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Section 1: 10-K

orm10k2015.htm

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

FORM 10-K

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

For the Fiscal Year Ended December 31, 2015

OR

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

For the transition period from ________ to __________

Commission file number 000-54957

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

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

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

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

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

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

 
 

 

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

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

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

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

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

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

The aggregate market value of voting and non-voting equity held by non-affiliates of the registrant was approximately $161,735,000 on the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2015, based on the closing sales price of $15.02 on that date for shares of the registrant’s common stock as reported by the NYSE MKT. For this computation, the registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the registrant and certain other stockholders; such an exclusion shall not be deemed to constitute an admission that any such person is an "affiliate" of the registrant.  


 
As of March 9, 2016, there were approximately 10,247,000 shares of the registrant’s common stock outstanding.
 


 
DOCUMENTS INCORPORATED BY REFERENCE

 


 
None

 
 

 



TABLE OF CONTENTS

PART I
 
    Page
     
Item 1.    Business 1
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments 27
Item 2.   Properties 27
Item 3. Legal Proceedings 33
Item 4. Mine Safety Disclosures 33

PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 33
Item 6. Selected Financial Data 36
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 61
Item 8. Consolidated Financial Statements and Supplementary Data 62
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 110
Item 9A.   Controls and Procedures 110
Item 9B. Other Information 110
 
PART III
 
Item 10.   Directors, Executive Officers and Corporate Governance 110
Item 11. Executive Compensation 114
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 116
Item 13. Certain Relationships and Related Transactions, and Director Independence 117
Item 14. Principal Accounting Fees and Services 121

PART IV
 
Item 15. Exhibits, Consolidated Financial Statement Schedules 122
     
Signatures   124


 
 

 



 
EXPLANATORY NOTE REGARDING THIS ANNUAL REPORT

 
As previously announced, as part of a plan to reorganize our business operations so that, among other things, we could elect to qualify as a real estate investment trust (a “REIT”) for federal income tax purposes,  effective May 20, 2013, Owens Mortgage Investment Fund, a California Limited Partnership (the “Predecessor” or “OMIF”) merged with and into Owens Realty Mortgage, Inc., a Maryland corporation (the “Registrant”) with the Registrant as the surviving corporation (the “Merger”) and the Registrant commenced conducting all of the business conducted by the Predecessor.  Upon consummation of the Merger, limited partners of the Predecessor received one share of common stock, par value $0.01 per share, of the Registrant (the “Common Stock”), for every 25 limited partner units of the Predecessor  that they owned, and certain units of the Predecessor representing the general partner interest of Owens Financial Group, Inc. were also exchanged for Common Stock as is discussed in further detail in our consolidated financial statements under “Note 1 - Organization” in Item 8 of this Annual Report on Form 10-K (“Annual Report”). The rights of the stockholders of the Registrant are governed by Maryland law and the charter, bylaws and other governing documents of the Registrant.
 
The shares of Common Stock issued pursuant to the Merger were registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to a Registration Statement on Form S-4 (File No. 333-184392), which was declared effective by the Securities and Exchange Commission (the “SEC”)  on February 12, 2013. Pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Registrant is deemed to be the successor issuer to the Predecessor and the Registrant’s Common Stock was subsequently registered under Section 12(b) of the Exchange Act and is listed on the NYSE MKT, LLC.
 
References to Owens Realty Mortgage, Inc. and its subsidiaries, “ORM,” the “Company,” “we”, “us”, or “our” in this Annual Report (including in the consolidated financial statements and notes thereto in this Annual Report) have the following meanings, unless we specifically state or the context requires otherwise:
 
·  
For periods prior to May 20, 2013: the Predecessor and its subsidiaries;
 
·  
For periods from and after May 20, 2013: ORM and its subsidiaries.
 
PART I

Item 1. BUSINESS

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

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

The Company was incorporated in Maryland on August 9, 2012. Effective May 20, 2013, OMIF, a California Limited Partnership formed in 1984 merged with and into the Company, with the Company as the surviving corporation in the Merger, and the Company commenced conducting all of the business conducted by OMIF at the effective time of the Merger.  The Merger was conducted to reorganize our business operations so that, among other things, we could elect to qualify as a real estate investment trust (a “REIT”) for federal income tax purposes. As a qualified REIT we are generally not subject to federal income tax on that portion of our REIT taxable income that is distributed to our stockholders, provided that at least 90% of taxable income is distributed and provided that certain other requirements are met. Certain of our assets that produce non-qualifying income are held in taxable REIT subsidiaries. Unlike other subsidiaries of a REIT, the income of a taxable REIT subsidiary is subject to federal and state income taxes.
 
 
1

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

The following table shows the total Company stockholders’ equity, loans, real estate properties and net income (loss) attributable to common stockholders as of or for the years ended December 31, 2015, 2014, 2013, 2012 and 2011:
 
   
ORM Stockholders’
Equity
 
Loans
 
Real Estate
Properties
 
Net Income
(Loss) Attributable to Common Stockholders
2015……………………….
 
$
194,979,998
 
$
106,743,807
 
$
153,838,412
 
$
23,569,116
 
2014……………………….
 
$
184,571,858
 
$
68,033,511
 
$
163,016,805
 
$
7,929,629
 
2013……………………….
 
$
179,874,410
 
$
58,796,293
 
$
135,315,964
 
$
8,732,897
 
2012……………………….
 
$
179,459,931
 
$
70,262,262
 
$
127,773,349
 
$
(1,679,820
)
2011……………………….
 
$
181,045,959
 
$
69,421,876
 
$
145,591,660
 
$
(24,744,255
)

As of December 31, 2015, we held investments in 56 loans, secured by liens on title and leasehold interests in real property. 71% of the loans are located in Northern California. The remaining 29% are located in Southern California, Arizona, Hawaii, Nevada, Oregon and Michigan.

The following table sets forth the types and maturities of loans held by us as of December 31, 2015:

TYPES AND MATURITIES OF LOANS
(As of December 31, 2015)
 
 
Number
of Loans
 
Amount
 
Percent
             
Senior loans
53
 
$
103,716,010
 
97.16%
Junior loans
3
   
3,027,797
 
2.84%
 
56
 
$
106,743,807
 
100.00%
             
Maturing on or before December 31, 2015
2
 
$
8,452,253
 
7.92%
Maturing on or between January 1, 2016 and December 31, 2017
49
   
83,189,357
 
77.93%
Maturing on or between January 1, 2018 and March 1, 2028
5
   
15,102,197
 
14.15%
 
56
 
$
106,743,807
 
100.00%
             
Commercial
34
 
$
76,800,297
 
71.95%
Residential
19
   
24,675,867
 
23.12%
Land
3
   
5,267,643
 
4.93%
 
56
 
$
106,743,807
 
100.00%

We have established an allowance for loan losses of approximately $1,842,000 as of December 31, 2015. The above amounts reflect the gross amounts of our loans without regard to such allowance.

The average loan balance of the loan portfolio is $1,906,000 as of December 31, 2015. Of such investments, 13% earn a variable rate of interest and 87% earn a fixed rate of interest. All were negotiated according to our investment standards.

We have other assets in addition to loans, comprised principally of the following, as of December 31, 2015:

·  
$8,481,000 in cash and cash equivalents and restricted cash required to transact our business and/or in conjunction with contingency and escrow reserve requirements;
 
 
2

 
 
·  
$153,838,000 in real estate held for sale and investment;
 
·  
$2,141,000 in investment in limited liability company;
 
·  
$1,765,000 in interest and other receivables;
 
·  
$785,000 in deferred financing costs, net; and
 
·  
$741,000 in other assets.
 
Delinquencies

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

·  
payments on the loan become delinquent;
 
·  
the loan is past maturity;
 
·  
it learns of physical changes to the property securing the loan or to the area in which the property is located; or
 
·  
it learns of changes to the economic condition of the borrower or of leasing activity of the property securing the loan.
 
A review normally includes conducting a physical evaluation of the property securing the loan and the area in which the property is located, and obtaining information regarding the property’s occupancy. In some circumstances, management may determine that a more extensive review is warranted, and may obtain an updated appraisal, updated financial information on the borrower or other information. As of December 31, 2015, we obtained updated appraisals on certain of the properties securing our trust deed investments and certain of our wholly- and majority- owned real estate properties.

As of December 31, 2015 and 2014, we had three and six loans, respectively, that were impaired totaling approximately $8,694,000 and $22,316,000, respectively. This included two matured loans totaling $8,452,000 and $8,614,000, respectively. In addition, one loan totaling approximately $862,000 was past maturity but less than 90 days delinquent in monthly payments as of December 31, 2014 (combined total of impaired and past maturity loans of $8,694,000 and $23,178,000, respectively). Of the impaired and past maturity loans none were in the process of foreclosure and none involved borrowers who were in bankruptcy as of December 31, 2015 and 2014. We foreclosed on no loans during the year ended December 31, 2015. We foreclosed on three and six loans during the years ended December 31, 2014 and 2013 with aggregate principal balances totaling $7,671,000 and $26,187,000, respectively, and obtained the properties via the trustee’s sales.

There were no loans modified as troubled debt restructurings during the year ended December 31, 2015.

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

During the year ended December 31, 2013, the terms of two impaired loans were modified as troubled debt restructurings. One such impaired loan was modified to combine all principal, delinquent interest and advances into principal and provide for amortizing payments at a reduced interest rate over an extended maturity of 15 years. The other impaired loan was rewritten during the year whereby the Company repaid the unrelated first deed of trust on the subject property of approximately $5,899,000 and refinanced its second deed of trust by combining them into one first deed of trust in the amount of $9,625,000 with interest at 10% per annum due in five years. As part of the modification, approximately $659,000 of past due interest on our original note was paid from the proceeds of the rewritten loan, which was recorded as a discount against the principal balance of the new loan because the loan was impaired (net principal balance of $8,966,000). In addition, we loaned the borrower an additional $2,500,000 to fund certain improvements to the property (aggregate principal balance of $11,466,000). The $9,625,000 and $2,500,000 loans were repaid in full during the year ended December 31, 2015.
 
 
3

 
Of the $22,316,000 in loans that were impaired as of December 31, 2014, $8,867,000 remained impaired as of December 31, 2015 (balance now $8,694,000) and $13,488,000 was paid off by the borrowers during 2015.

