ITEM 1. BUSINESS
Business Focus and Strategies
Organized in 1999 as a real estate investment trust or “REIT,” we invest in real estate development projects. We have generally invested in for-sale single-family or multi-family projects, typically structured as secured construction loans, secured subordinated loans, mezzanine loans, or equity investments. We have also considered investments in commercial real estate. We have sought to invest throughout California and in other states when presented with suitable opportunities. We do not engage in any foreign operations or derive any revenue from foreign operations, and do not intend to do so in the future. Effective January 1, 2004, we withdrew our REIT status and are now taxed as a C Corporation.
Most investments that we structured as loans were underwritten with maturity dates of up to 36 months, which dates may be extended when deemed to be in the Company’s best interest. Most investments are secured by recorded deeds of trust on the property being developed with title insurance protecting the position of our deeds of trust. We have also made unsecured loans to development entities or taken an ownership interest in a development entity. In such circumstances we typically have required a shared appreciation interest or other equity participation.
All approved investments have been subject to detailed legal documentation that has been formulated by legal counsel for our specific purposes. In addition, our Board of Directors has implemented specific guidelines for the making of loans and investments. In accordance with our loan documents, we generally have advanced the monthly interest payments out of available loan proceeds, although our loan documents provide us with a right not to advance or to cease such payments should it be determined that conditions require such actions. Loan fees, if charged, are typically advanced out of the loan proceeds with the initial loan advance. Generally, our loans have required the borrower to make a ‘‘balloon payment’’ equal to the principal advanced as well as advanced interest and fees upon maturity of the loan. The loan maturity date has historically been the earlier of the date of sale of the secured real estate or the date stated in the loan documents.
In previous letters and meetings of shareholders, the Company has discussed the plan for providing shareholder liquidity. Given how the plan affects our focus and strategies, it is appropriate to reiterate and summarize the plan. Several years ago after careful consideration of the viable alternatives, the Board of Directors determined that the optimal path that would allow the Company to provide future liquidity to our shareholders was first to restructure and downsize the company, thereby reducing operating expenses, and subsequently proceed with a controlled liquidation of the Company’s portfolio. Over the past 36 months, the Company has completed the downsizing and has outsourced loan and asset management functions. The Company now has no direct or full time employees and contracts with one board member to perform the functions of the Chief Executive Officer and Chief Financial Officer on a per hour as needed basis. Tax, audit and legal functions continue to be outsourced to independent, well respected firms.
Following the restructuring, The Company formulated an individualized plan for each of the properties in the portfolio. The goal is to maximize the return from each property by either holding and managing as a rental or marketing the property for sale. The rental income, interest income received and the proceeds from a sale are being used for operating expenses, property carrying and operational costs and servicing and paying down Company debt. See Note 12 in the Subsequent Events section for details of the Company debt reduction that has been completed.
Company Management
Investment Origination
We engage persons skilled in loan underwriting, disbursement and monitoring, and the various business and legal issues that may be involved with real estate lending, investing and property management. Our management and independent contractors, where appropriate, provide all of the services including but not limited to: underwriting loans and investments, overseeing all loans and investments, servicing loans and managing properties that the Company owns (REO). Currently, there are no plans to make future investments other than advances to cover carrying and operating costs of REO. These advances are reviewed and approved by the Board of Directors.
Collateral Valuation
We utilize the experience of our management and independent contractors, third party appraisals or other information deemed useful to make assessments of a project’s viability and projected value in order to determine what carrying and operating costs are to authorized and what impairments, if any, should be recognized. In the evaluation process, emphasis is placed on the ability of the underlying collateral to protect against losses in the event of default. The evaluation is based on the projected market value of the project, using various tools, including comparable sales of similar properties and projections of market appeal and demand at completion. We typically require third party appraisals to support valuation.
Servicing
Investment servicing involves taking all steps necessary to administer the investment, including monitoring the propriety of funding requests, monitoring progress of a project and accounting for principal and income. We now employ an outside agent to service our loans and manage our REO properties. Loan proceeds and advances are disbursed as only as needed, and only after we have received satisfactory documentation. Before making disbursements requests are verified by invoices and supported by frequent site inspections.
Sales of construction mortgage loans
The Company plans to hold mortgage loans to maturity, and has not embarked on selling loans in any secondary public market, nor are we aware that an efficient secondary market exists for the loans we hold. We may, however, decide to sell assets or loans from time to time for a number of reasons, including, without limitation: (1) to dispose of an asset for which credit risk concerns have arisen; (2) to reduce interest rate risk; (3) or to re-structure our balance sheet when our management deems it advisable. Our Board of Directors reviews and approves all such proposals.
Management Agreement
Effective October 1, 2008, the Company engaged an independent company, RMRF Enterprises, Inc., a California corporation, dba Cupertino Capital, to perform ongoing administrative and certain services related to the day to day operations and asset management under a Management Agreement. On December 31, 2010, the registrant terminated its agreement with RMRF Enterprises and entered into a Management Agreement with LG Servicing, Inc., a California corporation. The new Management Agreement commenced January 1, 2011, and provides for LG Servicing Inc. to perform an equivalent set of services. The Management Agreement is attached to this report as Exhibit 10.4.
ITEM 1A.
ITEM 1A. RISK FACTORS
General Economic Conditions in Lending Areas
Our business plan previously sought to diversify our investments throughout California and other states in the western United States of America. Approximately 78.42% of our investments are currently located in the San Francisco Bay Area, 0.81% in Southern California, 18.21% in California’s Central Valley, and 2.55% in other states of the United States of America. The potential success of real estate investments in general is subject to fluctuations in local market conditions, including fluctuations in the supply of and demand for similar properties, and the performance of our investments has and will continue to depend on the economic and real estate market conditions prevailing in the markets where our investments are located. Since the investments are located in a limited geographical region, they may be subject to a greater risk of delinquency or default if the industries concentrated in these areas suffer adverse economic or business developments.
Realization of Assets
The Company’s liquidity and ability to meet its obligations as they become due are subject to, among other things, its ability to obtain timely repayments or other dispositions of its investments. Many of the investments rely on the completion and sale of the developed real estate in order to realize repayment or other disposition proceeds. In the event that proceeds from repayments or other investment dispositions are not sufficient to timely meet our commitments and conventional commercial credit facilities are not available to us, we may therefore be required to seek credit facilities from private placement debt sources and/or to sell some of our investments prematurely. In such cases, the amount of proceeds received could be substantially less than what we would have expected if we allowed a proper marketing period for a particular investment. This would have a negative impact on the estimated net realizable value of our assets. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Demand for new homes is sensitive to economic conditions over which we have no control.
Demand for homes is sensitive to changes in economic conditions such as the level of employment, consumer confidence, consumer income, the availability of financing and interest rate levels. If mortgage interest rates increase or if any of these other economic factors adversely change nationally, or in the market in which we operate, the ability or willingness of prospective buyers to purchase new homes could be adversely affected.
Our results of operations and financial condition are greatly affected by the performance of the real estate industry.
Our real estate activities are subject to numerous factors beyond our control, including local real estate market conditions, substantial existing and potential competition, general national, regional and local economic conditions, fluctuations in interest rates and mortgage availability and changes in demographic and environmental conditions. Real estate markets have historically been subject to strong periodic cycles driven by numerous factors beyond the control of market participants. Real estate investments often cannot easily be converted into cash and market values may be adversely affected by these economic circumstances, market fundamentals, competition and demographic conditions. Because of the effect these factors have on real estate values, it is difficult to predict with certainty the level of future sales or sales prices that will be realized for individual assets.
We may not be able to conduct successful operations in the future.
The results of our operations will depend, among other things, upon our ability to develop and market our properties. Furthermore, our proposed operations may not generate income sufficient to meet operating expenses or will generate income and capital appreciation, if any, at rates lower than those anticipated or necessary to sustain ourselves. Our operations may be affected by many factors, some known by us, some unknown, and some which are beyond our control. Any of these problems, or a combination thereof, could have a materially adverse effect on our viability as an entity and might cause the investment of our shareholders to be impaired or lost.
We are subject to risks associated with investments in real estate.
The value of, and our income from, our properties may decline due to developments that adversely affect real estate generally and those that are specific to our properties. General factors that may adversely affect our real estate portfolios include:
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increases in interest rates;
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a general tightening of the availability of credit;
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a decline in the economic conditions in one or more of our primary markets;
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an increase in competition for customers or a decrease in demand by customers;
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an increase in supply of our property types in our primary markets;
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declines in consumer spending during an economic recession that adversely affect our revenue; and
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the adoption on the national, state or local level of more restrictive laws and governmental regulations, including more restrictive zoning, land use or environmental regulations and increased real estate taxes.
Additional factors may adversely affect the value of, and our income from, specific properties, including:
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adverse changes in the perceptions of prospective purchasers of the attractiveness of the property;
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opposition from local community or political groups with respect to development or construction at a particular site;
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a change in existing comprehensive zoning plans or zoning regulations that impose additional restrictions on use or requirements with respect to our property;
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our inability to provide adequate management and maintenance or to obtain adequate insurance;
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an increase in operating costs;
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new development of a competitor's property in or in close proximity to one of our current markets; and
We are subject to real estate development risks.
