us and our manager as to what loans will be sold. For example, the manager may select loans of a higher credit quality or having higher interest rates than the loans funded with the proceeds from the sale. The sale of loans may result in a reduced overall yield of our portfolio. Loans the manager may sell to third parties will enable the manager to re-lend proceeds from the loans sales generating loan origination revenue and fees under the operating agreement, which increases the managers capital and ability to repay the formation loan.

Your ability to offset income with our losses may be limited.

We are engaged in mortgage lending. We take the position that we are engaged in the active conduct of equity-financed lending. Under the applicable Treasury regulations, each member is required to report separately on his income tax return all or a portion of the member’s distributive share of our income as nonpassive income. Each member’s distributive share of our losses, if any, will be reported as passive losses. Passive losses may be used to offset passive income. To the extent that passive losses do not offset passive income, they may be carried forward to offset passive income in future years. It is possible, however, that the IRS could assert that our income is properly treated as portfolio income for purposes of those limitations. Such treatment is subject to the interpretation of complex Treasury regulations, and is dependent upon a number of factors, such as whether we are engaged in a trade or business, the extent to which we incur liabilities in connection with our activities, and the proper matching of the allocable expenses incurred in the production of income. There can be no assurance that an IRS challenge to our characterization of our income will not succeed. It also is possible that members may be subject to other limitations on the deductibility of our expenses and losses.

Your tax liability may exceed the cash you receive.

Your tax liabilities associated with an investment in the units for a given year may exceed the amount of cash we distribute to you during such year. As a member, you will be taxed on your allocable share of our taxable income whether or not you actually receive cash distributions from us. Your taxable income could exceed cash distributions you receive, for example, if you elect to reinvest into additional units the cash distributions you would otherwise have received. Taxable income in excess of cash distributions also could result if we were to generate so-called “phantom income” (taxable income without an associated receipt of cash). Phantom income could be recognized from a number of sources, including, without limitation, any established loan loss reserves or fluctuation thereof, repayment of principal on loans incurred by the company as well as imputed income due to original issue discount, market discount, imputed interest and significant modifications to existing loans. Under very limited circumstances, you could receive a special distribution to enable you to pay taxes on specified types of income. We take the position that we are engaged in a lending trade or business, as a result of which all or a portion of the income earned by members with respect to their investment in our units will be treated as ordinary income.

We expect to generate unrelated business taxable income.

Tax-exempt investors (such as an employee pension benefit plan or an IRA) may be subject to tax to the extent that income from the units is treated as unrelated business taxable income, or UBTI. We may realize UBTI from the sale of loans if we are deemed to be a “dealer” in the business of selling loans to customers in the ordinary course of our trade or business and a particular loan or loans are deemed to be “dealer property.” In addition, we borrow funds on a limited basis, which can cause a portion of our income to be treated as UBTI. We may also receive income from services rendered in

connection with making or securing loans, which is likely to constitute UBTI. Furthermore, any rental income that we receive from a lease of personal property would constitute UBTI unless the personal property is leased along with real property and the rents received from the personal property are an incidental amount of the total rents received under the lease.  While we do not currently intend to own and lease personal property, it is possible we may do so as a result of a foreclosure upon a default. Although we will use reasonable efforts to prevent any borrowings and leases of personal property from causing any significant amount of income from the units to be treated as UBTI, we expect that some portion of our income will be UBTI. Prospective investors that are tax-exempt entities are urged to consult their own tax advisors regarding the suitability of an investment in units. In particular, an investment in units may not be suitable for charitable remainder trusts.

You may be subject to state and local tax laws.

The state in which you reside may impose an income tax upon your share of our taxable income. Furthermore, states such as California, in which we will own property, generally impose income tax upon a member’s share of the company’s taxable income considered allocable to such states, whether or not a member resides in that state. As a result, a nonresident member may be required to file a tax return in California and any other such state. Differences may exist between federal income tax laws and state and local income tax laws. We may be required to withhold state taxes from distributions to members in certain instances. You are urged to consult with your own tax advisers with respect to state and local tax consequences of an investment in our units.

Changes in tax laws could have an adverse effect on your investment.