Following is a table representing our delinquency/impairment experience and foreclosures as of and during the years ended December 31, 2015, 2014, 2013, 2012 and 2011:
 
   
2015
 
2014
 
2013
 
2012
   
2011
Delinquent/Impaired Loans
 
$
8,694,000
 
$
22,316,000
 
$
31,738,000
 
$
49,252,000
 
$
52,327,000
Loans Foreclosed
 
$
 
$
7,671,000
 
$
26,187,000
 
$
2,000,000
 
$
61,438,000
Total Loans
 
$
106,744,000
 
$
68,034,000
 
$
58,796,000
 
$
70,262,000
 
$
69,422,000
Percent of Delinquent Loans to Total Loans
   
8.14%
   
32.80%
   
53.98%
   
70.10%
   
75.38%

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

Compensation to the Manager

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

Compensation and Reimbursement from the Company

Management Fees

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

Servicing Fees

The Manager may act as servicing agent on any or all of the loans held by the Company and expects to continue to service all such loans.  In consideration for acting as the servicing agent, the Manager receives from the Company a monthly servicing fee, which, when added to all other fees paid in connection with the servicing of a particular loan, does not exceed the lesser of the customary, competitive fee in the community where the loan is placed for the provision of such services on that type of loan or up to 0.25% per year of the unpaid balance of loans held by the Company at the end of each month. The Manager has historically been paid the maximum servicing fee allowable.

Reimbursement of Other Expenses

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

Compensation from Borrowers

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

 
4

 
Acquisition and Origination Fees

The Manager is entitled to receive and retain all acquisition and origination fees paid or payable by borrowers for services rendered in connection with the evaluation and consideration of potential investments of the Company (including any selection fee, mortgage placement fee, nonrecurring management fee, and any origination fee, loan fee, or points paid by borrowers, or any fee of a similar nature). The acquisition and origination fees are paid by borrowers, and thus, are not an expense of the Company. These fees may be paid at the placement, extension or refinancing of the loan or at the time of final repayment of the loan. The amount of these fees is determined by competitive conditions and the Manager and may have a direct effect on the interest rate borrowers are willing to pay the Company.

Late Payment Charges

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

Other Miscellaneous Fees

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

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

Principal Investment Objectives

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

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

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

Investment in Real Estate Loans

Our acquisition and investment policies are to invest at least 86.5% of our capital in real estate loans and activities related thereto.  Due to the declining economy and reductions in real estate values prior to 2013, we experienced increased foreclosures which resulted in our ownership of significantly more real estate than in the past. Therefore, while we initially adhered to our policies of investing at least 86.5% of our capital in real estate loans, economic conditions beyond our control have resulted in less than 86.5% of our capital being accounted for as investments in real estate loans. As of December 31, 2015, approximately 38% of our assets were classified as investments in real estate loans (net of allowance for loan losses).  Additionally, we must maintain a contingency reserve in an aggregate amount of at least 1.5% of our capital pursuant to our charter.
 
 
5

 

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

·  
the ratio of the amount of the investment to the value of the property by which it is secured;
 
·  
the property’s potential for capital appreciation;
 
·  
expected levels of rental and occupancy rates;
 
·  
current and projected cash flow generated by the property;
 
·  
potential for rental rate increases;
 
·  
the marketability of the investment;
 
·  
geographic location of the property;
 
·  
the condition and use of the property;
 
·  
the property’s income-producing capacity;
 
·  
the quality, experience and creditworthiness of the borrower;
 
·  
general economic conditions in the area where the property is located; and
 
·  
any other factors that OFG believes are relevant.

Types of Loans

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

First Mortgage Loans

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

 
6

 
Second and Wraparound Mortgage Loans

Second and wraparound mortgage and deed of trust loans are secured by second or wraparound deeds of trust on real property which is already subject to prior mortgage indebtedness, in an amount which, when added to the existing indebtedness, does not generally exceed 75% of the appraised value of the secured property. A wraparound loan is one or more junior mortgage loans having a principal amount equal to the outstanding balance under the existing mortgage loans, plus the amount actually to be advanced under the wraparound mortgage loan. Under a wraparound loan, we generally make principal and interest payments on behalf of the borrower to the holders of the prior mortgage loans.

Third Mortgage Loans

Third mortgage and deed of trust loans are secured by third deeds of trust on real property which is already subject to prior first and second mortgage indebtedness, in an amount which, when added to the existing indebtedness, does not generally exceed 75% of the appraised value of the secured property.

Construction and Rehabilitation Loans

Construction and rehabilitation loans are loans made for both original development and renovation of property. Construction and rehabilitation loans invested in by us are generally secured by first deeds of trust on real property for terms of six months to two years. In addition, if the secured property is being developed, the amount of such loans generally will not exceed 75% of the post-development appraised value. We will not usually disburse funds on a construction or rehabilitation loan until work in the previous phase of the project has been completed, and an independent inspector has verified completion of work to be paid for. In addition, we require the submission of signed labor and material lien releases by the contractor in connection with each completed phase of the project prior to making any periodic disbursements of loan proceeds. As of December 31, 2015, our loan portfolio contains twenty-four construction/rehabilitation loans with aggregate outstanding principal balances totaling $34,416,000.

Leasehold Interest Loans

Loans on leasehold interests are secured by an assignment of the borrower’s leasehold interest in the particular real property. Such loans are generally for terms of from six months to 15 years. Leasehold interest loans generally do not exceed 75% of the value of the leasehold interest at origination. The leasehold interest loans are either amortized over a period that is shorter than the lease term or have a maturity date prior to the date the lease terminates. These loans permit OFG to cure any default under the lease. As of December 31, 2015, our loan portfolio does not contain any leasehold interest loans.

Prepayment Penalties and Exit Fees

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

Balloon Payment

As of December 31, 2015, 99.8% of our loans provide for a “balloon payment” on the principal amount due upon maturity of the loan (including both interest only and amortizing loans with a balloon payment). As of December 31, 2015, one loan (0.2% of total loans) was a fully amortizing loan with a principal balance of approximately $242,000 and a remaining term of 146 months. There are no specific criteria used in evaluating the credit quality of borrowers for loans requiring balloon payments. Furthermore, a substantial period of time may elapse between the review of the financial statements of the borrower and the date when the balloon payment is due. As a result, there is no assurance that a borrower will have sufficient resources to make a balloon payment when due. To the extent that a borrower has an obligation to pay the  loan principal in a large lump sum payment, its ability to repay the loan may be dependent upon its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial amount of cash. As a result, these loans can involve a higher risk of default than amortizing loans (where principal is paid at the same time as the interest payments).
 
 
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Repayment of Loans on Sales of Properties

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

Fixed Rate Loans

Approximately 87.0% ($92,816,000) and 93.7% ($63,718,000) of our loans as of December 31, 2015 and 2014, respectively, bear interest at a fixed rate. The weighted average interest rate of such loans as of December 31, 2015 and 2014 was approximately 8.1% and 8.7%, respectively.

Variable Rate Loans

Approximately 13.0% ($13,928,000) and 6.3% ($4,315,000) of our loans as of December 31, 2015 and 2014, respectively, bear interest at a variable rate or include terms whereby the interest rate is increased at a later date. Currently, variable rate loans use the three-month LIBOR rate (0.61% and 0.26% at December 31,  2015 and 2014, respectively) and the six-month LIBOR rate (0.85% and 0.36% at December 31, 2015 and 2014, respectively). OFG may negotiate spreads over these indices of 6.5% to 9.0%, although there is no assurance that spreads will not be lower or higher depending upon market conditions at the time the loan is made.

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

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

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

Debt Coverage Standard for Loans

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

Loan Limit Amount

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

Loans to Affiliates

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

Purchase of Loans from Affiliates

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

·    
OFG makes or purchases such loans in its own name and temporarily holds title thereto for the purpose of facilitating the acquisition of such loans, and provided that such loans are purchased by us for a price no greater than the cost of such loans to OFG (except for compensation in accordance with the terms of the Management Agreement and the charter);
 
 
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·    
There is no other benefit arising out of such transactions to OFG;

·    
Such loans are not in default, and;

·    
Such loans otherwise satisfy, among other things, the following requirements:
 
·  
We will not make or invest in loans on any one property if at the time of acquisition of the loan the aggregate amount of all loans outstanding on the property, including loans by the Company, would exceed an amount equal to 80% of the appraised value of the property as determined by independent appraisal, unless substantial justification exists because of the presence of other documented underwriting criteria.
 
·  
We will limit any single loan and limit the loans to any one borrower to not more than 10% of our total assets as of the date the loan is made or purchased.
 
·  
We will not invest in or make loans on unimproved real property in an amount in excess of 25% of our total assets.
 
Competition

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

Regulation of the Manager

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

Employees

The Company does not have employees, other than six full-time and one part-time employee that work directly for its wholly-owned subsidiaries, Brannan Island, LLC and Sandmound Marina, LLC. OFG provides all of the employees (including our officers) necessary for our operations pursuant to the Management Agreement. As of December 31, 2015, OFG had twelve full-time and four part-time employees. All employees are at-will employees and none are covered by collective bargaining agreements.

Distribution of Company Information

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

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

Item 1A. RISK FACTORS

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

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

Risks Related to Our Business

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As of December 31, 2015, our portfolio had approximately $8,694,000 in delinquent and/or impaired loans (compared to $22,316,000 as of December 31, 2014). We also had approximately $50,333,000 of non-income producing real estate held for sale or investment for a total of $59,027,000 in non-performing assets, which represented approximately 30% of our total capital as of December 31, 2015.

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

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

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

Loan repayments are less likely in a volatile market environment.

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

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

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

 
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Foreclosures create additional ownership risks.

When we acquire property by foreclosure, we have economic and liability risks as the owner, such as:

 
• 
earning less income and reduced cash flows on foreclosed properties than could be earned and received on loans;
     
 
• 
not being able to realize sufficient amounts from sales of the properties to avoid losses;
 
 
• 
properties being acquired with one or more co-owners (called tenants-in-common) where development or sale requires written agreement or consent by all; without timely agreement or consent, we could suffer a loss from being unable to develop or sell the property;
     
 
• 
maintaining occupancy of the properties;
 
 
• 
controlling operating expenses;
 
 
• 
coping with general and local market conditions;
 
 
• 
complying with changes in laws and regulations pertaining to taxes, use, zoning and environmental protection;
 
 
• 
 
possible liability for injury to persons and property; and
 
possible liability for environmental remediation.
 
During the years ended December 31, 2015 and 2014, we recorded impairment losses on one and one of our real estate properties held for sale and investment in the aggregate amount of approximately $1,589,000 and $179,000, respectively.