Our development projects are subject to significant risks relating to our ability to complete our projects on time and on budget. Factors that may result in a development project exceeding budget or being prevented from completion include:
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an inability to secure sufficient financing on favorable terms, including an inability to refinance construction loans;
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the subprime mortgage financial crisis of 2009 brought about a rise in defaults and home foreclosures. It caused tighter lending standards. The negative effect of the subprime situation has affected the company’s ability to sell homes and secure financing.
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construction delays or cost overruns, either of which may increase project development costs;
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an increase in commodity costs;
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an inability to obtain zoning, occupancy and other required governmental permits and authorizations;
If any of these occur, we may not achieve our projected returns on properties under development and we could lose some or all of our investments in those properties.
The real estate business is very competitive and many of our competitors are larger and financially stronger than we are.
The real estate business is highly competitive. We compete with a large number of companies and individuals, and many of them have significantly greater financial and other resources than we have. Our competitors include local developers who are committed primarily to particular markets and also national developers who acquire properties throughout the U.S. We cannot assure that we will have the necessary resources to be competitive.
Unfavorable changes in economic conditions could adversely impact occupancy or rental rates.
Weakened economic conditions, including decreased job growth and job losses, have affected and continue to significantly affect apartment home occupancy and rental rates. Significant decreases in occupancy or rental rates in the markets, in which we operate, in turn, may have a material adverse impact on our cash flows and operating results. The risks which may affect conditions in these markets include the following:
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changes in the national, regional, and local economic climates;
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local conditions, such as an oversupply of apartments or other housing available for rent, or a reduction in demand for apartments in the area;
● declines in the financial condition of our tenants, which may make it more difficult for us to collect rents from some tenants;
● changes in market rental rates;
● declines in mortgage interest rates, making alternative housing more affordable;
● government or builder incentives which enable first time have buyers to put little or no money down, making alternative housing options more attractive;
● a continued economic downturn which simultaneously affects one or more of our geographical markets; and
● increased operating costs, if these costs cannot be passed through to residents.
We may experience a decrease in rental revenues, an increase in operating expenses, or a combination of both, which may adversely affect our results of operations and our ability to satisfy our financial obligations.
Difficulties of selling real estate could limit our flexibility.
We intend to evaluate the potential disposition of assets that may no longer help us meet our objectives. When we decide to sell an asset, we may encounter difficulty in finding buyers in a timely manner as real estate investments generally cannot be disposed of quickly, especially when market conditions are poor. These difficulties have been exacerbated in the current credit environment because buyers have experienced difficulty in obtaining the necessary financing. These factors may limit our ability to vary our portfolio promptly in response to changes in economic or other conditions and may also limit our ability to utilize sales proceeds as a source of liquidity, which would adversely affect our ability finance current operations or repay debt.
Investments through joint ventures involve risks not present in investments in which we are the sole investor.
We have invested and may continue to invest as a joint venture partner in joint ventures. These investments involve risks, including the possibility the other joint venture partner may have business goals which are inconsistent with ours, be in a position to take action or withhold consent contrary to our requests, or become insolvent and require us to assume and fulfill the joint venture’s financial obligations. We and our joint venture partner may each have the right to initiate a buy-sell arrangement, which could cause us to sell our interest, or acquire our joint venture partner’s interest, at a time when we otherwise would not have entered into such a transaction. Each joint venture agreement is individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion may be limited to varying degrees depending on the terms of the joint venture agreement.
We depend on our key personnel and resources.
Our success depends in part on our ability to attract and retain the services of executive officers, board directors and other personnel resources. There is substantial competition for qualified personnel in the real estate industry, and the loss of any of our key personnel could have an adverse effect on us.
We may be unable to renew, repay, or refinance our outstanding debt.
We are subject to the risk that indebtedness on our properties or our unsecured indebtedness will not be renewed, repaid, or refinanced when due or the terms of any renewal or refinancing will not be as favorable as the existing terms of such indebtedness. If we are unable to refinance our indebtedness on acceptable terms, or at all, we might be forced to dispose of one or more of the properties on disadvantageous terms, which might result in losses to us. Such losses could have a material adverse effect on us and our ability to pay amounts due on our debt. Furthermore, if a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the mortgagee could foreclose on the property, appoint a receiver and exercise rights under an assignment of rents and leases, or pursue other remedies, all with a consequent loss of our revenues and asset value.
Variable rate debt is subject to interest rate risk.
We have mortgage debt with varying interest rates dependent upon various market indexes. In addition, we have a revolving credit facility bearing interest at a variable rate on all amounts drawn on the facility. We may incur additional variable rate debt in the future. Increases in interest rates on variable rate debt would increase our interest expense, unless we make arrangements which hedge the risk of rising interest rates, which would adversely affect net income and cash available for payment of our debt obligations.
Issuances of additional debt may adversely impact our financial condition.
Our capital requirements depend on numerous factors, including the occupancy rates of our apartment properties, development and capital expenditures, and costs of operations. If our capital requirements vary materially from our plans, we may require additional financing earlier than anticipated. If we issue more debt, we could become more leveraged, resulting in increased risk of default on our obligations and an increase in our debt service requirements, both of which could adversely affect our financial condition and ability to access debt in the future.
Insurance and Environmental Risks
In addition to these other significant business and financial risks, including but not limited to liquidity, the prevailing market for residential real estate, fluctuations in prevailing interest rates, timely completion of projects by developers, we are subject uninsured risks such as earthquake and other casualty damage that may be uninsurable or insurable only at economically unfeasible costs, and potential environmental liabilities relating to properties on which we have made investments or received through foreclosure.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns interests in real property, including joint venture interests in real property and certain real property that we have acquired through foreclosure. Our policy is to maximize the value of the foreclosed properties prior to liquidation. In some cases this may involve completing construction, sometimes through a subsidiary, and then marketing the property for sale. The properties we own are described in the notes to the consolidated financial statements contained in this Form 10-K pursuant to Item 8 of Part II.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Legal proceedings are described in Note 12 the caption “Litigation” in the footnotes to the consolidated financial statements included in this Form 10-K pursuant to Item 8 of Part II.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
[RESERVED]
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Equity, Related Stockholder Matters, and Purchases of Equity Securities are described in Note 8 under the caption “Shareholder’s Equity” in the footnotes to the consolidated financial statements included in Form 10-K pursuant to Item 8 of Part II.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
Statements contained in this Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation,'' (“MD&A”) and elsewhere in this Form 10-K, which are not historical facts, may be forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Investors are cautioned not to attribute undue certainty to these forward-looking statements, which speak only as of the date of this Form 10-K. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events, other than as required by law.
Overview
Bella Vista Capital was incorporated in March 1999 as Primecore Mortgage Trust, Inc. Since incorporation and through December 2000, Primecore engaged in the business of providing loans for the development of primarily high-end single family residential real estate. During 1999 and 2000 Primecore raised the capital to fund these loans from the sale of shares of Preferred Stock. This capital was invested primarily in high priced San Francisco Bay Area residential real estate at a time when prices were increasing at a rapid pace. By the end of 2000, Primecore had loan commitments of $436 million on 117 loans with over $216 million funded.
After 2000, the market for high-end real estate in the San Francisco Bay Area began to rapidly deteriorate; Primecore began to experience borrower defaults and through 2003 took title to 48 properties by way of foreclosure or deed in lieu of foreclosure. Primecore also recognized significant impairments in its portfolio. The impairment of the investment portfolio resulted in substantial operating losses. The Company realized that these net operating losses could be carried forward and used to reduce future taxable income. In prior years, the company used its REIT status, and the payment of dividends, to eliminate corporate level taxation. However, the REIT rules restricted the types of loans the Company could make. In particular, the Company was prohibited from making loans with equity participation. With the ability to carry forward prior years’ net operating losses to offset future taxable income, the Company was free to terminate its REIT status, which it did effective January 1, 2004, and was no longer restricted in the types of investments it could make.
In April 2004 Primecore changed its name to Bella Vista Capital in order to reflect its new business focus. During 2004 new management focused on completing and liquidating the existing portfolio of assets, internalizing operations, resolving outstanding legal issues and developing a pipeline of new investment opportunities. In addition to the completion and sale of a number of our non-performing investments, management completed the transition to internal management and reduced continuing operating expenses.
As a result of the restructuring program commenced in October 2007, the Company has no direct employees and is outsourcing the administration and asset management functions and enlisting a Board member to function as CEO and CFO responsibilities on an as-needed consulting basis. These steps were taken to reduce operational expenses.
During Fiscal Year 2010 the Board took additional restructuring measures consistent with the reduced property portfolio and the continuing strategy of reducing operating cost and progressing with a plan for a controlled liquidation. Most notably, the Board reduced its size from 4 to 3 members. Additionally, the CEO and CFO positions were combined and are carried out by a single board member on an as-needed consulting basis.