Changes in federal, state or local tax law could have an adverse effect on the rate of return on your investment in our units or on the market value of our assets. On December 22, 2017, the tax legislation commonly referred to as the Tax Cuts and Jobs Act was signed into law and contains significant changes to the Internal Revenue Code generally applying in taxable years beginning after December 31, 2017. The Tax Cuts and Jobs Act eliminates or restricts various deductions for taxable years beginning after December 31, 2017 and before January 1, 2026.  The reduction or limitation of these tax deductions could adversely affect the real estate prices in California which has high state and local taxes and higher property values. In addition, changes in the tax deductions could increase taxes payable by certain borrowers, thereby reducing their available cash and adversely impacting their ability to make payment on the loans, which in turn, could cause a rise in delinquencies. You are urged to consult with your own tax advisor with respect to the impact of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our units.

Risks of investment by benefit plan investors and other tax-exempt investors.

If you elect to participate in the DRIP, you should consider the same factors that you had to consider when considering an investment in the units initially, including if you are a Benefit Plan Investor subject to the requirements of the Employee Retirement Income Security Act (“ERISA”), you should consider, among other things, (i) whether the investment satisfies the diversification requirements of Section 404(a)(1)(C) of ERISA; (ii) whether the investment is prudent, since it is not expected that there will be a market created in which you can sell or otherwise dispose of the units. In addition if you are a Benefit Plan Investor that is a tax-qualified pension or 401(k) plan, an IRA or a similar plan, you should consider (i) whether a distribution of units in kind from the plan or IRA would be accepted as a rollover by a trustee or custodian of a successor plan or IRA, and if not accepted, whether the automatic 20% income tax withholding would create the need to effectuate the rollover using assets other than the units; and (ii) whether a required distribution from a tax-qualified pension or 401(k) plan or IRA commencing on the April 1 following the calendar year in which the beneficiary attains age 70 1⁄2 (or if later with respect to a tax-qualified plan distribution, the date the beneficiary retires) could cause the beneficiary to become subject to income tax that the beneficiary would need to satisfy out of assets other than the units if such beneficiary were not able to transfer the units for cash. Finally, all Benefit Plan Investors, including tax-qualified pension and 401(k) plans and IRAs, should consider (i) whether the investment will impair the liquidity of your plan, IRA or other entity; and (ii) whether interests in us or the underlying assets owned by us constitute “plan assets” for purposes of Section 406 of ERISA or Section 4975 of the Code which could cause certain transactions with us to constitute non-exempt prohibited transactions. ERISA requires that the assets of a plan be valued at their fair market value as of the close of the plan year, and it may not be possible to adequately value the units from year to year, since there will not be a market for those units and the appreciation of any property may not be shown in the value of the units until we sell or otherwise dispose of our investments. If you are an employee benefit plan subject to federal, state or local law that is substantially similar to ERISA, you should consider whether an investment in the units would satisfy the requirements of such similar law.

•

in any calendar year, redeem more than 5%; or

•

in any calendar quarter, redeem more than 1.25%, of the weighted average number of units outstanding during the twelve (12) month period immediately prior to the date of the redemption.

•

first, to redemptions upon the death of a member; and

•

next, to other redemption requests until all other requests for redemption have been met.

•

after one year, 92% of the purchase price or of the capital account balance, whichever is less;

•

after two years, 94% of the purchase price or of the capital account balance, whichever is less;

•

after three years, 96% of the purchase price or of the capital account balance, whichever is less;

•

after four years, 98% of the purchase price or of the capital account balance, whichever is less;

•

after five years, 100% of the purchase price or of the capital account balance, whichever is less.

•

make additional loans;

•

fund working capital reserves;

•

pay RMC up to 4.5% of proceeds from sale of units for organization and offering expenses, excluding units sold in the DRIP; and,

•

fund a formation loan to RMC at up to 7% of proceeds from sale of units, excluding the DRIP.

For the quarterly period ended

2019

2018

March 31

$

1,092,396

$

403,400

June 30

823,654

299,240

September 30

760,856

787,524

December 31

571,576

1,243,607

Total

$

3,248,482

$

2,733,771

•

are of shorter terms at origination than commercial real estate loans by institutional lenders and conventional single-family home mortgage lenders;

•

are written without a prepayment penalty; and

•

are not yet sellable into an established secondary market as companies or individuals originating loans similar to those originated by RMC on behalf of the company typically intend to hold the loans until maturity.