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

When we acquire property by foreclosure or otherwise as a lender, we may develop the property, either singly or in combination with other persons or entities. This could be done in the form of a joint venture, limited liability company or partnership, with OFG and/or unrelated third parties. This development can create the following risks:
 
 
• 
Reliance upon the skill and financial stability of third party developers and contractors;
 
 
• 
Inability to obtain governmental permits;
 
 
• 
Delays in construction of improvements;
 
 
• 
Increased costs during development and the need to obtain additional financing to pay for the development; and
 
 
• 
Economic and other factors affecting the timing or price of sale or the leasing of developed property.

Larger loans result in less diversity and may increase risk.

As of December 31, 2015, we were invested in a total of 56 loans, with an aggregate book value of approximately $106,744,000. The average book value of those loans was approximately $1,906,000, and the median book value was $1,210,000. Ten of such loans had a book value each of 3% or more of the aggregate book value of all loans, and the largest loan relationship had a total book value of 7.9% of all loans.

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

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

Appraisals are obtained from qualified, independent appraisers on all properties securing trust deeds, which may have been commissioned by the borrower and may precede the placement of the loan with us. However, there is a risk that the appraisals prepared by these third parties are incorrect, which could result in defaults and/or losses related to these loans.

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

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

Geographical concentration of loans may result in additional delinquencies.

Northern California real estate secured approximately 71% of the total loans held by us as of December 31, 2015. Northern California consists of Monterey, Kings, Fresno, Tulare and Inyo counties and all counties north of those. In addition, 9%, 6%, 6%, 6%, and 1% of total loans were secured by Arizona, Southern California, Michigan, Nevada and Hawaii real estate, respectively. These concentrations may increase the risk of delinquencies on our loans when the real estate or economic conditions of one or more of those areas are weaker than elsewhere, for reasons such as:

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

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

As of December 31,2015, our loan portfolio contains twenty-four construction or rehabilitation loans with principal balances aggregating $34,416,000 (including one fully funded loan in the amount of $1,035,000), and we have commitments to fund an additional $16,395,000 on such loans in the future (including interest reserves on these and other loans). We may make additional construction and rehabilitation loan commitments in the future. Construction and rehabilitation loans may be riskier than loans secured by properties with an operating history, because:

 
• 
the application of the loan proceeds to the construction or rehabilitation project must be assured;
 
 
• 
the completion of planned construction or rehabilitation may require additional financing by the borrower; and
 
 
• 
permanent financing of the property may be required in addition to the construction or rehabilitation loan.
 
Investments in loans secured by leasehold interests may be riskier than loans secured by fee interests in properties.

Although our loan portfolio does not contain any loans secured by leasehold interests as of December 31, 2015, we have made such loans in the past, and we may resume leasehold-secured lending in the future. Loans secured by leasehold interests are riskier than loans secured by real property because the loan is subordinate to the lease between the property owner (lessor) and the borrower, and our rights in the event the borrower defaults are limited to stepping into the position of the borrower under the lease, subject to its requirements of rents and other obligations and period of the lease.

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

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

 
• 
their position is subordinate in the event of default; and
 
 
there could be a requirement to cure liens of a senior loan holder, and, if this is not done, we would lose our entire interest in the loan.
 
As of December 31, 2015, our loan portfolio contained 2.8% in second mortgage and deed of trust loans and 0% in third mortgage and deed of trust loans. As of December 31, 2015, we were not invested in any wraparound mortgage or deed of trust loans.

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

The loans we invest in or purchase generally require the borrower to make a “balloon payment” on the principal amount upon maturity of the loan. A balloon payment is a large principal balance that is payable after a period of time during which the borrower has repaid none or only a small portion of the principal balance. As of December 31, 2015, 99.8% of our loans required balloon payments at the end of their terms. Loans with balloon payments are riskier than loans with even payments of principal over an extended time period like 15 or 30 years because the borrower’s repayment depends on its ability to sell the property profitably, obtain suitable refinancing or otherwise raise a substantial amount of cash when the loan comes due. There are no specific criteria used in evaluating the credit quality of borrowers for loans requiring balloon payments. Furthermore, a substantial period of time may elapse between the review of the financial statements of the borrower and the date when the balloon payment is due. As a result, there is no assurance that a borrower will have sufficient resources to make a balloon payment when due.

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

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

Our loans permit prepayment, which may lower returns.

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

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

We may obtain participation in the appreciation in value or in the cash flow from a secured property. If a borrower defaults and claims that this participation makes the loan comparable to equity (like stock) in a joint venture, we might lose our secured position as lender in the property. Other creditors of the borrower might then wipe out or substantially reduce our investment. We could also be exposed to the risks associated with being an owner of real property. We are not presently involved in any such arrangements.

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

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

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

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

Our loans require that borrowers carry adequate hazard insurance for our benefit. Some events, however, are uninsurable, or insurance coverage for them is economically not practicable. Losses from earthquakes, floods or mudslides, for example, which occur in California, may be uninsured and cause losses to us on entire loans. Since December 31, 2015, no such loan loss has occurred.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The covenants in our Credit Facilities might adversely affect us.

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

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

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

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

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

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

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

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

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

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

·    
our financial performance; and

·    
general stock and credit market conditions.

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

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

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

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

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

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

We intend to own real property only if we foreclose on a defaulted loan and purchase the property at the foreclosure sale. Acquiring a property at a foreclosure sale may involve significant costs. If we foreclose on a security property, we expect to obtain the services of a real estate broker and pay the broker’s commission in connection with the sale of the property. We may incur substantial legal fees and court costs in acquiring a property through contested foreclosure and/or bankruptcy proceedings. In addition, significant expenditures, including property taxes, maintenance costs, renovation expenses, mortgage payments, insurance costs and related charges, must be made on any property we own, regardless of whether the property is producing any income.

Under applicable environmental laws, any owner of real property may be fully liable for the costs involved in cleaning up any contamination by materials hazardous to the environment. Even though we might be entitled to indemnification from the person that caused the contamination, there is no assurance that the responsible person would be able to indemnify us to the full extent of our liability. Furthermore, we would still have court and administrative expenses for which we may not be entitled to indemnification.

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

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

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

      As of December 31, 2015, most of our loans do not have a prepayment penalty or exit fee. Based on our Manager’s historical experience, we expect that at least 90% of our loans will continue to not have a prepayment penalty. Should interest rates decrease, our borrowers may prepay their outstanding loans with us in order to receive a more favorable rate. This may reduce the amount of income we have available to distribute to you.
 
 
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      Our results of operations will vary with changes in interest rates and with the performance of the relevant real estate markets. If the economy is healthy, we expect that more investors will borrow money to acquire, develop or renovate real property. However, if the economy grows too fast, interest rates may increase too quickly and the cost of borrowing may cause real estate values to decline. Alternatively, if the economy enters a recession, real estate development may slow. A slowdown in real estate activity may reduce the opportunities for real estate lending and we may have fewer loans to make or acquire, thus reducing our revenues and the distributions you receive.

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

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

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

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

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

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

Our Manager and William C. Owens, who owns 64.3889% of the outstanding shares of stock of OFG as of December 31, 2015, although unlikely, may also sponsor other real estate programs having investment objectives and policies similar to ours. As a result, OFG and William C. Owens may have conflicts of interest in allocating their time and resources between our business and other activities. During times of intense activity in other programs and ventures, OFG and its key people may devote less time and resources to our business than they ordinarily would. Our Management Agreement with OFG does not specify a minimum amount of time and attention that OFG and its key people are required to devote to the Company. Thus, OFG may not spend sufficient time managing our operations, which could result in our not meeting our investment objectives. Currently, OFG does not sponsor other real estate programs or any other programs that have an objective and policies similar to those of the Company.

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

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

 
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OFG earned a total of approximately $2,238,000, $1,884,000 and $1,816,000 for the fiscal years ended December 31, 2015, 2014 and 2013, respectively, for managing the Company. In addition, OFG earned a total of approximately $1,993,000, $1,245,000 and $664,000 in fees from borrowers for the fiscal years ended December 31, 2015, 2014 and 2013, respectively. The total amount earned by OFG that is paid by borrowers represents fees on loans originated or extended for the Company (including loans fees, late payment charges and miscellaneous fees).

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

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

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

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

Our properties may be subject to impairment charges.

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

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

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

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

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

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

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

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

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

United States Federal Income Tax Risks Relating to Our REIT Qualification

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Risks of Ownership of Our Common Stock

The public market for our Common Stock may be limited.

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

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

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

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

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

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

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

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

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

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

Risks Related to Our Organization and Structure

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

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

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

The charter and bylaws of the Company and the Maryland General Corporation Law (the “MGCL”) contain provisions that could delay, defer or prevent a transaction or a change in control of us that might involve a premium price for holders of our Common Stock or otherwise be in their best interests.

 
25

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

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

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

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

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

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

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

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

 
26

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

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

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

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

 
• 
actual receipt of an improper benefit or profit in money, property or services; or
 
 
• 
a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

Our charter authorizes us to obligate ourselves to indemnify our present and former directors and officers for actions taken by them in those and other capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify, to the maximum extent permitted by Maryland law, each present or former director or officer who is made, or threatened to be made, a party to any proceeding because of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers.

Item 1B. UNRESOLVED STAFF COMMENTS

None

Item 2. PROPERTIES

The Manager operates from its executive offices at 2221 Olympic Boulevard, Walnut Creek, CA 94595 (the “Executive Office”). The lessor is Olympic Blvd. Partners, a California Limited Partnership (“OBP”), of which the Manager is a 50% general partner. The Executive Office is the sole asset of OBP. The Executive Office is subject to a loan with a principal balance of $670,800 as of December 31, 2015 with monthly payments of interest and principal of $4,566 and a balloon payment of $617,013 due on February 28, 2018. The loan is subject to a prepayment penalty equal to 1% of any unscheduled principal payments made in the twelve month period prior to January 31, 2016. The Company does not have separate offices.

As of December 31, 2015, we hold title to twenty-five real estate properties that were acquired through foreclosure including properties held within ten majority- or wholly-owned limited liability companies and one within a wholly-owned corporation (see below). As of December 31, 2015, the total carrying amount of these properties was $153,838,000. Eighteen of the properties are being held for long-term investment and the remaining seven properties are currently being marketed for sale. We also have a 50% ownership interest in a limited liability company accounted for under the equity method that owns property located in Santa Clara, California with a carrying amount of $2,141,000 as of December 31, 2015.