The real estate market has experienced significant deflationary pricing and significant inventory buildup. While it is true that some recent publicly published statistics appear to demonstrate an increase in sale rate, a significant portion of this increase is at distressed or foreclosure pricing, a clear negative factor for pricing in the foreseeable future. As the credit markets appear to have begun to return to some form of normalcy, high unemployment and the insecurities fostered by layoffs have evolved as the latest major drag on the economy, consumer confidence and the real estate market. Thus, as indicated in Part 1, Item 1 above, the Company has discontinued originating any new investments secured by deeds of trust or subordinated debt or investments in equity partnerships.
As a result of the current difficult market conditions, the Company has taken control of certain underlying projects associated with certain nonperforming loans and equity partnership investments. Control was obtained by settlement with the borrower or by assuming the role of managing partner. These properties are now Real Estate Owned (REOs). For each of these properties, the Company has developed individual plans in order to maximize value based on the local market conditions, potential for future appreciation, and the properties’ operating and debt structure. In a number of cases, these REO’s are being operated as either a rental or a hybrid of units used for rental and units available for sale. In a particular case of a condominium project, it was deemed appropriate to auction the individual units versus renting or offering for sale and thereby having to continue to fund the carrying costs for an extended period.
In terms of the path forward, the Company has continued to evaluate the real estate and credit markets as well as our existing portfolio and is not planning on originating any new investments in the foreseeable future. The Company is managing the existing REO and other properties under its control with the goals of maximizing value and completing the sale of all these portfolio properties, which is expected to happen over the next several years (market permitting). The resulting proceeds will first be used to retire debt, fund current operating and REO expenses, and finally to provide liquidity to existing shareholders. It should clearly be noted that the timing of any future shareholder liquidity event is highly dependent on when properties are sold, at what price and when all of the existing debt is repaid.
RESULTS OF OPERATIONS
Revenues
Revenues from Loans Receivable
We reported revenues from loans receivable of $208,244 during the year ended September 30, 2011, an 11% decrease as compared to $234,782 during the year ended September 30, 2010. The decrease in revenues was due to a decrease in the average amount invested during the comparable periods and a decline in our average return due to lower interest rates on loans in the portfolio.
Revenues from Joint Venture Investments in Real Estate Developments
We reported no revenue from joint venture investments in real estate for the year ended September 30, 2011, a 100% decrease as compared to $240,800 in revenues for the year ended September 30, 2010. These revenues are derived from the repayment of loans and equity participations. The 2010 revenues represented gains from the disposition and sale of fully impaired investments. During the year ended September 30, 2011 we received proceeds of approximately $1.63 million from our joint venture investments, approximately a 25% increase as compared with approximately $1.3 million during the year ended September 30, 2010. However, these proceeds represented only a return of our original capital investment and, therefore, we did not receive any returns in excess of our investment, which would have been reportable as revenues.
Revenues from Sale of Investments in Real Estate Developments
We reported no revenue from the sale of investments in real estate developments for the year ended September 30, 2011; a 100% decrease as compared to $7,618,381 for the year ended September 30, 2010. The decrease is due to a reduction of sales of REO projects as the company had fewer assets to sell during 2011.
REO Property Rental Revenues
We reported REO property rental revenues totaling $138,823 for the year ended September 30, 2011, a 16% decrease as compared to $166,935 for the year ended September 30, 2010. The decrease is due to continued sales of REO units that had been temporarily rented. The remaining rental units continued to offset carrying costs of the REO units as we waited for the market conditions to improve to dispose of the assets.
Rental Revenue
We reported rental revenues totaling $793, 955 for the year ended September 30, 2011, a 19% increase as compared to $666,518 for the year ended September 30, 2010. The increase is due to the addition of the International Boulevard rental property placed in service in December 2010, and increased revenue on the other rental properties. The associated rental expenses excluding depreciation were $339,164 for the year ended September 30, 2011, a 2% increase as compared to $331,187 for the year ended September 30, 2010. This increase in costs corresponds with the addition of the International Boulevard rental property.
Expenses
As a result of the continuing downturn in the real estate market and significant uncertainties associated with future investments, we have discontinued originating any new equity or subordinated debt investments and ceased originating new trust deed investments. In order to streamline the operations of the company and reduce operating expenses to compensate for the eroding market conditions and declining property values, the Board of Directors determined in 2007 that the best course of action to preserve shareholder’s value was to begin implementation of a restructuring program. The Board has continued to make significant progress under this program which has ultimately resulted in significant operating cost savings and increased efficiencies, including: closing the Palo Alto office, terminating all direct employees and outsourcing the administration and asset management functions. Additionally, in 2010, the size of the Board was reduced from 4 to 3 members and the CEO and CFO responsibilities were consolidated and are now fulfilled by a single Board member on as-needed consulting basis.
We group our expenses in three categories: Bella Vista operating expenses, REO expenses, and impairments. Bella Vista operating expenses are associated with the ongoing operations of the Company. REO expenses include all of the carrying costs for REO properties such as property taxes, insurance, maintenance, marketing, legal, debt service and administrative expenses.
Bella Vista total operating expenses (including controllable, nonrecurring and non-cash expenses) were $617,477 for the year ended September 30, 2011, a 32% decrease as compared to $917,878 for the year ended September 30, 2010. This significant reduction in Bella Vista operating expenses is a direct result of the restructuring plan the Board of Directors began in 2007. Further, it is a clear and definitive indication of the Bella Vista Board’s success and ongoing commitment to minimize controllable expenses and provide an efficient and cost effective controlled liquidation of the Bella Vista portfolio.
REO expenses were $473,282 for the year ended September 30, 2011, a 36% decrease as compared with $741,149 during the year ending September 30, 2010. The decrease is due to the sale(s) of a number of REO properties.
We recorded impairment charges totaling $1,331,481 for the year ended September 30, 2011; a 73% decrease as compared with $5,010,749 for the year ended September 30, 2010. The impairments reported for the year ended September 30, 2011, were related to certain investments whose values had declined due to the continuing decreases in real estate prices and the carrying costs associated with longer than normal projected holding periods and marketing times. The recorded impairments for the year ended September 30, 2010 related to certain investments that declined in value due to then current prevailing real estate market conditions coupled with lower than projected sales rates. We have impaired these investments based on estimates of the decrease in value (supported with third party input) and the increase in carrying and operating costs associated with either holding or renting these properties for periods longer than originally projected due to the continued weakness and highly uncertain conditions in the real estate and credit markets.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity means the need for, access to and uses of cash. Our principal sources of liquidity are the sale of the REO properties and the repayment of our real estate investments. Our principal uses of cash are to fund obligations under existing loan commitments, costs of operating and holding investments in real estate development for future sales, and operating expenses. If the net proceeds or timing of the sale of our REO properties or the timing and repayments from our real estate investments are insufficient or are substantially delayed when compared to the ongoing cash required to fund REO expenses, interest payments and operating expenses, the Company will likely be required to borrow additional funds to address the shortfall in amount and/or timing. Given the current market weakness that continues to result in lower sale prices and slower property sales, we anticipate that the Company may need to borrow additional funds to support operations for the next twelve months. Further, the Company cannot provide any assurance that we will be successful in obtaining additional funds on terms acceptable to the Company.
Sources of Cash
At September 30, 2011 we had cash and cash equivalents of $53,709 and our primary sources of liquidity were proceeds from the sale of our completed investments in REO properties, payoffs of loans receivable, interest from investments in trust deeds that paid interest monthly, our lines of credit and cash on hand. Subsequent to September 30, 2011, through the date of this filing, the Company has continued to have adequate investment payoffs and revenue to meet ongoing obligations.
We typically receive repayment on our investments when a development project has been completed and sold or refinanced to third parties. Accordingly, our repayments are a function of our developers’ ability to complete and sell the development properties in which we have invested. We received repayments totaling approximately $2.3 million during the year ended September 30, 2011 a 74% decrease as compared with approximately $8.8 million during the year ended September 30, 2010. This decrease was due to decreased demand for the specific assets remaining in the portfolio as well as a smaller inventory of properties in the portfolio as a result of the $8.8 million of sales in the prior year (FY 2010). Due to the continued weakness and uncertainty in the real estate and credit markets in 2011, there continues to be a high degree of uncertainty in estimating the timing of the sales or the amount of proceeds we might receive from the future sale or refinancing of our properties.
Therefore, it is possible that our repayments may not be sufficient to meet our commitments including REO and Bella Vista Capital operating expenses and we may be forced to sell assets or seek financing at terms that may be unfavorable. This would have a negative impact on the estimated net realizable value of our assets.
We have two lines of credit secured by our Brighton and Pulgas investments, the two lines total $3.0 million of which $3.0 million was outstanding as of September 30, 2011.
The Company expects to continue to borrow against its real estate assets or sell its real estate projects in order to fund REO expenses, BVC operating expenses, and retire the Company’s indebtedness. The Company believes that it has adequate resources to secure necessary financing and assure its liquidity for the foreseeable future, but it cannot predict with certainty the availability or terms of any such financing.