2019

2018

Secured loans principal – end of period balance

$

70,660,284

$

62,115,713

Secured loans principal– average daily balance

$

66,808,000

$

61,069,000

Interest on loans

$

5,994,790

$

5,200,702

Portfolio interest rate⁽¹⁾

8.8

%

8.5

%

Effective yield rate⁽²⁾

9.0

%

8.5

%

Provision for loan losses

$

87,000

$

—

Total operations expense⁽⁷⁾

$

1,006,908

$

457,848

Net Income⁽⁷⁾

$

4,973,712

$

4,790,272

Percent of average members’ capital⁽³⁾⁽⁴⁾

6.1

%

6.4

%

Member Distributions, net

$

4,534,952

$

4,462,623

Percent of average members’ capital⁽³⁾⁽⁵⁾

5.6

%

6.0

%

Members’ capital, gross – end of period balance

$

81,755,930

$

79,198,453

Members’ capital, gross – average daily balance

$

81,340,000

$

74,469,000

Member Redemptions⁽⁶⁾

$

3,248,482

$

2,733,771

(1)

Stated note interest rate of secured loans - weighted daily average

(2)

Percent of secured loans – average daily balance

(3)

Percent of members’ capital, gross – average daily balance

(4)

Percent based on the net income available to members (excluding 1% allocated to the manager)

(5)

Members Capital Distributed during 2019 is net of O&O costs allocated to members during the year.

(6)

Scheduled member redemptions as of December 31, 2019 were $447,417, payable in 2020. Scheduled member redemptions as of December 31, 2018 were $1,253,669.

Principal - secured loans

LTV

First trust

deeds

Percent of

total

principal

Second trust

deeds

Percent of

total

principal

Total

principal

Percent of

total

principal

<40%

$

6,949,302

9.8

%

$

2,493,655

3.5

%

$

9,442,957

13.3

%

40-49%

2,680,367

3.8

%

990,236

1.4

%

3,670,603

5.2

%

50-59%

16,779,468

23.7

%

7,151,619

10.1

%

23,931,087

33.8

%

60-69%

15,440,914

21.9

%

15,819,135

22.4

%

31,260,049

44.3

%

Subtotal <70%

41,850,051

59.2

%

26,454,645

37.4

%

68,304,696

96.6

%

70-79%

861,986

1.2

%

1,243,974

1.8

%

2,105,960

3.0

%

Subtotal <80%

42,712,037

60.4

%

27,698,619

39.2

%

70,410,656

99.6

%

>80%⁽¹⁾

—

0.0

%

249,628

0.4

%

249,628

0.4

%

Total

$

42,712,037

60.4

%

$

27,948,247

39.6

%

$

70,660,284

100.0

%

Principal - secured loans - non-performing

LTV

First trust

deeds

Percent

total

principal

Second trust

deeds

Percent

total

principal

Total

Percent

total

principal

<40%

$

2,856,650

4.0

%

$

—

0.0

%

$

2,856,650

4.0

%

40-49%

—

0.0

%

345,706

0.5

%

345,706

0.5

%

50-59%

—

0.0

%

441,367

0.6

%

441,367

0.6

%

60-69%

1,072,682

1.5

%

3,329,342

4.7

%

4,402,024

6.2

%

Subtotal <70%

3,929,332

5.5

%

4,116,415

5.8

%

8,045,747

11.3

%

70-79%

190,769

0.3

%

—

0.0

%

190,769

0.3

%

Subtotal <80%

4,120,101

5.8

%

4,116,415

5.8

%

8,236,516

11.6

%

>80%⁽¹⁾

—

0.0

%

249,628

0.4

%

249,628

0.4

%

Total

$

4,120,101

5.8

%

$

4,366,043

6.2

%

$

8,486,144

12.0

%

1)

The fair value of the collateral, and the dollar amount of senior claims/liens for loans secured by second deeds of trust, used in the LTV computation in the tables above were those which existed at origination, except the LTV for a non-performing loan with principal of $249,628, which was determined to have an LTV which exceeded 90%. RMI IX made a concession – as did the selling broker – to facilitate the sale of the underlying collateral. RMI IX’s concession approximated $37,000.

Interest on

loans, net

Provision

For Loan

Losses

Operations

Expense

Net

Income

For the years ended

December 31, 2019

$

5,994,790

87,000

1,006,908

4,973,712

December 31, 2018

5,200,702

—

457,848

4,790,272

Change

$

794,088

87,000

549,060

183,440

Change

Loan balance increase

$

383,448

—

15,421

368,027

Loan portfolio effective yield rate

410,640

—

—

410,640

Reduced support from RMC

—

—

157,399

(157,399

)

Cost allocated from RMC

—

—

(87,037

)

87,037

Gain on sale, loans

—

—

—

(6,300

)

Late fees

—

—

—

31,712

Capital balance increase

—

—

56,928

(56,928

)

Information technology for members' capital

—

—

87,795

(87,795

)

California tax payment

—

—

11,790

(11,790

)

RMC fees/costs reimbursements waived

—

—

308,212

(308,212

)