·  
The Company’s (or related entities) title to all properties is held as fee simple.
 
·  
There are mortgages or encumbrances to third parties on two of our real estate properties (see below for Tahoe Stateline Venture, LLC (“TSV”) and TOTB Miami, LLC (“TOTB” or “TOTB Miami”)).
 
 
27

 
 
·  
Of the twenty-five properties held, thirteen of the properties are income-producing. Only minor renovations and repairs to the properties are currently being made or planned (other than continued tenant improvements on real estate held for investment, development of the land held within TSV and Zalanta Resort at the Village, LLC (“Zalanta”), development of the North Building within TOTB North, LLC (“TOTB North”) and improvements to the property within Brannan Island, LLC).
 
·  
The Manager believes that all properties owned by the Company are adequately covered by customary casualty insurance.

Real estate acquired through foreclosure may be held for a number of years before ultimate disposition primarily because we have the intent and ability to dispose of the properties for the highest possible price (such as when market conditions improve). During the time that the real estate is held, we may earn less income on these properties than could be earned on loans and may have negative cash flow on these properties.

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

For purposes of assessing potential impairment of value during 2015, 2014 and 2013, we obtained updated appraisals or other valuation support on certain of our real estate properties held for sale and investment, which resulted in additional impairment losses on one, one and two properties, respectively, in the aggregate amount of approximately $1,589,000, $179,000 and $666,000, respectively, recorded in the consolidated statements of operations.

Real estate properties held for sale as of December 31, 2015 and 2014 consisted of the following properties acquired through foreclosure:
   
December 31,
2015
 
December 31,
2014
Retail complex, Greeley, Colorado (held within 720 University, LLC) – sold in 2015
 
$
 
$
11,547,472
Undeveloped, industrial land, San Jose, California – transferred from held for investment in 2015
   
1,958,400
   
Light industrial building, Paso Robles, California – transferred from held for investment in 2015 and sold in January 2016
   
1,460,935
   
Golf course, Auburn, California (held within Lone Star Golf, Inc.) – transferred to held for investment in 2015
   
   
2,020,410
Medical office condominium complex, Gilbert, Arizona (held within AMFU, LLC)
   
4,716,487
   
4,716,159
Commercial buildings, Sacramento, California – sold in 2015
   
   
3,890,968
169 condominium units and 160 unit unoccupied apartment building under renovation, Miami, Florida (held within TOTB Miami, LLC) – transferred from held for investment in 2015
   
51,942,602
   
Unimproved, residential and commercial land, Gypsum, Colorado
   
4,224,000
   
5,813,434
Commercial and residential land under development, South Lake Tahoe, California (held within Tahoe Stateline Venture, LLC) *
   
23,094,481
   
30,449,896
Commercial and residential land under development, South Lake Tahoe, California (held within Zalanta Resort at the Village, LLC) *
   
12,794,261
   
Retail buildings, San Jose, California – sold in 2015
   
   
1,056,000
   
$
100,191,166
 
$
59,494,339
* These two real estate assets had previously been reported as one asset. In the second quarter of 2015, certain parcels owned by TSV
were transferred into Zalanta, a new entity that is wholly owned by the Company, to prepare for the second phase retail/condominium project.
 
 
28

 
Real estate held for investment, net of accumulated depreciation, is comprised of the following properties as of December 31, 2015 and 2014:
   
December 31,
2015
 
December 31,
2014
 
Light industrial building, Paso Robles, California – transferred to held for sale in 2015
 
         $
 
             $
1,459,063
 
Commercial buildings, Roseville, California
   
701,897
   
731,906
 
Undeveloped, residential land, Madera County, California – sold in 2015
   
   
726,580
 
Undeveloped, residential land, Marysville, California
   
403,200
   
403,200
 
Undeveloped land, Auburn, California (formerly part of golf course owned by DarkHorse Golf Club, LLC)
   
103,198
   
103,198
 
75 improved, residential lots, Auburn, California (held within Baldwin Ranch Subdivision, LLC)
   
3,878,544
   
3,878,544
 
Undeveloped, industrial land, San Jose, California – transferred to held for sale in 2015
   
   
1,958,400
 
Storage facility/business, Stockton, California – transferred to held for sale and sold in 2015
   
   
3,847,884
 
One and two improved residential lots, West Sacramento, California
   
58,560
   
58,560
 
Undeveloped, residential land, Coolidge, Arizona
   
1,017,600
   
1,017,600
 
Marina with 30 boat slips and 11 RV spaces, Oakley, California (held within The Last Resort and Marina, LLC) – transferred to held for sale and sold in 2015
   
   
236,500
 
Golf course, Auburn, California (held within Lone Star Golf, Inc.) – transferred from held for sale in 2015
   
1,941,245
   
 
Office condominium complex (15 units), Roseville, California
   
3,558,386
   
3,684,203
 
Industrial building, Sunnyvale, California (held within Wolfe Central, LLC) – transferred to held for sale and sold in 2015
   
   
3,027,734
 
133 condominium units, Phoenix, Arizona (held within 54th Street Condos, LLC) – transferred to held for sale and sold in 2015
   
   
6,933,229
 
61 condominium units, Lakewood, Washington (held within Phillips Road, LLC)
   
4,219,657
   
4,364,743
 
169 condominium units and 160 unit unoccupied apartment building under renovation, Miami, Florida (held within TOTB Miami, LLC) – transferred to held for sale in 2015
   
   
34,353,958
 
1/7th interest in single family home, Lincoln City, Oregon
   
93,647
   
93,647
 
12 condominium and 3 commercial units, Tacoma, Washington (held within Broadway & Commerce, LLC)
   
2,360,237
   
2,408,681
 
6 improved residential lots, Coeur D’Alene, Idaho
   
316,800
   
316,800
 
Retail Complex, South Lake Tahoe, California (held within Tahoe Stateline Venture, LLC)
   
23,122,714
   
23,211,896
 
Marina and yacht club with 179 boat slips, Isleton, California (held within Brannan Island, LLC)
   
2,600,360
   
2,220,448
 
Unimproved, residential and commercial land, Bethel Island, California (held within Sandmound Marina, LLC)
   
2,334,773
   
2,334,773
 
Marina with 52 boat slips and campground, Bethel Island, California (held within Sandmound Marina, LLC)
   
1,478,727
   
1,145,919
 
Assisted living facility, Bensalem, Pennsylvania
   
5,402,376
   
5,005,000
 
Office condominium unit, Oakdale, California – acquired in 2015
   
55,325
   
 
   
            $
53,647,246
  
              $
103,522,466
 

We presently have no plans to significantly improve any of our real estate properties, other than the unimproved land held within TSV and Zalanta and the units within the North Building held within TOTB North, which is wholly owned by TOTB Miami.

 
29

 
The only real estate properties with book values in excess of 10% of our total assets or properties still owned as of December 31,  2015 with gross revenue in excess of 10% of our total revenue are the properties located in Miami, Florida (held within TOTB) and the properties located in South Lake Tahoe, California (held within TSV and Zalanta). TOTB is a residential condominium complex and none of the individual leases are for greater than 10% of the rentable square footage of the buildings.

Other operating data related to TOTB is as follows:
   
2015
 
2014
 
2013
Average Annual Rental per Square Foot (1)
$
19.45   
 
$
18.07   
 
$
17.16   
Federal Tax Basis of Depreciable Assets (all Residential Buildings and Improvements) (2)
$
14,856,727   
 
$
14,856,727   
 
$
14,856,727   
Depreciation Rate (3)
 
3.64%   
      
                3.64%   
       
3.64%   
     Depreciation Method (3)
 
MACRS
Straight Line
   
MACRS
Straight Line
   
MACRS
Straight Line
Depreciable Life (3)
 
27.5 Years   
   
  27.5 Years   
   
27.5 Years   
Realty Tax Rate (4)
$
              22.538   
 
$
                 23.057   
 
$
23.197   
Annual Realty Taxes (5)
$
         740,924   
 
$
            694,310   
 
$
607,319   
(1) 2013 adjusted to reflect changes in total square footage in 2014 from 167,963 to 180,792 (not including the North Building under renovation).
(2) Does not include the North building which is currently under renovation.
(3) Depreciation ceased for book purposes during 2015 as the properties were transferred to held for sale.
(4) Millage rate per $1,000 of Taxable Value.
(5) Including property taxes of the North Building under renovation that are currently being capitalized.

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

Year of
Lease
Expiration
December 31,
 
Number of
Leases Expiring
Within the
Year (2)
 
Rentable
Square
Footage
Subject to
Expiring Leases
 
Final
Annualized
Base Rent
Under Expiring
Leases (1)
 
Percentage of Gross Annual Rental Represented by Such Leases
 
2016
 
147
 
158,397
$
3,187,020
 
85.7%
 
2017
 
1
 
925
 
19,200
 
0.5%
 
   
148
 
159,322
$
3,206,220
 
86.2%
 
     
 
(1)
“Final Annualized Base Rent” for each lease scheduled to expire represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to expiration multiplied by 12. Tenant reimbursements generally include payment of a portion of real estate taxes, operating expenses and common area maintenance and utility charges.
 
(2)
As of December 31, 2015, there were 7 vacant units and 14 month-to-month leases (some of which were in the process of being renegotiated).

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

   
2015
 
2014
 
2013 (1)
Average Annual Rental per Square Foot (1)
$
50.71   
 
$
41.61   
 
$
N/A
Federal Tax Basis of Depreciable Assets (all Commercial Buildings and Improvements)
$
17,357,310   
 
$
16,946,786   
 
$
N/A
Depreciation Rate
 
Various
   
Various
   
N/A
Depreciation Method
 
MACRS
Straight Line
   
MACRS
Straight Line
   
N/A
Depreciable Life
 
5-39 Years   
   
5-39 Years   
   
N/A
Realty Tax Rate (2)
 
               1.0907   
%
 
               1.0667   
%
 
N/A
Annual Realty Taxes
$
            186,943   
 
$
            129,459   
 
$
N/A
(1) Property was acquired via purchases and foreclosures in 2012 and 2013 and development of the retail phase was completed in the 4th quarter of 2014. Thus, this data is not applicable in 2013.
(2) Millage rate per Taxable Value.
 