Uses of Cash
Investment Funding
We invested approximately $1.2 million in the completion of continuing development projects during the year ended September 30, 2011; a 14% decrease as compared with approximately $1.4 million for the year ended September 30, 2010. At September 30, 2011, we estimated the costs to complete our Investments in Real Estate Developments plus the remaining funding obligation on our Joint Venture Investments in Real Estate Developments to be approximately $426,000. All of these estimated costs relate to tenant improvements at the remaining retail space in East Palo Alto and will not be incurred until a tenant has been secured; consequently the timing is currently unknown.
Stock Repurchases and cancellations
We used no cash to repurchase BVC common stock during the years ended September 30, 2011 or September 30, 2010. Any stock repurchases are contingent upon us having available cash in excess of our working capital needs.
Stockholder Liquidity and Realizable Value of Investments
In the past, provided that certain or our liquidity requirements were satisfied, we have provided liquidity to our stockholders through the repurchase of outstanding shares. Because our stock does not trade in any secondary market, no market value exists for our stock and another method must be used to determine the repurchase price. The Board of Directors has used the net realizable value of our assets as well as an assessment of the risk profile for each of the assets in the portfolio to guide in the determination of the repurchase price for planned repurchases as well as Company repurchases in response to unsolicited tender offers.
The realizable value of our assets represents our current estimate of the amount of proceeds we expect to receive once our investments are completed and ready for sale. The estimate relies on a number of assumptions including the expected value of the investment once completed, less applicable selling costs, the remaining costs and the length of time required to complete the project. Many factors outside of our control can cause changes in these estimates and produce significantly different results. Furthermore, as noted above, there is no organized public market for our shares, so our calculation of the estimated realizable value of its assets per outstanding share should not be viewed as an estimate of any market value per share, and there can be no assurance as to the amount or timing of any investment returns on the shares.
Since June 2005, we have not used funds to pay dividends or distributions or, except in certain extraordinary circumstances, to redeem shares. Such extraordinary circumstances have included us making tender offers in response to unsolicited third party tender offers which the Board deemed inadequately priced and opportunistic. Our Board will determine the timing and terms of any future share redemptions based on available liquidity, net realizable value, and assessment of the risk profile for each of the investments in the portfolio.
The information presented below reconciles the differences between the carrying value of our investments based on US GAAP and the estimated realizable value of our investments.
Net Realizable Value of Assets per Share
The following calculation determines the estimated net realizable value per share of stock:
Our estimated net realizable value of assets per share (NRV) was $1.48 as of September 30, 2011. This represents a decrease of $0.22 during the year ended September 30, 2011. This compares with the September 30, 2010 NRV of $1.70. The decrease was primarily attributable to decreases in the estimated realizable value of some of the portfolio assets as a result of the decline in real estate values combined with the ongoing REO carrying costs and operational expenses of the Company.
Off-Balance Sheet Arrangements
As of September 30, 2011, we had no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operation covers our financial statements, which have been prepared in accordance with accounting principles generally, accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to the valuation of our assets and liabilities. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect the more significant judgments and estimates used in the preparation of its consolidated financial statements.
Valuation of Investments
All of our Acquire, Develop, and Construct loans (ADC loans) are classified for financial reporting purposes as joint venture investments in real estate developments. We have taken ownership on some ADC loans that are classified as investments in real estate developments. Such investments are stated at the lower of cost or fair value. The determination of fair value is a complex task and subject to various assumptions regarding the underlying property. Management conducts a review for impairment on an investment-by-investment basis whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges), typically from the sale of a completed property, are less than the carrying amount of the investment, plus estimated costs to complete. The estimation of expected future net cash flows is inherently uncertain and relies to a considerable extent on assumptions regarding current and future economics and market conditions. If, in future periods, there are changes in the estimates or assumptions incorporated into the impairment review analysis, the changes could result in an adjustment to the carrying amount of the investments. To the extent that there is impairment, the excess of the carrying amount of the investment over its estimated fair value, less estimated selling costs, will be charged to income. We believe that all of our investments are carried at the lower of cost or fair value; however, conditions may change and cause our ADC loans and investments in real estate to decline in value in a future period.
Loan Accounting
In accordance with the ADC accounting rules, we treat these loans as if they were real estate joint ventures, and thus we do not accrue income for interest and points until the sale or refinancing of a property. Revenue from interest and points from these ADC loans is recognized as cash is received from the sale or refinancing of such properties. ADC loans are classified as joint venture investments in real estate developments and include amounts funded under the loan agreements. If our ADC loans qualified as loans under GAAP, interest and points would be recognized as income in periods prior to the sale of the underlying property.
In addition to ADC loans, we have made direct equity investments in real estate joint ventures. These joint venture investments are accounted for in the same manner as our ADC loans and are classified as joint venture investments in real estate developments. During the year ended September 30, 2008, we acquired control and became the 100% owner of two of our joint ventures investments; MSB Brighton, a multi-unit condominium conversion in California and Cummings Park Associates, a residential and retail project in East Palo Alto. As discussed earlier, due to weak market conditions we chose to convert MSB Brighton to a rental property and thus classified it as an investment in rental property on our consolidated financial statements. Cummings Park Associates continues to be carried as REO Rental Property on our consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required by this item are included in this Form 10-K beginning on page FS-1.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
Evaluation of Effectiveness of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of September 30, 2011. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that our disclosure controls and procedures were not effective as of September 30, 2011 due to the weakness in internal control described below.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of September 30, 2011 based on the framework set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness in internal control over financial reporting is defined by the Public Company Accounting Oversight Board’s Audit Standard No. 5 as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting. Based on this evaluation, management concluded that our internal control over financial reporting was not fully effective as of September 30, 2011.
Management’s assessment identified the following weakness in internal control over financial reporting: the changes in personnel and systems during fiscal 2008, and continuing though subsequent periods, has reduced management’s ability to maintain the financial control system and produce timely financial statements.
In order to address this deficiency, the Company’s management and the Board of Directors decided to meet on a regular basis to review and approve significant transactions affecting the financial statements, to review the financial information reported on forms 10-Q and 10-K, and to seek expertise as deemed necessary in critical accounting and financial reporting matters.
This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting during the period ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Our Board of Directors consists of three director positions. Our directors, executive officers and senior officers and their positions, as of the date of this filing, are:
The business background and experience of our directors and executive officers is as follows:
William Offenberg, age 59, has been a member of the Board since July 2005. Prior to joining the Board, Mr. Offenberg acted as a consultant to the Board since July 2004. From 1998 to 2005, Mr. Offenberg was an Operating Partner at Morgenthaler Partners, a $2 billion private equity firm, where he specialized in recapitalizations and leveraged buyouts. In his capacity as Operating Partner, Mr. Offenberg has served in a variety of executive and board positions at various Morgenthaler portfolio companies. Between 1993 and 1997, Mr. Offenberg was President and Chief Executive Officer of Gatan International, a developer of scientific instrumentation. Prior to joining Gatan, Mr. Offenberg was President of Spectra-Physics Analytical from 1986 to 1993. Between 1977 and 1986, Mr. Offenberg held various management positions at Perkin-Elmer's Instrument Group. Mr. Offenberg began his career as a chemist at Atlantic Richfield. Mr. Offenberg has degree in Chemistry from Bowdoin College and did graduate work in analytical chemistry at Indiana University.
Jeffrey Black, age 58 is a Senior Vice President in the Silicon Valley office of CBRE, a national real estate company, where he has worked since 2009. In his 35 years as a real estate broker, he has concluded real estate transactions in excess of $2 billion. Notable clients that Mr. Black has represented include eBay, Altera, Amdahl, AT&T, Exxon Corporation, Marriott, TRW Corporation, Thermo Scientific, Steelcase, Advanced Micro Devices and Ernst & Young. He has been named one of the Top 225 Brokers Nationwide (CBRE 2010); No. 4 Broker in Silicon Valley (San Jose Business Journal 2003); the Hall of Fame Award (Association of Silicon Valley Brokers 1997). Mr. Black has a Bachelor’s of Science and Commerce degree in Finance from Santa Clara University.
Patricia Wolf, age 66, joined the Ottawa University Board of Trustees in 1993 and served as Chair of the Board from 2006 to 2009. She was strategically involved in major university events including the opening of new campuses in new markets and in the selection of it current president. She has been recognized for outstanding leadership during a period of significant change. In 2010 she received the University's most prestigious award for her lasting significance and contribution to the University. From 1986 until 2002 she was employed by Management Technology America, the computer software company she founded in 1986. As a result of her emphasis on performance and her expertise in organizational growth and development, Management Technology America was acquired in 1999 by a company listed on the NYSE. She continued leading the company from 1999 to 2002. Mrs. Wolf has been recognized as an outstanding achiever with various organizations. She holds a Bachelor’s degree in Business Administration and a Master’s degree in Management, both from Ottawa University.