Allowance for loan losses, general reserve

—

50,000

—

(50,000

)

Allowance for loan losses, specific reserve

—

37,000

—

(37,000

)

Other

—

—

(1,448

)

1,448

Change

$

794,088

87,000

549,060

183,440

Mortgage

Servicing

Fees

Asset

Management

Fees, net

Costs

From

RMC, net

Professional

Services, net

Other

Total

For the years ended

December 31, 2019

$

166,878

278,103

—

524,940

36,987

1,006,908

December 31, 2018

151,457

—

—

289,053

17,338

457,848

Change

$

15,421

278,103

—

235,887

19,649

549,060

Change

Loan balance increase

$

15,421

—

—

—

—

15,421

Capital balance increase

—

56,928

—

—

—

56,928

Cost allocated from RMC

—

—

(87,037

)

—

—

(87,037

)

RMC fees/costs reimbursements waived

—

221,175

87,037

—

—

308,212

Information technology for members' capital

—

—

—

87,795

—

87,795

Reduced support from RMC

—

—

—

143,152

14,247

157,399

California tax payment

—

—

—

—

11,790

11,790

Other

—

—

—

4,940

(6,388

)

(1,448

)

Change

$

15,421

278,103

—

235,887

19,649

549,060

Interest on

loans, net

Provision

For Loan

Losses

Operations

Expense

Net

Income

For the three months ended

December 31, 2019

$

1,589,783

87,000

296,298

1,213,693

September 30, 2019

1,526,142

—

338,408

1,226,729

Change

$

63,641

87,000

(42,110

)

(13,036

)

Change

Loan balance increase

131,890

—

4,418

127,472

Loan portfolio effective yield rate

(68,249

)

—

—

(68,249

)

Gain on sale, loans

—

—

—

(20,833

)

Late fees

—

—

—

(10,954

)

Cost allocated from RMC

—

—

(10,360

)

10,360

California tax payment

—

—

12,590

(12,590

)

RMC fees/costs reimbursements waived

—

—

10,360

(10,360

)

Professional Service Timing

—

—

—

—

Allowance for loan losses, general reserve

—

50,000

—

(50,000

)

Allowance for loan losses, specific reserve

—

37,000

—

(37,000

)

Other

—

—

(59,118

)

59,118

Change

$

63,641

87,000

(42,110

)

(13,036

)

2019

2018

Members’ capital

Contributions by members

$

2,682,081

$

10,479,930

Organization and offering costs, net

(89,259

)

(510,692

)

Formation loan, net

168,645

(434,325

)

Redemptions, net

(3,166,435

)

(2,733,771

)

Earnings distributed to manager

(45,000

)

—

Earnings distributed to members, net of DRIP

(2,119,145

)

(2,080,785

)

Cash – members’ capital, net

(2,569,113

)

4,720,357

Loan principal/advances/interest

Principal collected

44,597,043

41,506,194

Loans sold to non-affiliate, net

4,994,818

22,128,128

Interest received, net

5,732,666

5,042,952

Other loan income

52,797

18,499

Loan funding & advances, net

(58,052,653

)

(64,966,301

)

Loans transferred from affiliates

—

(5,889,819

)

Cash – loans, net

(2,675,329

)

(2,160,347

)

Operations expense

(979,982

)

(394,909

)

Net change in cash

$

(6,224,424

)

$

2,165,101

Cash, end of period

$

4,450,529

$

10,674,953

2019

2018

Capital redemptions-without penalty

$

1,281,768

$

1,923,685

Capital redemptions-subject to penalty

1,966,714

810,086

Total

$

3,248,482

$

2,733,771

Early withdrawal penalties

$

111,551

$

54,429

Report of Independent Registered Public Accounting Firm

44

Balance Sheets

45

Statements of Income

46

Statements of Changes in Members’ Capital

47

Statements of Cash Flows

48

Notes to Financial Statements

50

December 31,

December 31,

ASSETS

2019

2018

Cash and cash equivalents

$

4,450,529

$

10,674,953

Loans

Principal

70,660,284

62,115,713

Advances

14,040

21,041

Accrued interest

680,146

473,966

Loan balances secured by deeds of trust

71,354,470

62,610,720

Allowance for loan losses

(87,000

)

—

Loan balances secured by deeds of trust, net

71,267,470

62,610,720

Total assets

$

75,717,999

$

73,285,673

LIABILITIES, INVESTORS IN APPLICANT STATUS, AND MEMBERS’ CAPITAL

Accounts payable and accrued liabilities