 
30

 
The following table shows information regarding rental rates and lease expirations over the next ten years for TSV and assumes that none of the tenants exercise renewal options or termination rights, if any, at or prior to scheduled expirations:
Year of
Lease
Expiration
December 31,
 
Number of
Leases
Expiring
Within the
Year
 
Rentable
Square
Footage
Subject to
Expiring
Leases
 
Final
Annualized
Base Rent
Under
Expiring
Leases (1)
 
Percentage of Gross Annual Rental Represented by Such Leases
 
2019
 
5
 
11,497
$
789,458
 
54.9%
 
2020
 
3
 
2,646
 
181,691
 
12.6%
 
2021
 
1
 
1,989
 
128,391
 
8.9%
 
2024
 
2
 
5,777
 
339,595
 
23.6%
 
   
11
 
21,909
$
1,439,135
 
100.0%
 
     
 
(1)
“Final Annualized Base Rent” for each lease scheduled to expire represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to expiration multiplied by 12. Tenant reimbursements generally include payment of a portion of real estate taxes, operating expenses and common area maintenance and utility charges.

The following table presents occupancy data of our leased real estate properties held for investment as of December 31, 2015, 2014, 2013, 2012 and 2011 (where applicable):
 
   
Occupancy % (1)
Property Description/Location
Year Foreclosed
 
2015
 
2014
 
2013
 
2012
 
2011
Light industrial building, Paso Robles, California (sold in January 2016)
1997
89.1%
67.4%
60.1%
58.7%
58.7%
Commercial buildings, Roseville, California
2001
100.0%
81.2%
88.6%
100.0%
81.2%
Office condominium complex (15 units), Roseville, California
2008
62.9%
70.5%
45.3%
58.9%
49.2%
Medical office condominium complex, Gilbert, Arizona
2010
48.3%
43.1%
43.1%
40.4%
39.9%
60 condominium units, Lakewood, Washington
2010
95.9%
97.9%
97.1%
95.1%
95.8%
169 condominium units, Miami, Florida (TOTB Miami, LLC) (2)
2011
95.8%
95.2%
99.5%
97.5%
99.5%
12 condominium and 3 commercial units, Tacoma, Washington
2011
80.4%
75.8%
37.9%
61.9%
54.3%
Retail complex, South Lake Tahoe, California
2013
95.5%
75.0%
N/A
N/A
N/A
Industrial building/land, Santa Clara, California (1850 De La Cruz, LLC)
2005
100.0%
100.0%
100.0%
100.0%
100.0%
Notes:
           
(1)   Calculated by dividing net rentable square feet included in leases signed on or before December 31, 2015 at the property by the aggregate net rentable square feet of the property.
(2) We also own a 160 unit apartment building in the same complex as these condominium units in Miami, Florida. The apartment building owned directly by TOTB North is currently under renovation and, thus, no occupancy statistics are presented.

As of December 31, 2015, virtually all of our leases on residential rental properties are either month-to-month leases or will expire in 2016. These leases currently represent approximately $4,466,000 in annual rental revenue to the Company.
 
 
31

 

 
The following table shows information regarding rental rates and lease expirations over the next ten years and thereafter for our commercial and industrial rental properties at December 31, 2015 and assumes that none of the tenants exercise renewal options or termination rights, if any, at or prior to scheduled expirations. Seven of our twenty-nine commercial leases and virtually all of our residential leases are set to expire during 2016. We expect that new leases will be signed with existing or new tenants for the majority of these spaces and at rental rates that are at market and are at or above expiring rental amounts.
Year of
Lease
Expiration
December 31,
 
Number of
Leases
Expiring
Within the
Year
 
Rentable
Square
Footage
Subject to
Expiring
Leases
 
Final
Annualized
Base Rent
Under
Expiring
Leases (1)
 
2016
 
7
 
28,590
$
431,420
 
2017
 
4
 
9,397
 
119,494
 
2018
 
6
 
57,531
 
457,039
 
2019
 
5
 
11,497
 
789,458
 
2020
 
4
 
6,264
 
250,360
 
2021
 
2
 
4,800
 
180,624
 
2022
 
 
 
 
2023
 
 
 
 
2024
 
1
 
5,777
 
339,595
 
2025
 
 
 
 
2026 and thereafter
 
 
 
 
   
29
 
123,856
$
2,567,990

(1)
“Final Annualized Base Rent” for each lease scheduled to expire represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to expiration multiplied by 12. Tenant reimbursements generally include payment of a portion of real estate taxes, operating expenses and common area maintenance and utility charges.
 
At December 31, 2015, our properties were leased to tenants that are engaged in a variety of businesses. The following table sets forth information regarding leases with the nine tenants with the largest amounts leased based upon Annualized Base Rent as of December 31, 2015:
 
Leased
Square Feet
   
Annualized
Base Rent (1)
Expiration
Date
Renewal
Options
Tenant Name
CIGNA Health Care of AZ (AMFU)
14,746
 
$
       265,428
9/30/2016
1-5 yr. Option   
JKB Financial (Roseville, CA office)
5,954
   
               92,882
2/28/2018
None                 
Arizona Skin and Laser (AMFU)
5,248
   
77,985
5/31/2018
None                 
Avis Rent A Car (1850 De La Cruz) (2) (3)
40,000
   
169,926
7/15/2018
2-5 yr. Options
Up Shirt Creek (TSV) (3)
4,689
   
294,567
9/30/2019
2-5 yr. Options
Powder House (TSV) (3)
5,778
   
364,014
9/30/2019
2-5 yr. Options
Meadow Farms Country Smokehouse (TSV)
1,086
   
65,160
6/30/2020
2-3 yr. Options
Bakers Three California (TSV) (4)
1,989
   
111,472
2/28/2021
1-5 yr. Option  
McP’s Pub Tahoe (Tahoe Stateline Venture)
5,777
   
279,507
10/31/2024
2-5 yr. Options
 
 
(1)  Annualized Base Rent represents the current monthly Base Rent, excluding tenant reimbursements, for each lease in effect at December 31, 2015 multiplied by 12. Tenant reimbursements generally include payment of a portion of real estate taxes, operating expenses and common area maintenance and utility charges.
 
 
(2)  Amount of annualized base rent reported reflects ORM’s 50% membership interest in 1850 De La Cruz, LLC.
 
 
(3)  There are two leases for two separate and distinct parcels/units to these tenants with the same terms (leased square feet and annualized base rent combined).
 
 
(4)  Rent commenced on February 15, 2016.
 
 
32

 
Item 3. LEGAL PROCEEDINGS

In the normal course of business, we may become involved in various types of legal proceedings such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc., to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes, or to protect, or recoup its investment from the real property secured by the deeds of trust.  None of these actions would typically be of any material importance.  As of December 31, 2015, we are not involved in any legal proceedings other than those that would be considered part of the normal course of business.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

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

Market Information for Common Stock

Our Common Stock is listed on the NYSE MKT under the ticker symbol “ORM”. The following table sets forth, for each of the indicated quarterly periods, the high and low sales prices for our Common Stock, as reported on the NYSE MKT.
   
Sales Price
 
   
High
 
Low
 
2014
             
First Quarter
 
$
15.28
 
$
12.40
 
Second Quarter
 
$
19.85
 
$
14.88
 
Third Quarter
 
$
19.40
 
$
14.25
 
Fourth Quarter
 
$
15.45
 
$
13.96
 
2015
             
First Quarter
 
$
15.00
 
$
12.46
 
Second Quarter
 
$
15.02
 
$
12.98
 
Third Quarter
 
$
15.25
 
$
13.40
 
Fourth Quarter
 
$
14.23
 
$
13.15
 
 
The closing sale price for our Common Stock, as reported on the NYSE MKT on March 9, 2016 was $14.97 per share.

Holders

As of March 9, 2016, we had 10,247,477 shares of our Common Stock outstanding held by approximately 701 record holders. The number of record holders does not necessarily bear any relationship to the number of beneficial owners of our Common Stock.

Dividends

We have elected to be taxed as a REIT for federal income tax purposes and, as such, anticipate that we will distribute annually at least 90% of our REIT taxable income, excluding net capital gains. Through the calendar year ended December 31, 2015, we have paid dividends quarterly (monthly during 2013) and made distributions of approximately $4,344,000 and $2,907,000 during 2015 and 2014, respectively (including amounts accrued as of December 31, 2015 and 2014).  In addition, we paid approximately $1,314,000 in dividends to shareholders in 2015 in the form of income taxes on capital gains.

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

 
33

 
The following table sets forth the dividends declared and paid per share of Common Stock during 2015 and 2014:

   
2015
 
2014
 
Dividends Declared:
           
First Quarter
$
0.07
 
$
0.05
 
Second Quarter
$
0.18
 
$
0.05
 
Third Quarter
$
0.08
 
$
0.05
 
Fourth Quarter
$
0.08
 
$
0.12
 


Securities Authorized for Issuance under Equity Compensation Plans

None

Performance Graph

The following graph is a comparison of the cumulative total stockholder return on shares of the Company's Common Stock, the Russell 2000 Index, and the SNL U.S. Finance REIT Index, a published industry index, from July 1, 2013 (the day we commenced trading on the NYSE MKT) to December 31, 2015. The graph assumes that $100 was invested on July 1, 2013 in our Common Stock, the Russell 2000 Index and the SNL U.S. Finance REIT and that all dividends were reinvested without the payment of any commissions. There can be no assurance that the performance of the Company’s shares will continue in line with the same or similar trends depicted in the graph below. The information included in the graph and table below was obtained from SNL Financial LC, Charlottesville, VA ©2015.
 



 
34

 


   
Period Ended
 
Index
07/01/13
12/31/13
06/30/14
12/31/14
06/30/15
12/31/15
Owens Realty Mortgage, Inc.
100.00
142.94
230.75
175.80
183.39
165.92
Russell 2000
100.00
118.32
122.09
124.11
130.01
118.63
SNL U.S. Finance REIT
100.00
99.13
114.68
113.52
108.85
104.10

In accordance with SEC rules, this section entitled "Performance Graph" shall not be incorporated by reference into any of our future filings under the Securities Act or the Exchange Act except to the extent that we specifically incorporate such disclosure by reference in any such filings, and shall not be deemed to be “soliciting material” or to be “filed” under the Securities Act or the Exchange Act.

Recent Sales of Unregistered Securities

None

Repurchases of Common Stock

As is discussed in further detail in our consolidated financial statements under “Note 9 – Stockholders’ Equity” in Item 8 of this Annual Report , on January 15, 2016, the Company announced a new repurchase plan (the “2016 Repurchase Plan”), which will permit us to purchase up to $7.5 million of our Common Stock. This plan will not commence until April 2016 and expires in March 2017.