Terms of Directors and Officers
Our Board of Directors consists of the number of persons as shall be fixed by the Board of Directors from time to time by resolution to be divided into three classes, designated Class I, Class II and Class III, with each class to be as nearly equal in number of directors as possible. Currently there are three director positions. Ms. Wolf is a Class I director and her term expires as of the annual meeting of shareholders for the fiscal year ended in 2012. Mr. Black is a Class II director and his term expires as of the annual meeting for the fiscal year ended in 2013. Mr. Offenberg is a Class III director and his term expires as of the annual meeting for the fiscal year ended in 2011. At each annual meeting, the successors to the class of directors whose term expires at that time are to be elected to hold office for a term of three years, and until their successors are elected and qualified, so that the term of one class of directors expires at each annual meeting.
The full Board acts to nominate candidates for the Board, as there is no separate nominating committee. There have been no changes during the year covered by this report in the procedures for nomination or by which shareholders may recommend nominees to the Board.
For any vacancy on the Board of Directors, including a vacancy created by an increase in the number of directors, the vacancy may be filled by election of the Board of Directors or the shareholders, with the director so elected to serve until the next annual meeting of shareholders, if elected by the Board of Directors, or for the remainder of the term of the director being replaced, if elected by the shareholders; any newly-created directorships or decreases in directorships are to be assigned by the Board of Directors so as to make all classes as nearly equal in number as possible. Directors may be removed only for cause and then only by vote of a majority of the combined voting power of shareholders entitled to vote in the election for directors. Subject to the voting rights of the holders of the stock, the charter may be amended by the vote of a majority of the combined voting power of shareholders, provided that amendments to the article dealing with directors may only be amended if it is advised by at least two-thirds of the Board of Directors and approved by vote of at least two-thirds of the combined voting power of shareholders. The effect of these as well as other provisions of our charter and bylaws may discourage takeover attempts and make more difficult attempts by shareholders to change management.
Executive officers are appointed by the Board of Directors, serve at the Board’s pleasure and may be removed from office at any time without cause. There are no family relationships among any of our directors or executive officers.
Audit Committee
The Company has no separate audit committee. The Board of Directors acts as the audit committee for all purposes relating to communications with the auditors and responsibility for oversight of the audit.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of copies of the Forms 3, 4 and 5 and amendments thereto furnished to the Company with respect to the fiscal year ended 2011, or written representations that no such reports were required to be filed with the Securities and Exchange Commission, except as described below, the Company believes that during the year ended September 30, 2011, all directors and officers of the Company and beneficial owners of more than 10% of any class of equity securities of the Company registered pursuant to Section 12 of the Exchange Act filed their required Forms 3, 4, or 5, as required by Section 16(a) of the Securities Exchange Act of 1934, as amended. As of December 2010, Company director Jeffrey Black's beneficial ownership of the Company's stock was reduced by a total of 28,000 shares upon a distribution to trust beneficiaries of shares held in a family trust of which Mr. Black was a trustee. Mr. Black did not file a Form 4 at that time as required under Section 16(a).
Code of Ethics
The Company has adopted a Code of Ethics applicable to the Chief Executive Officer, the Chief Financial Officer, and the principal accounting officer. The Company's Code of Ethics is incorporated by reference as Exhibit 14.1 to this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Officers
Summary Compensation Table
Outstanding Equity Awards at Fiscal Year-End
Compensation of Directors
As Chairman of the Board and director, Mr. Offenberg received $35,000, Mr. Black and Ms. Wolf each received $25,000 for their participation in our standard board meetings. All directors are also compensated $1,000 for each board meeting they attend, other than the regular quarterly board meetings.
As has been previously disclosed in all of the Company’s prior relevant filings, on September 25, 2007, the Company entered into a compensation agreement with William Offenberg to assume the role of Executive Chairman of the Board which was later transitioned to the role of Chief Executive Officer. At the last annual meeting Mr. Offenberg’s responsibilities were expanded to include the duties of Chief Financial Officer as well. The compensation paid under such agreement to Mr. Offenberg during the fiscal year covered by this report is shown under the “All Other Compensation” column in the above table.
Our charter obligates us to indemnify our directors and officers and to pay or reimburse expenses for such individuals in advance of the final disposition of a proceeding to the maximum extent permitted from time to time by Maryland law. The Maryland General Corporation Law, the "Maryland GCL'', permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities, unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith, or (2) was a result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services, or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table presents information regarding the beneficial ownership of the only known beneficial owners of in excess of 5% of our outstanding common shares.
Security Ownership of Certain Beneficial Owners
The following table presents information regarding the beneficial ownership of our capital stock as of September 30, 2011 of: (1) each of our directors and executive officers; and (2) all of our directors and executive officers as a group. Unless otherwise indicated in the footnotes to the table, the beneficial owners named have, to our knowledge, sole voting and investment power with respect to the shares beneficially owned, subject to community property laws where applicable.
* Less than one percent of our outstanding capital stock.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
One of the three current members of the Board, William Offenberg acts as an executive officer of the Company and cannot be considered an independent director; Mr. Black was chief financial officer of the Company until April 2010 and cannot be considered an independent director as he held such officer during the previous three years; and Ms. Wolf is considered an independent director, as that term is defined under New York Stock Exchange Rule Section 303A, the NYSE’s Corporate Governance Rules. Under those Rules, no director qualifies as “independent” unless the Board of Directors affirmatively determines that the director has no material relationship with the Company (directly or as a partner, shareholder or officer of an organization that has a relationship with the Company). Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, among others. However, as the concern is independence from management, the NYSE does not view ownership of even a significant amount of stock, by itself, as a bar to an independence finding. Accordingly, while Mr. Black and Ms. Wolf own shares of the Company’s common stock, the Board views these directors/nominees as independent under these standards. In addition, a director is not independent under the NYSE Rules if: (i) the director is, or has been within the last three years, an employee of the Company, or an immediate family member is, or has been within the last three years, an executive officer, of the Company; (ii) the director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $100,000 in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service; (iii) (A) the director or an immediate family member is a current partner of a firm that is the Company’s internal or external auditor; (B) the director is a current employee of such a firm; (C) the director has an immediate family member who is a current employee of such a firm and who participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice; or (D) the director or an immediate family member was within the last three years (but is no longer) a partner or employee of such a firm and personally worked on the Company’s audit within that time; (iv) the director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of the Company’s present executive officers at the same time serves or served on that company’s compensation committee; or (v) the director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the Company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues.
Two of our directors have made secured loans to the Company. See Note 9 to the consolidated financial statements contained in Form 10-K that begin on page FS-1. In addition, one of our directors made a short term unsecured loan to the Company in December 2010, as described in Note 9 to the consolidated financial statements contained in Form 10-K that begin on page FS-1.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Company accounts for the expenses associated with accounting fees (audit and tax) in the year in the year in which the expenses are actually occurred for services provided. The following table presents the expenses actually incurred by the Company for such fees and services during:
Tax fees are comprised of fees related to the preparation and filing of the Company’s federal and applicable state tax
return(s).
The Company does not have an independent audit committee, and the full board of directors therefore serves as the audit committee for all purposes relating to communication with the Company’s auditors and responsibility for the Company audit. All engagements for audit services, audit related services and tax services are approved in advance by the full board of directors of the Company. The Company's Board of Directors has considered whether the provision of the services described above for the years ended September 30, 2011 and 2010 is compatible with maintaining the auditor’s independence.
All audit and non-audit services that may be provided by our principal accountant to the Company shall require pre-approval by the Board. Further, our auditor shall not provide those services to the Company specifically prohibited by the Securities and Exchange Commission, including bookkeeping or other services related to the accounting records or financial statements of the audit client; financial information systems design and implementation; appraisal or valuation services, fairness opinion, or contribution-in-kind reports; actuarial services; internal audit outsourcing services; management functions; human resources; broker-dealer, investment adviser, or investment banking services; legal services and expert services unrelated to the audit; and any other service that the Public Company Oversight Board determines, by regulation, is impermissible.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Financial Statements. The following financial information is included as a separate section of this Annual Report on Form 10-K:
1.
Report of Independent Registered Public Accounting Firm
2.
Consolidated Balance Sheets as of September 30, 2011 and 2010
3.
Consolidated Statements of Operations for the years ended September 30, 2011 and 2010
4.
Consolidated Statement of Shareholders’ Equity for the years ended September 30, 2011 and 2010
5.
Consolidated Statements of Cash Flows for the years ended September 30, 2011 and 2010
6.
Notes to Consolidated Financial Statements for the years ended September 30, 2011 and 2010
b. Exhibits. Exhibits submitted with this Form 10-K, as filed with the Securities and Exchange Commission, or those incorporated by reference to other filings are:
c. Financial Statement Schedules
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Bella Vista Capital, Inc.