The following table summarizes information about the Company’s repurchases of its shares of Common Stock pursuant to the Repurchase Plan announced in May 2015 (the “2015 Repurchase Plan”), based on the settlement date, during the quarter ended December 31, 2015:

Issuer Repurchase of Equity Securitiesi
   
 
 
 
 
Period
 
 
Total Number of
Shares
Purchasedii
 
 
Average
Price Paid
per Share
Total Number of
Shares Purchased
 as Part of Publicly
Announced Plans
or Programs
 
Maximum Dollar Value of
Shares that May Yet Be
Purchased Under the Plans or
Programs
October 1 through October 31
66,528
$    14.10
66,528
Dollar amount: $1,309,238
November 1 through November 30
73,250
$    14.04
73,250
Dollar amount: $280,915  
December 1 through December 31
20,483
$    13.86
20,483
Dollar amount: $0             
Total
160,261
$    14.04
160,549
 

i On May 27, 2015, our Board of Directors publicly announced the 2015 Repurchase Plan that permitted the Company to buy up to $7.5 million of its Common Stock pursuant to such plan. Purchases began in July 2015 and the Plan was to expire in April 2016, but the limits of the plan were met in December 2015 and the Company will not make any further purchase pursuant to the 2015 Repurchase Plan.

ii In connection with the 2015 Repurchase Plan, the Company has entered into agreements pursuant to SEC Rule 10b5-1 authorizing a third-party broker to purchase shares on the Company’s behalf from time to time, including without limitation during normal blackout periods, in accordance with trading instructions included in such agreements.


 
35

 


Item 6. SELECTED FINANCIAL DATA

The following tables present selected historical consolidated financial information and should be read in conjunction with the more detailed information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical consolidated financial statements, including the related notes, included elsewhere in this Annual Report. Prior period amounts have been reclassified to conform to current period presentation.

   
As of and For the Years Ended December 31,
 
   
2015
 
2014
 
2013
 
2012
 
2011
 
Operating Data:
                               
Interest income
 
$
8,277,004
 
$
5,382,019
 
$
3,020,884
 
$
2,567,583
 
$
5,340,638
 
Rental income
   
12,791,096
   
12,268,214
   
11,223,260
   
13,237,664
   
12,575,756
 
Other revenues
   
175,451
   
170,018
   
165,211
   
161,031
   
178,067
 
Total revenue
   
21,243,551
   
17,820,251
   
14,409,355
   
15,966,278
   
18,094,461
 
Real estate operating expenses
   
8,510,110
   
8,158,038
   
8,150,944
   
10,235,444
   
10,518,800
 
Depreciation and amortization
   
2,052,181
   
2,255,577
   
2,485,587
   
2,292,537
   
3,133,823
 
Management fees
   
2,051,134
   
1,726,945
   
1,664,076
   
1,760,589
   
2,312,377
 
Interest expense
   
1,938,113
   
1,161,822
   
513,750
   
523,579
   
530,063
 
(Reversal of) provision for loan losses
   
(1,026,909
)
 
(1,869,733
)
 
(7,822,112
)
 
(124,000
)
 
9,074,121
 
Impairment losses on real estate properties
   
1,589,434
   
179,040
   
666,240
   
4,873,266
   
15,022,659
 
Other expenses
   
1,618,266
   
1,821,601
   
1,828,484
   
1,685,938
   
1,143,954
 
Total expenses
   
16,732,329
   
13,433,290
   
7,486,969
   
21,247,353
   
41,735,797
 
Operating income (loss)
   
4,511,222
   
4,386,961
   
6,922,386
   
(5,281,075
)
 
(23,641,336
)
Gain on sales of real estate, net
   
21,818,553
   
3,243,359
   
2,942,861
   
4,111,841
   
26,283
 
Gain on foreclosure of loans
   
   
464,754
   
952,357
   
   
 
Net income (loss) before income taxes
   
26,329,775
   
8,095,074
   
10,817,604
   
(1,169,234
)
 
(23,615,053
)
Income tax expense
   
93,335
   
   
   
   
 
Net income (loss)
   
26,236,440
   
8,095,074
   
10,817,604
   
(1,169,234
)
 
(23,615,053
)
Net income attributable to non-controlling interests
   
(2,667,324
)
 
(165,445
)
 
(2,084,707
)
 
(510,586
)
 
(1,129,202
)
Net income (loss) attributable to common stockholders
 
$
23,569,116
 
$
7,929,629
 
$
8,732,897
 
$
(1,679,820
)
$
(24,744,255
)
Earnings (loss) per common share (basic and diluted)
 
$
2.22
 
$
0.74
 
$
0.78
 
$
(0.15
)
$
(2.21
)
Dividends declared per common share
 
$
0.41
 
$
0.27
 
$
0.25
 
$
0.17
 
$
1.19
 
 
 
36

 

 
Balance Sheet Data:
                               
Loans, net
 
$
104,901,361
 
$
65,164,156
 
$
54,057,205
 
$
45,844,365
 
$
44,879,979
 
Real estate held for sale
   
100,191,166
   
59,494,339
   
5,890,131
   
56,173,094
   
13,970,673
 
Real estate held for investment
   
53,647,246
   
103,522,466
   
129,425,833
   
71,600,255
   
131,620,987
 
Other assets
   
13,912,666
   
13,742,960
   
17,268,412
   
34,149,176
   
23,399,422
 
Total assets
   
272,652,439
   
241,923,921
   
206,641,581
   
207,766,890
   
213,871,061
 
Total indebtedness
   
67,032,538
   
49,019,549
   
13,917,585
   
13,384,902
   
10,242,431
 
Total liabilities
   
73,143,592
   
53,177,310
   
20,415,275
   
20,257,659
   
15,305,274
 
Non-controlling interests
   
4,528,849
   
4,174,753
   
6,351,896
   
8,049,300
   
17,519,828
 
Total equity
   
199,508,847
   
188,746,611
   
186,226,306
   
187,509,231
   
198,565,787
 
Book value per share
 
$
19.03
 
$
17.14
 
$
16.66
 
$
16.03
 
$
16.17
 
                                 

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

Forward Looking Statements

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

Overview and Background

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

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

On May 20, 2013, OMIF merged with and into the Company with the Company as the surviving corporation, succeeding to and continuing the business and operations of OMIF. The Company now, by virtue of the Merger, directly or indirectly owns all of the assets and business formerly owned by OMIF. The Company is a deemed successor issuer to OMIF pursuant to Rule 12g-3(a) under the Exchange Act, and on July 1, 2013, the Company’s Common Stock was listed on the NYSE MKT exchange. For accounting purposes, the Merger has been treated as a transfer of assets and exchange of shares between entities under common control. The accounting basis used to initially record the assets and liabilities in the Company is the carryover basis of OMIF. OMIF was a California Limited Partnership registered with the SEC that was formed in 1983 for the purposes of funding and servicing short-term commercial real estate loans.
 
 
37

 
Our primary sources of revenue are interest income earned on our loan investment portfolio and revenues we generate from our operating real estate assets. We have resumed originating loans and believe the Company is well positioned to capitalize on lending opportunities as the economy continues to recover. However, there can be no assurances that we will be able to identify and make loans to suitable commercial real estate borrowers or have adequate capital and liquidity to fund such loans.

Our operating results are affected primarily by:

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

Between 2008 and 2013, we experienced increased delinquent loans and foreclosures which created substantial losses. As a result, we own significantly more real estate than in the past, which has reduced cash flow and net income. As of December 31, 2015, approximately 8% of our loans were impaired and/or past maturity, down from 34% as of December 31, 2014. As of December 31, 2015, we owned approximately $154 million of real estate held for sale or investment, which is approximately 56% of total assets, a decrease of $9.2 million or 6% of total assets as compared to December 31, 2014. During 2015, we sold eight real estate properties for aggregate net sales proceeds of $53,252,000 (including note receivable of $4,650,000) and gains totaling $21,666,000. We also recognized an additional $153,000 in deferred gain under the installment method due to the final repayment received on a carryback loan from the sale of a real estate property in 2012. We will continue to attempt to sell certain of our properties but may need to sell them for losses or wait until market values fully recover. In addition, under the REIT tax rules, we may be subject to a “prohibited transaction” penalty tax on tax gains from the sale of our properties in certain circumstances. In addition, we are also limited in the number and dollar amount of properties we can sell in a given year under the REIT tax rules.

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

Business Strategy

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

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

Current Market Conditions, Risks and Recent Trends

From 2013 through 2015, the global capital and credit markets continued to slowly recover from the economic downturn which began in 2007. Real estate markets also continued to recover, slowly on a national basis and more significantly in major metropolitan areas, and we expect this trend to continue through 2016 and beyond. Accordingly, as our real estate assets are carried at the lower of carrying value or fair value less costs to sell, it is possible that we have substantial imbedded gains in certain of our real estate properties held for sale and investment that are not reflected in our financial statements or in the value of our stock. However, despite these improvements, the overall market recovery remains uncertain. Should the economy regress, the commercial real estate sector may experience additional losses and operating challenges.

 
38

 
Critical Accounting Policies

In preparing the consolidated financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet dates and revenues and expenses for the reporting periods. Such estimates relate principally to the determination of (1) the allowance for loan losses including the accrued interest and advances that are estimated to be unrecoverable based on estimates of amounts to be collected plus estimates of the fair value of the property as collateral; (2) the valuation of real estate held for sale and investment (at acquisition and subsequently); and (3) the estimate of environmental remediation liabilities.  At December 31, 2015, we owned twenty-five real estate properties, including properties held within ten majority- or wholly-owned limited liability companies and one within a wholly-owned corporation. The limited liability company not wholly owned is held as follows: an 80.74% ownership interest in a limited liability company that owns property located in Miami, Florida (OFG holds the remaining ownership interests). We also have a 50% ownership interest in a limited liability company accounted for under the equity method that owns property located in Santa Clara, California (a third party holds the remaining ownership interest).

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

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

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

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

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

 
39

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

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

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

Significant Developments During 2015

Loan Activity – We originated 38 new loans totaling $84,099,000 (when fully funded) with a weighted average interest rate of 7.87%.  We received full or partial repayment on 20 loans in the total amount of $35,119,000 with a weighted average interest rate of 8.72%.  We recorded reversal of loan loss allowances on two impaired loans totaling $1,904,000 and recorded an increase in the general allowance for loan losses of $877,000, resulting in a net reversal of $1,027,000.

Real Estate Property Sales – We sold eight real estate properties for aggregate net sales proceeds of $53,252,000 (including note receivable of $4,650,000) and gains totaling $21,666,000. The sale of one property resulted in the repayment of a note payable in the amount of $9,771,000.

Real Estate Construction Projects – We continued the construction/renovation project on the vacant apartment building owned by TOTB  North and incurred approximately $18,037,000 in capitalized costs. This project is expected to be completed during the first quarter of 2016. In addition, we commenced the construction of the second phase retail/condominium project now owned by Zalanta during the third quarter of 2015 and incurred approximately $5,245,000 in capitalized costs. This project is expected to be completed during the first quarter of 2017.

Financing Activities – We amended the credit and related agreements (the “CB&T Credit Facility”) with California Bank & Trust (“CB&T”) to increase the maximum potential borrowings from $20,000,000 up to $30,000,000 and to add First Bank as an additional lender.

Stock Repurchase Plan – Werepurchased 520,524 shares of our Common Stock under the 2015 Repurchase Plan for a total cost of $7,503,000 (including commissions) and an average cost of $14.41 per share, and will make no further repurchases pursuant to that plan.  In December 2015, our Board approved the 2016 Repurchase Plan which permits us to purchase up to $7,500,000 of our Common Stock. This plan commences in April 2016 and expires in March 2017.  

Subsequent Events – The following events have occurred during the first quarter of 2016 and are discussed in further detail in our consolidated financial statements under “Note 16 – Subsequent Events” in Item 8 of this Annual Report:

·    
We sold one industrial building complex located in Paso Robles, California and one building in an office complex located in Roseville, California for total net sales proceeds of $6,479,000 and gains totaling $4,839,000.
 
·    
We executed an amendment to the CB&T Credit Facility to increase the current maximum commitment of the lenders form $30,000,000 to $50,000,000 and to extend the maturity date for borrowings under the facility to March 1, 2018. The amendment also permits the maximum commitment of the lenders, including such additional lenders as may be added by the parties, to be increased up to $75,000,000 if requested by the Company and approved by the lenders.

 
40

 
Comparison of Results of Operations for Years Ended 2015 and 2014
 
The following table sets forth our results of operations for the years ended December 31, 2015 and 2014:
 
   
Year Ended December 31,
 
Increase/(Decrease)
   
2015
 
                   2014
   
                Amount
 
Percent
 
Revenues:
                         
Interest income on loans
 
$
8,277,004
 
$
5,382,019
   
$
2,894,985
 
54
%
Rental and other income from real estate properties
   
12,791,096
   
12,268,214
     
522,882
 
4
%
Income from investment in limited liability company
   
175,451
   
169,999
     
5,452
 
3
%
Other income
   
   
19
     
(19
)
nm
 
   Total revenues
   
21,243,551
   
17,820,251
     
3,423,300
 
19
%
Expenses:
                         
Management fees to Manager
   
2,051,134
   
1,726,945
     
324,189
 
19
%
Servicing fees to Manager
   
186,467
   
156,995
     
29,472
 
19
%
General and administrative expense
   
1,278,994
   
1,661,210
     
(382,216
)
(23)
%
Rental and other expenses on real estate properties
   
8,510,110
   
8,158,038
     
352,072
 
4
%
Depreciation and amortization
   
2,052,181
   
2,255,577
     
(203,396
)
(9)
%
Interest expense
   
1,938,113
   
1,161,822
     
776,291
 
67
%
Bad debt expense from uncollectible rent
   
152,805
   
3,396
     
149,409
 
nm
 
Recovery of loan losses
   
(1,026,909
)
 
(1,869,733
)
   
842,824
 
(45)
%
Impairment losses on real estate properties
   
1,589,434
   
179,040
     
1,410,394
 
nm
 
   Total expenses
   
16,732,329
   
13,433,290
     
3,299,039
 
25
%
   Operating income
   
4,511,222
   
4,386,961
     
124,261
 
3
%
Gain on sales of real estate, net
   
21,818,553
   
3,243,359
     
18,575,194
 
nm
 
Gain on foreclosure of loans
   
   
464,754
     
(464,754
)
(100)
%
   Net income before income taxes
   
26,329,775
   
8,095,074
     
18,234,701
 
nm
 
Income tax expense
   
93,335
   
     
93,335
 
100
%
   Net income
   
26,236,440
   
8,095,074
     
18,141,366
 
nm
 
Net income attributable to noncontrolling interests
   
(2,667,324
)
 
(165,445
)
   
(2,501,879
)
nm
 
   Net income attributable to common stockholders
 
$
23,569,116
 
$
7,929,629
   
$
15,639,487
 
197
%
nm – not meaningful

Revenues

Interest income on loans increased $2,895,000 (54% increase) to $8,277,000 for the year ended December 31, 2015, as compared to $5,382,000 for the year ended December 31, 2014. The increase was primarily due to the accretion of the remaining $512,000 discount on an impaired loan as the loan was repaid prior to maturity in the first quarter of 2015, the collection of past due interest related to an impaired loan that we foreclosed on during 2014 of approximately $1,723,000 (as compared to $517,000 that was collected during 2014) and an increase in the average balance of performing loans between 2014 and 2015 of approximately $32,234,000 (96)%.

Rental and other income from real estate properties increased $523,000 (4% increase) to $12,791,000 for the year ended December 31, 2015, as compared to $12,268,000 for the year ended December 31, 2014, primarily due to rental income from a real estate property obtained via foreclosure in December 2014, increased rental rates and/or occupancy on certain of our properties during 2014 and 2015 and increased income from the TSV retail property that was completed and partially occupied during the fourth quarter of 2014, net of the reduction in rental income following the sale of four operating properties during 2015.


Expenses

Management fees amounted to approximately $2,051,000 and $1,727,000 for the years ended December 31, 2015 and 2014, respectively. Servicing fees amounted to approximately $186,000 and $157,000 for the years ended December 31, 2015 and 2014, respectively.

 
41

 
The maximum management and servicing fees were paid to the Manager during years ended December 31, 2015 and 2014. The maximum management fee permitted under the Company’s charter is 2.75% per year of the average unpaid balance of loans. For the years 2015, 2014, 2013, 2012 and 2011, the management fees were 2.75%, 2.75%, 2.74%, 2.67% and 2.19% of the average unpaid balance of loans, respectively.
 
In determining whether to take the maximum management fees permitted, the Manager may consider a number of factors, including current market yields, delinquency experience, un-invested cash and real estate activities. During 2015 and 2014, the Manager chose to take the maximum compensation that it is able to take pursuant to the charter and will likely continue to take the maximum compensation for the foreseeable future.

General and administrative expense decreased $382,000 (23% decrease) during the year ended December 31, 2015, as compared to 2014, due primarily to lower legal, appraisal, consulting and insurance expenses during 2015 as compared to 2014.

Rental and other expenses on real estate properties increased $352,000 (4% increase) during the year ended December 31, 2015, as compared to 2014, primarily due to expenses incurred on the assisted living facility located in Bensalem, Pennsylvania that was obtained via foreclosure in December 2014 and the completion of the retail complex owned by TSV during the fourth quarter of 2014, and, thus, there was a full year of operating expenses for these properties during 2015. A significant portion of the TSV expenses were charged to tenants as common area maintenance (“CAM”) reimbursements and reflected in the increase in revenue for the property during the period. These increased expenses were partially offset by a decrease in expenses as a result of the sale of eight properties during 2015.

Depreciation and amortization expense decreased $203,000 (9% decrease) during the year ended December 31, 2015, as compared to 2014, primarily due to the sale of five depreciable properties during 2015.

Interest expense increased $776,000 (67% increase) during the year ended December 31, 2015 as compared to 2014, due to interest incurred on our lines of credit, the loans payable within TOTB and TSV and the amortization of deferred financing costs to interest expense from these debt instruments during the year ended December 31, 2015. All of these debt facilities, other than the CB&T Credit Facility and the Company’s Credit Facility with Opus Bank (the “Opus Credit Facility”), began to incur interest expense subsequent to the third quarter of 2014.

The reversal of the provision for loan losses of $1,027,000 during the year ended December 31, 2015 was the result of an analysis performed on the loan portfolio. The general loan loss allowance increased  $877,000 during the year ended December 31, 2015 due to an increase in the balance of performing loans during the year (net of payoffs). There was also an increase in the balance of both land and residential loans which have a higher historical loss factor for purposes of the general allowance calculation. The specific loan loss allowance decreased $1,904,000 during the year ended December 31, 2015, because new appraisals obtained during 2015 on two impaired loans reflected increased values of the underlying collateral, thus, resulting in a decrease in the specific allowance on these loans.

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

The impairment losses on real estate properties of $1,589,000 and $179,000, respectively, during the years ended December 31, 2015 and 2014 were the result of updated appraisals or other valuation information obtained on certain of our real estate properties during those years.
 
Gain on Sales of Real Estate

Gain on sales of real estate (excluding gain attributable to a noncontrolling interest in 2015) increased $18,575,000 during the year ended December 31, 2015, as compared to 2014. The increase during the year ended December 31, 2015 was a result of the sale of eight real estate properties during 2015, resulting in gains totaling $21,666,000 (see further detail under “Real Estate Properties Held for Sale and Investment” below). We also recognized $153,000 of deferred gain under the installment method related to the sale of the condominiums located in Santa Barbara, California in 2012 due to the remaining repayment of the carry back loan during the first quarter of 2015. The gain from the sale of one of these properties was offset by net income attributable to a noncontrolling interest of approximately $2,479,000, as a portion of the gain on sale of the property held within 720 University, LLC was attributable to the noncontrolling interest.  During 2014, we sold two parcels of land and recognized deferred gains under the installment method in the total amount of $3,242,000.
 
 
42

 
Net Income Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests increased $2,502,000 during the year ended December 31, 2015, as compared to 2014, due primarily to the sale of the shopping center owned by 720 University during 2015 as a portion of the gain on sale of approximately $2,479,000 was attributable to our joint venture partner in 720 University.