We have audited the accompanying consolidated balance sheets of Bella Vista Capital, Inc., as of September 30, 2011 and 2010 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended. Bella Vista Capital, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bella Vista Capital, Inc. as of September 30, 2011 and 2010 and the results of its consolidated operations and its consolidated cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
PMB Helin Donovan, LLP
San Francisco, California
July 11, 2013
FS-1
BELLAVISTA CAPITAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 30, 2011 AND 2010
FS-2
BELLAVISTA CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2011 AND 2010
FS-3
BELLAVISTA CAPITAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2011 AND 2010
FS-4
BELLAVISTA CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2011 AND 2010
FS-5
1. ORGANIZATION AND BUSINESS:
Organization
Bella Vista Capital, Inc., a Maryland corporation (the Company, our, we), was formed on March 18, 1999 and commenced operations effective May 1, 1999. We have been engaged in the business of investing in real estate development projects, primarily in California. Our investments are structured as loans secured by real estate, loans made to real estate development entities and joint venture investments in real estate development entities. We are organized in a single operating segment for purposes of making operating decisions and assessing performance. Bella Vista Capital, Inc. is also the 100% shareholder of Frank Norris Condominiums Inc., which is a California corporation formed for the purpose of owning and selling residential real estate. The Company holds a 100% interest in Cummings Park Associates, LLC a California Limited Liability Company formed to develop and sell a mixed use residential and retail project in East Palo Alto California. The Company also holds a 100% interest in MSB Brighton LLC, currently operated as a rental property. Additionally, the Company holds at 69.22% interest in 1472 Investors, LLC, currently operated as a rental property.
The financial statements are presented on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business as the company proceeds with is previously discussed plans for a controlled liquidation. The Company has experienced significant losses and expects to continue to generate negative cash flows due to REO and operating expenses. The Company’s ability to continue as a going concern is, therefore, dependent upon its ability and the timing to sell its existing real estate investments and obtain additional funds from those net proceeds and further borrowings, if necessary. Failure to do so would result in a depletion of its available funds. The Company believes that it currently has sufficient cash and financial resources to meet its REO and operating requirements over the next year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation Policy
The consolidated financial statements include the accounts of Bella Vista Capital, Inc. and its wholly owned subsidiaries: MSB Brighton LLC, Frank Norris Condominiums Inc., Cummings Park Associates, LLC and 1472 Investors, LLC. All intercompany accounts and transactions have been eliminated in consolidation. We have entered into various joint venture agreements with unrelated third parties to hold or develop real estate assets. We must determine for each of these joint ventures whether to consolidate the entity or account for our investment under the equity or cost basis of accounting. Investments acquired or created are evaluated based on the accounting guidance relating to variable interest entities (“VIEs”), which requires the consolidation of VIEs in which we are considered to be the primary beneficiary. If the investment is determined not to be a VIE, then the investment is evaluated for consolidation (primarily using a voting interest model) under the remaining consolidation guidance relating to real estate. If we are the general partner in a limited partnership, or manager of a limited liability company, we also consider the consolidation guidance relating to the rights of limited partners or non-managing members, as the case may be, to assess whether any rights held by the limited partners, or non-managing members, as the case may be, overcome the presumption of control by us. We evaluate our accounting for investments on a quarterly basis or when a reconsideration event (as defined in GAAP) with respect to our investments occurs. The analysis required to identify VIEs and primary beneficiaries is complex and requires substantial management judgment. Accordingly, we believe the decisions made to choose an appropriate accounting framework are critical.
Use of Estimates
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Valuations of investments in real estate include management’s best estimates of the amounts expected to be realized on the sale of its investments. The estimates are based on an analysis of the properties, including certain inherent assumptions and estimates that are involved in preparing such valuations. The amounts the Company will ultimately realize could differ materially in the near term from these estimates.
FS-6
Net Earnings per Share
Earnings per common share is computed on the weighted average number of common shares outstanding during each year. Basic earnings per share is computed as net income/loss applicable to common stockholders divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities when the effect would be dilutive.
Loans Receivable Secured By Real Estate
We have originated loans secured by real estate. These loans are secured by deeds of trust on real property, accrue interest on a monthly basis and are typically additionally collateralized by personal guarantees from the principals of our borrowers. We recognize interest income on these loans during the period in which the interest is earned and recognize income on any loan fees charged under the effective interest method.
We establish and maintain credit reserves for loans receivable secured by real estate based on estimates of credit losses inherent in these loans as of the balance sheet date. To calculate the credit reserve, we assess inherent losses by determining loss factors (defaults, the timing of defaults, and loss severities upon defaults) that can be specifically applied to each loan. We follow the guidelines of ASC 310-10-S99-4 “Accounting for Loan Losses”, and ASC 450-10-05 “Loss Contingencies”, in setting credit reserves for our residential and commercial loans. We follow the guidelines of ASC 310-10-35-16 “Assessing Whether a Loan is Impaired”, in determining impairment on commercial real estate loans.
Joint Venture Investments in Real Estate Developments
Our joint venture investments in real estate developments are comprised of loans, known as Acquisition, Development, and Construction loans (“ADC Loans”), which are secured by real estate and have many characteristics of joint venture investments and investments in real estate joint ventures.
ADC Loans
We have originated secured loans to acquire, develop and construct residential real estate. These loans contain many of the following characteristics which are identified with ADC loans:
1.
The lender has agreed to provide all or substantially all necessary funds to acquire, develop or construct the property. The borrower has title to but little or no cash equity in the project;
2.
The lender funds substantially all the interest and fees during the term of the loan by adding them to the loan balance;
3.
Typically, the lender’s only security is the project itself. The lender has no recourse to other assets of the borrower, and the borrower does not guarantee the debt;
4.
In order for the lender to recover its investment in the project, the property must be sold to independent third parties or the borrower must obtain refinancing from another source.
Because our ADC loans contain many of the characteristics of investments in real estate, they are classified for financial reporting purposes as joint venture investments in real estate developments (Note 4). ADC loans with no equity participation interest are stated at the lower of cost or fair value and accounted for as an investment in real estate. Revenue from interest and points is recognized as cash is received from the sale or refinancing of such properties. ADC loans that include an equity participation interest are accounted for in the same manner as joint venture investments in real estate developments. ADC loans include amounts funded under the loan agreements and capitalized interest expense, where applicable. If our ADC loans qualified as borrowings under US GAAP, interest and points would be recognized in income as earned instead of at the time of sale of the underlying property.
Joint Venture Investments in Real Estate
We provide equity capital to real estate developers necessary to acquire, develop and construct real estate developments. Such investments are structured as membership interests in the development entity. We account for such investments using the equity method of accounting.
FS-7
Management conducts a review for impairment on an investment-by-investment basis whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable, or at least quarterly. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges), typically from the sale of a completed property, are less than the carrying amount of the investment, which does not include accrued interest and points. The estimation of expected future net cash flows is inherently uncertain and relies to a considerable extent on assumptions regarding current and future economic and market conditions. If, in future periods, there are changes in the estimates or assumptions incorporated into the impairment review analysis, the changes could result in an adjustment to the carrying amount of the investments. To the extent impairment has occurred, the excess of the carrying amount of the investment over its estimated fair value, less estimated selling costs, is charged to operations.
Investments in Real Estate Developments
Investments in Real Estate Developments represent development projects that the Company has obtained through foreclosure of its mortgage loans or controls by virtue of its operating agreements with development entities, and relate to real properties for which the Company has a controlling ownership interest. We consolidate the assets and liabilities of these Investments in Real Estate Developments in our financial statements. The Company’s basis in the projects is the carrying amount of the project at the time of loan foreclosure. Management conducts a review for impairment of these assets on an investment-by-investment basis whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, but not less frequently than quarterly. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges), typically from the sale of a completed property, are less than the carrying amount of the investment, which does not include accrued interest and points. The estimation of expected future net cash flows is inherently uncertain and relies to a considerable extent on assumptions regarding current and future economic and market conditions. If, in future periods, there are changes in the estimates or assumptions incorporated into the impairment review analysis, the changes could result in an adjustment to the carrying amount of the investments. To the extent impairment has occurred, the excess of the carrying amount of the investment over its estimated fair value, less estimated selling costs, is charged to operations.
Cash and Cash Equivalents
Cash and cash equivalents include cash held in financial institutions and other highly liquid short-term investments with original maturities of three months or less.
Income Taxes
Our taxable income differs from income measured in accordance with generally accepted accounting principles in the United States of America due to timing differences in the recognition of income from our ADC loans and REO properties. For tax purposes, interest and points are accrued as income according to the terms of our loan contracts, but not recognized under generally accepted accounting principles in the United States of America until the contract has been paid through sale or refinancing of the secured property.
The Company uses the asset and liability method whereby deferred tax assets and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
Recent Accounting Pronouncements:
Recent accounting standards that have been issued or proposed by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
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3. LOANS RECEIVABLE SECURED BY REAL ESTATE:
As of September 30, 2011, loans receivable secured by real estate summarized by location consisted of the following:
As of September 30, 2010, loans receivable secured by real estate summarized by location consisted of the following:
Loans Receivable Secured by Real Estate consist of loans to real estate developers which are secured by deeds of trust on real property, accrue interest monthly and generally have repayment guarantees from the principals of the borrowing entity. Management has evaluated the underlying collateral of loans in default and believes no impairment exists at the balance sheet dates.