Comparison of Results of Operations for Years Ended 2014 and 2013
 
The following table sets forth our results of operations for the years ended December 31, 2014 and 2013:
 
   
Year Ended December 31,
 
Increase/(Decrease)
   
2014
 
2013
   
Amount
 
Percent
 
Revenues:
                         
Interest income on loans
 
$
5,382,019
 
$
3,020,884
   
$
2,361,135
 
78
%
Rental and other income from real estate properties
   
12,268,214
   
11,223,260
     
1,044,954
 
9
%
Income from investment in limited liability company
   
169,999
   
160,805
     
9,194
 
6
%
Other income
   
19
   
4,406
     
(4,387
)
nm
 
   Total revenues
   
17,820,251
   
14,409,355
     
3,410,896
 
24
%
Expenses:
                         
Management fees to Manager
   
1,726,945
   
1,664,076
     
62,869
 
4
%
Servicing fees to Manager
   
156,995
   
151,643
     
5,352
 
4
%
General and administrative expense
   
1,661,210
   
1,657,467
     
3,743
 
nm
 
Rental and other expenses on real estate properties
   
8,158,038
   
8,150,944
     
7,094
 
nm
 
Depreciation and amortization
   
2,255,577
   
2,485,587
     
(230,010
)
(9
)%
Interest expense
   
1,161,822
   
513,750
     
648,072
 
126
%
Bad debt expense from uncollectible rent
   
3,396
   
19,374
     
(15,978
)
(82
)%
Provision for (recovery of) loan losses
   
(1,869,733
)
 
(7,822,112
)
   
5,952,379
 
(76
)%
Impairment losses on real estate properties
   
179,040
   
666,240
     
(487,200
)
(73
)%
   Total expenses
   
13,433,290
   
7,486,969
     
5,946,321
 
79
%
   Operating income
   
4,386,961
   
6,922,386
     
(2,535,425
)
(37
)%
Gain on sales of real estate, net
   
3,243,359
   
2,942,861
     
300,498
 
10
%
Gain on foreclosure of loans
   
464,754
   
952,357
     
(487,603
)
(51
)%
   Net income
   
8,095,074
   
10,817,604
     
(2,722,530
)
(25
)%
Net income attributable to noncontrolling interests
   
(165,445
)
 
(2,084,707
)
   
1,919,262
 
(92
)%
   Net income attributable to common stockholders
 
$
7,929,629
 
$
8,732,897
   
$
(803,268
)
(9
)%
nm – not meaningful

Revenues

Interest income on loans increased $2,361,000 (78% increase) to $5,382,000 for the year ended December 31, 2014, as compared to $3,021,000 for the year ended December 31, 2013. The increase was primarily due to an increase in the average balance of performing loans of approximately 29% and an increase in interest income collected on delinquent/impaired loans of approximately $1,470,000 during the year ended December 31, 2014, as compared to 2013.

Rental and other income from real estate properties increased $1,045,000 (9% increase) to $12,268,000 for the year ended December 31, 2014, as compared to $11,223,000 for the year ended December 31, 2013, primarily due to increased rental rates and/or occupancy on certain of our properties during the latter part of 2013 and 2014 and increased income from properties obtained via foreclosure in 2013 and 2014, net of reduced revenue as a result of the sale of three operating properties during 2013.

 
43

 
Expenses

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

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

Depreciation and amortization expense decreased $230,000 (9% decrease) during the year ended December 31, 2014, as compared to 2013, primarily due to recording catch-up depreciation on the property held within TOTB Miami in June 2013 when the property was transferred from “Held for sale” to “Held for investment” resulting in a decrease in depreciation of $299,000 during 2014 and a decrease in depreciation of $102,000 on the property within 720 University as depreciation was discontinued during the fourth quarter of 2014 when the property was transferred to “Held for sale”. This decrease was partially offset by an increase in depreciation recorded of approximately $178,000 as a result of two new properties obtained via foreclosure during 2014 and depreciation commencing on the retail property held within TSV during the fourth quarter of 2014.

Interest expense increased $648,000 (126% increase) during the year ended December 31, 2014 as compared to 2013, due to interest incurred on our new lines of credit, one new loan payable within TOTB and one new loan payable within TSV and the amortization of deferred financing costs on the lines of credit and new loans payable to interest expense during the year ended December 31, 2014.

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

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

Gain on Sales of Real Estate

Gain on sales of real estate (excluding gain attributable to a noncontrolling interest in 2013) increased $2,473,000 during the year ended December 31, 2014, as compared 2013. The increase during the year ended December 31, 2014 was a result of the recording of deferred gains under the installment method in the total amount of $2,951,000 related to the sale of the condominiums located in Santa Barbara, California in 2012 (and held within Anacapa Villas, LLC), the condominiums located in Oakland, California in 2013 (and held within 1401 on Jackson, LLC) and the parcel of land located in Lake Charles, Louisiana in 2013 (and held within Dation, LLC) due to full or partial principal repayments received on the carry back loans during 2014. During 2014, we also sold one of the improved, residential lots located in West Sacramento, California for $175,000, resulting in a gain of approximately $105,000 and the undeveloped, commercial land located in Half Moon Bay, California for $1,700,000, resulting in a gain of $178,000.  During the year ended December 31 2013, we sold five real estate properties and recognized gains of $2,943,000. The gain from the sale of one of these properties was offset by net income attributable to a noncontrolling interest of approximately $2,174,000, as the gain on sale of the property held within 1875 was all attributable to the noncontrolling interest.
 
 
44

 
Net Income Attributable to Non-Controlling Interests

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

Financial Condition

December 31, 2015 and 2014

Loan Portfolio

Our portfolio of loan investments increased from 34 as of December 31, 2014 to 56 as of December 31, 2015, and the average loan balance decreased from $2,001,000 as of December 31, 2014 to $1,906,000 as of December 31, 2015.

As of December 31, 2015 and 2014, we had three and six impaired loans, respectively, totaling approximately $8,694,000 (8.1%) and $22,316,000 (32.8%), respectively. This included two matured loans totaling $8,452,000 and $8,614,000, respectively. In addition, one loan of approximately $862,000 (1.3%) was past maturity but less than ninety days delinquent in monthly payments as of December 31, 2014 (combined total of $8,694,000 (8.1%) and $23,178,000 (34.1%), respectively, that are past maturity and impaired). Of the impaired and past maturity loans, none were in the process of foreclosure and none involved loans to borrowers who were in bankruptcy.  We foreclosed on no loans during the year ended December 31, 2015. We foreclosed on three and six loans during the years ended December 31, 2014 and 2013, respectively, with aggregate principal balances totaling approximately $7,671,000 and $26,187,000, respectively, and obtained the properties via the trustee’s sales.

Of the $22,316,000 in loans that were impaired as of December 31, 2014, $8,868,000 remained impaired as of December 31, 2015 (balance now $8,694,000) and $13,448,000 of such loans were paid off by the borrowers during 2015.

As of December 31, 2015 and 2014, approximately $106,502,000 (99.8%) and $67,780,000 (99.6%) of our loans are interest-only and/or require the borrower to make a “balloon payment” on the principal amount upon maturity of the loan. To the extent that a borrower has an obligation to pay loan principal in a large lump sum payment, its ability to satisfy this obligation may be dependent upon its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial cash amount. As a result, these loans involve a higher risk of default than fully amortizing loans. Borrowers occasionally are not able to pay the full amount due at the maturity date.  We may allow these borrowers to continue making the regularly scheduled monthly payments for certain periods of time to assist the borrower in meeting the balloon payment obligation without formally filing a notice of default.  These loans for which the principal and any accrued interest is due and payable, but the borrower has failed to make such payment of principal and/or accrued interest are referred to as “past maturity loans”. As of December 31, 2015 and 2014, we had two and three past maturity loans totaling approximately $8,452,000 and $9,476,000, respectively.
 
There were no loans modified as troubled debt restructurings during the year ended December 31, 2015.

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

 
45

 
During the year ended December 31, 2013, the terms of two impaired loans were modified as troubled debt restructurings. One such impaired loan was modified to combine all principal, delinquent interest and advances into principal and provide for amortizing payments at a reduced interest rate over an extended maturity of 15 years. The other impaired loan was rewritten by the Company during the year whereby we repaid the first deed of trust on the subject property of approximately $5,899,000 and refinanced its second deed of trust by combining them into one first deed of trust in the amount of $9,625,000 with interest at 10% per annum due in five years. As part of the modification, approximately $659,000 of past due interest on our original note was paid from the proceeds of the rewritten loan, which was recorded as a discount against the principal balance of the new loan because the loan was impaired (net principal balance of $8,966,000). In addition, we loaned the borrower an additional $2,500,000 to fund certain improvements to the property (aggregate principal balance of $11,466,000). The $9,625,000 and $2,500,000 loans were repaid in full during 2015.

As of December 31, 2015 and 2014, we held the following types of loan investments:
   
December 31,
2015
   
December 31,
2014
 
By Property Type:
           
Commercial
 
$
76,800,297
   
$
52,531,537
 
Residential
   
24,675,867
     
13,491,906
 
Land
   
5,267,643
     
2,010,068
 
   
$
106,743,807
   
$
68,033,511
 
By Position:
               
Senior loans
 
$
103,716,010
   
$
65,533,511
 
Junior loans*
   
3,027,797
     
2,500,000
 
   
$
106,743,807
   
$
68,033,511
 
* The junior loan in our portfolio at December 31, 2014 was junior to an existing senior loan held by us and was secured by the same collateral. This loan was paid off during 2015.

The types of property securing our commercial real estate loans are as follows as of December 31, 2015 and 2014:

   
December 31,
2015
 
December 31,
2014
 
Commercial Real Estate Loans:
             
Retail
 
$
9,206,415
 
$
7,591,592
 
Office
   
28,210,997
   
25,742,246
 
Apartment
   
13,094,806
   
9,622,580
 
Industrial
   
3,483,318
   
3,080,000
 
Marina
   
3,500,000
   
3,200,000
 
Church
   
1,175,000
   
1,175,000
 
Restaurant
   
400,000
   
1,058,567
 
Golf course
   
1,145,000
   
1,061,552
 
Hotel
   
7,985,000
   
 
Storage
   
7,652,116
   
 
Assisted care
   
947,645
   
 
   
$
76,800,297
 
$
52,531,537
 

 
46

 
Scheduled maturities of loan investments as of December 31, 2015 and the interest rate sensitivity of such loans are as follows:
   
Fixed
Interest
Rate
   
Variable
Interest
Rate
   
Total
 
Year ending December 31:
                       
2015 (past maturity)
 
$
8,452,253
   
$
   
$
8,452,253
 
2016
   
34,450,221
     
1,450,000
     
35,900,221
 
2017
   
38,044,5