As of September 30, 2011, $2,490,394 of these loans was secured by first trust deeds and $158,740 was secured by second trust deeds. As of September 30, 2010, $2,936,540 of these loans was secured by first trust deeds and $944,749 was secured by second trust deeds. At September 30, 2011, no loans were in default and we have recognized cumulative impairments on four (4) of our loans receivable totaling $758,234. As of September 30, 2010, six (6) loans totaling $1,402,839 were in default under the terms of our loans and we have recognized cumulative impairments on seven (7) of our loans receivable totaling $1,146,022.
Provision for impairment of loans receivable secured by real estate amounted to $264,379 and $953,027 for the years ended September 30, 2011 and 2010, respectively.
4. JOINT VENTURE INVESTMENTS IN REAL ESTATE DEVELOPMENTS:
As of September 30, 2011, joint venture investments in real estate developments summarized by location consisted of the following:
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As of September 30, 2010, joint venture investments in real estate developments summarized by location consisted of the following:
Joint Venture Investments in real estate developments consist of ADC loans and joint investments with real estate developers. ADC Loans, are loan arrangements that are typically secured by real property, provide for the payment of interest from an interest reserve established from loan funds and may also, provide for the payment of a share of project profits. Joint Venture investments are equity investments in operating entities formed for the purpose of developing real estate. Our investment typically earns a preferred return calculated based on our investment amount at a specific rate during the term of the investment and a share of the project profits.
Provision for impairment of joint venture investments in real estate developments amounted to $238,346 and $900,156 for the years ended September 30, 2011 and 2010, respectively.
Non controlling Interest
The Company accounts for the non-controlling interest of 32.2% in 1472 Investors, LLC in the consolidated financial statements classified as a separate component of equity. In addition, net earnings are attributed to both the Company and non controlling interest.
5. INVESTMENTS IN REAL ESTATE DEVELOPMENTS:
Investments in Real Estate Developments include real estate development projects we own, either directly or through a subsidiary company we own or control. The following table summarizes our Investments in Real Estate Developments by location as of September 30, 2011:
The following table summarizes our Investments in Real Estate Developments by location as of September 30, 2010:
Provision for impairment of investments in real estate developments amounted to $245,733 and $2,506,237 for the years ended September 30, 2011 and 2010, respectively.
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6. INVESTMENT IN RENTAL PROPERTY:
During 2009, the Company acquired control and became the 100% owner of the joint venture investment MSB Brighton LLC, a multi-unit condominium conversion in Modesto, California. Management converted this property from a held-for-sale to a rental. During 2010, the Company foreclosed on a 14 unit retail property in San Jose, California. Additionally, in December 2010, the Company took control of a rental project on International Blvd in Oakland CA. At September 30, 2011 and 2010, the rental properties are summarized as follows:
Depreciation expense related to investments in rental properties amounted to $116,232 and $107,204 for the years ended September 30, 2011 and 2010, respectively and is included in the statement of operations under Rental Expenses.
Provision for impairment of investments in rental properties amounted to $583,023 and $651,329 for the years ended September 30, 2011 and 2010, respectively.
7. NOTES PAYABLE:
Notes payable as of September 30, 2011 and 2010 consisted of the following:
The Alum Rock secured note was assumed by the Company during the year ended September 30, 2010. The note is secured by the Alum Rock rental property that is owned by the Company. The loan bears interest in year one at a rate of 7.5%, year two at 8.5% and year three at 9.5%, and matures on March 1, 2013. In December 2010, the interest rate was modified and reduced to 6.0% for the remainder of the term of the note. Interest-only payments are due monthly on the outstanding balance.
The Company financed the purchase of the D & O Liability policy. The rate and terms are favorable to the Company.
The Cummings Park Note was originated for the purpose of financing the construction of a residential and retail mixed use project in East Palo Alto, California. The original amount of the note was $14.9 million. The note is owed by Cummings Park Associates, LLC and is secured by the real property that is owned by Cummings Park Associates, a wholly owned subsidiary of the Company. The note matured on June 30, 2011 and the lender, Wells Fargo, would not extend the maturity date. This Note was paid off in August of 2011.
The Cummings Park Private Note is an obligation of Cummings Park Associates, a wholly owned subsidiary of the Company. This new Note completed a refinancing of a note payable to Wells Fargo. The Company obtained new financing in the amount of $635,000. The interest rate on the note is fixed at 8% per annum and matures in August 2012. The new financing was provided by Mr. Jeff Black, a Director of the Company. The interest rate on the note payable to Mr. Black is the same as the interest rate charged by Wells Fargo during the preceding 12 months.
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The $1,500,000 Brighton line of credit, of which $1,500,000 is outstanding as of September 30, 2011, is secured by our Brighton rental property in Modesto, California through our wholly-owned investment in MSB Brighton LLC. The line bears interest at 11.5%. Interest-only payments are due monthly on the outstanding balance. The line matures on October 1, 2012. A portion of the outstanding balance at September 30, 2011, is due to certain related parties (see Note 9). This note was paid in full in August 2012. (Note 12).
The $1,500,000 Pulgas line of credit, of which $1,500,000 is outstanding as of September 30, 2011, is secured by one of our direct investments in real estate in East Palo Alto, CA. The line bears interest at 11.5%. Interest-only payments are due monthly on the outstanding balance. The line matures on February 1, 2012, and is due to certain related parties (see Note 9). This note was paid in full in August 2012, (Note 12).
8. SHAREHOLDERS’ EQUITY:
There is currently no public trading market for our stock. We are authorized to issue up to 50,000,000 shares of Common Stock. As of September, 2011 we have repurchased and cancelled 1,564,097 shares in connection with legal settlements and 6,747,822 shares under tender offers at various prices. At September 30, 2011 and 2010 we had 11,171,433 shares of Common Stock outstanding.
The Company had an investment in a promissory note which was secured by two commercial properties in Oakland, CA. In December 2010, 1472 Investors, LLC, which was formed by the investors of the promissory note, foreclosed on the properties. The Company held a 67.8% ownership interest in the promissory note and therefore holds a 67.8% ownership interest in 1472 Investors, LLC. Accordingly, the Company consolidates 1472 Investors, LLC as a majority-owned subsidiary. The remaining ownership interest of the minority owners of 32.2% is reported in the Company’s financial statements as non-controlling interest
The Company has not declared or paid any dividends on its capital stock during the period from January 1, 2005 through the date of this report.
During the years ended September 30, 2011 and 2010, the Company made no stock repurchases or cancellations.
9. TRANSACTIONS WITH AFFILIATES
During the year ended September 30, 2009, the Company obtained lines of credit that were partially or fully funded by some of its directors. The terms of these relationships and lines of credit have been previously disclosed in the Company’s quarterly 10-Q filings, the Company’s Annual 10-K filings and are detailed below.
It should be noted that both lines of credit were structured such that the Company could draw on them only as needed and repay principal at any time cash became available. In this way, the total interest costs paid by the Company would be minimized. Therefore, the principal balances of both these lines of credit fluctuate based on the draws and pay downs. These lines have been funded through advances by two related parties and two independent third party private lenders.
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Brighton line of credit - The $1,500,000 line of credit had an outstanding balance of $1,500,000 as of September 30, 2011 and 2010. The line is secured by our MSB Brighton rental property in Modesto, California through our wholly-owned investment in MSB Brighton LLC. The line bears interest at 11.5% and matures on October 1, 2012. Interest-only payments are due monthly on the outstanding balance. This line of credit is partially funded by two of our directors, William Offenberg and Jeffrey Black. Of the $1,500,000 outstanding balance at September 30, 2011, $795,000 is owed to these parties. Since inception of the note Mr. Offenberg has sold and/or assigned $1,120,000 of his portion of the note balance to Mr. Black or other unrelated third party private lenders. Since inception of the note Mr. Black has purchased $300,000 of the note balance from Mr. Offenberg or other unrelated third party private lenders. The following table sets forth the amounts attributed to each affiliated party:
Pulgas line of credit - The $1,500,000 line of credit had an outstanding balance of $1,500,000 as of September 30, 2011 and 2010. The line is secured by one of our direct investments in real estate in East Palo Alto, California. The line bears interest at 11.5% and matures on February 1, 2012. Interest-only payments are due monthly on the outstanding balance. This line of credit is principally funded by one of our directors, William Offenberg. The full balance at September 30, 2011 was owed to Mr. Offenberg. The following table sets forth the amounts attributed to each affiliated party:
Short Term Unsecured Loan
In December 2010 the Company borrowed $106,000 from Mr. Offenberg to pay REO property taxes. The company would have incurred a 10% penalty on property taxes due on December 10, 2010. The company borrowed funds for a period of approximately 40 days to avoid these substantial penalties. The note was paid back in January 2011 with interest at a rate of 1% per month.
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10. INCOME TAXES
At September 30, 2011 and 2010, we had U.S. federal net operating loss carried forward of approximately $ 126.7 million and $126.5 million, respectively which expire in various amounts between the years 2016 and 2031. If there is a change in ownership, utilization of the U.S. net operating losses may be subject to substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986, as amended and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.
Operating Loss Carried forward
Operating loss carried forward consisted of the following at September 30, 2011:
Deferred Taxes
The significant components of the Company's deferred tax assets are as follows:
As of September 30, 2011 and 2010, the Company and its subsidiaries had provided valuation allowances of approximately $50.7 million and $58.4 million, respectively, in respect of deferred tax assets resulting from tax loss carried forward and temporary timing differences in the reporting of revenues and expenses because it is more likely than not that the carry forwards may expire unused and that future tax deductions may not be realized through future profitable operations.
The following table presents the income tax provision for federal and state income taxes for the years ended September 30, 2011 and 2010:
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11. COMMITMENTS AND CONTINGENCIES:
Litigation
As of September 30, 2011, the Company was involved in the following litigations in which claims for damages would be material if the plaintiff prevailed and there is at least a reasonable possibility that a loss may occur:
Richard Aster v Bella Vista Capital, Inc. et al.
This action was initiated in California Civil Court on August 10, 2007. The plaintiff is Richard Aster, the party that purchased the completed home from Bella Vista. The defendants are Bella Vista, Ainsworth Construction, Masma (the original developer) and various subcontractors who did work for each of these two construction companies. This lawsuit alleges construction defects in the installation of windows, decking and roofing related to a single family home that was purchased by the plaintiff from the Company after the Company acquired the property through foreclosure. In May 2011, this lawsuit was settled through mediation on terms and conditions that were acceptable to the Company.
Eden CDM v MAC Homes, LLC
This action was initiated in the Superior Court of the State of California for the County of Alameda on July 20, 2010. The plaintiff is Eden CDM, the general contractor hired to build the MacArthur project. The defendant is MAC Homes, LLC, the developer and Bella Vista’s joint venture partner. The plaintiff is seeking the retention amounts not paid at completion and legal fees. The contract with the general contractor had penalty provisions for delayed completion, which the Company strongly believes are owed by the general contractor and are greater than the retention amounts sought. This lawsuit was settled through mediation on terms and conditions that were acceptable to the Company.
139 Stillman Street Homeowners Association v Bella Vista Capital, Inc. et al.
This action was initiated in San Francisco County Superior Court on January 19, 2011. The plaintiff is 139 Stillman Street Homeowners Association. The plaintiff alleges that there are certain defects to the project that the Company had previously foreclosed on, completed unfinished units and sold to the various homeowners. The Company has retained legal counsel and will vigorously defend against this action.
Emilio Navarro v 1472 Investors, LLC
This action was initiated in Alameda County Superior Court on June 23, 2011. The plaintiff alleges that 1472 Investors, LLC, a majority-owned subsidiary of the Company, wrongfully foreclosed on the plaintiff’s real property in Oakland, CA. The Company has retained legal counsel and will vigorously defend against this action.
General Uninsured Losses
We require that our borrowers carry comprehensive liability, fire, flood, extended coverage, and rental loss insurance with policy specifications, limits, and deductibles customarily carried for similar properties. Additionally, we carry insurance on our investments in real estate development. There are, however, certain types of extraordinary losses that may be either uninsurable or not economically insurable. Further, all of our investments are located in areas that are subject to earthquake activity, and we generally do not require our borrowers to maintain earthquake insurance. Should an investment sustain damage as a result of an earthquake, we may incur losses due to insurance deductibles, co-payments on insured losses, or uninsured losses. Should an uninsured loss occur, we could lose our investment in, and anticipated profits and cash flows from an investment.
12. SUBSEQUENT EVENTS
The following events occurred after September 30, 2011:
Frank Norris, Inc. - Completion of Line of Credit with Related Party
In October 2011, Frank Norris, Inc., a wholly owned subsidiary, signed a line of credit agreement (the line) with a maximum borrowing amount of $500,000. The line was for a period of one year, with a rate of 9% per annum, with interest only payments due monthly on the outstanding balance. In October 2011, due to cash flow needs of the Company and its subsidiaries, the Company obtained funding in the amount of $170,000 on this line from Mr. William Offenberg and Mr. Jeffrey Black, both of whom are Directors of the Company. Subsequently, in December 2011 and in March 2012, Mr. Black and Mr. Offenberg advanced an additional $170,000 and $160,000, respectively. Total advances on the line of credit amounted to $500,000. The purpose of the advance in December 2011 and in March 2012 was to pay property taxes on all REO and other real estate owned by the Company and its subsidiaries. The Note was paid off in June 2012 with proceeds from sales of other REO properties.
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Alum Rock Retail Project, San Jose
In March of 2012, management made the decision to fully impair the Alum Rock property. The property had been generating sufficient cash flow to pay the senior debt service and operating expenses. However, faced with a decrease in rental revenue and a variety of needed repairs and costly improvements on the immediate horizon the Company determined that additional cash infusions would be required and the probability of recovering our original investment was determined to be very low. The Company reached an agreement with first mortgage holder to transfer ownership of the property to the first mortgage holder effective March 1, 2012, relieving BVC of the ongoing management and liability of the project.
MSB Brighton - Apartment Complex, Modesto, CA
The Company sold this property in May of 2012 for a price of $3,675,000. The sale enabled the Company to pay off the Brighton line of credit, the Pulgas Line of Credit and the Frank Norris Line of Credit - a total of $3,500,000 of debt was paid off with the proceeds of this sale.
Oakland Cathedral Building - 1615 Broadway, Oakland, CA
In May of 2012, OCB completed the sales of two residential units in this JV Investment. The Company provided seller carry financing to complete one of the sales. The Company received all the proceeds on the other sale.
Frank Norris, Inc. - Completion of sale of unit
In June of 2012, the Company completed a sale and closed escrow on a unit in the property. The Company provided seller carry financing to complete the sale.
Cummings Park Associates, LLC - Completion of Agreements with City of East Palo Alto
In June of 2012, the Company formalized an agreement to amend the Owner’s Participation Agreement, which regulates the entitlements for the development, such that the number of Below Market Rate (BMR) Units would be reduced from six to three units. The three former BMR units are under contract and we anticipate will be closed in the near future. The proceeds of such sales will pay the City of East Palo Alto an in-lieu of fee for reducing the number of BMR units and pay off the reminder of the debt on the project.
Emilio Navarro v 1472 Investors LLC, et al.
In July 2012, the Alameda County Superior Court ruled in favor of the 1472 Investors, LLC. The foreclosure and eviction of the former borrower was upheld. We were awarded a small judgment as part of the Court’s decision.
Cummings Park Associates, LLC - Completion of Sales
In August of 2012, the Company closed the sale of the three former BMR units in this project. The proceeds of the sales paid the City of East Palo Alto an in-lieu of fee for reducing the number of BMR units and paid off the balance of Cummings Park Secured Private Note. The remainder of the proceeds went to the Company. This was a long standing goal of the Board of Directors.
Notes Payable and Lines of Credit
As of August, 2012, The Company, including all consolidated entities and subsidiaries, had paid off all of its outstanding debt. Prior to that, the total debt owed by the Company was $6,435,000 as of September 30, 2011. Paying off all of the Company’s debt has been a long term goal of the Board.
Frank Norris, Inc. - Completion of sale of unit
In September of 2012, the Company completed a sale and closed escrow on a unit in the property. The Company provided seller carry financing to complete the sale.
1257 Investors, LLC - Completion of sale of property
This is a JV investment for the Company. The Company is a 42.9% owner of the LLC. In September of 2012, the LLC completed a sale of the property held by this single asset LLC. The LLC provided seller carry financing to complete the sale. The Company is now the beneficiary of 42.9% of the Seller Carry Note.
Frank Norris, Inc. - Completion of sale of unit
In November of 2012, the Company completed a sale and closed escrow on a unit in the property. The Company received all cash at the close of escrow.
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Oakland Cathedral Building - 1615 Broadway, Oakland, CA
In December of 2012, OCB completed the sale of another unit. The Company received cash proceeds on the sale.
Oakland Cathedral Building - 1615 Broadway, Oakland, CA
In January of 2013, the OCB completed sales of two more residential units. The Company provided a second position seller carry financing note to complete one of sales. The Company received all other cash proceeds on the sales.
Oakland Cathedral Building - 1615 Broadway, Oakland, CA
As of March of 2013, OCB entered into a sales contract to sell the final residential unit in the property. The sale closed in early June 2013. The Company provided seller carry financing to complete the sale of this unit. Only three retail/commercial units remain to be sold.
Oakland Cathedral Building - 1615 Broadway, Oakland, CA
The company has been negotiating with the developer and anticipates entering into an agreement in 2013 whereby the developer is relinquishing management of this project to the Company. The LLC that is in title to the project will become a consolidated entity of BVC. The Company will assume full operational control of this project by means of an amendment to the current LLC operating agreement which will allow the Company to direct and manage the sales of the remaining units.
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