Item 1 - Business
Redwood Mortgage Investors VII, a California Limited Partnership (the "Partnership"), was organized in 1989 of which Michael R. Burwell and Gymno Corporation, a California corporation, are the general partners. The address of the Partnership and the general partners is 900 Veterans Blvd., Suite 500, Redwood City, California 94063. The Partnership is organized to engage in business as a mortgage lender, for the primary purpose of making loans secured by deeds of trust on California real estate. Loans are arranged and serviced by Redwood Mortgage Corp., an affiliate of the general partners. The Partnership's objectives are to make investments, as referred to above, which will: (i) provide the maximum possible cash returns which limited partners may elect to (a) receive as monthly, quarterly or annual cash distributions or (b) have credited to their capital accounts and applied to Partnership activities; and (ii) preserve and protect the Partnership's capital. The Partnership's general business is more fully described under the section entitled "Investment Objectives and Criteria" pages 26-31 of the Prospectus, which is incorporated by reference.
Originally, 60,000 Units were offered on a "best efforts" basis through broker/dealer member firms of the National Association of Security Dealers, Inc. In accordance with the terms of the Prospectus, the general partners increased the number of Units for sale from 60,000 to 120,000 and elected to continue the offering until September 30, 1992. The offering closed on September 30, 1992, and the limited partners contributed capital totaled $11,998,359 of an approved $12,000,000 issue, in Units of $100 each. At that date all the applicants had been admitted into the Partnership with none left in the applicant status. The final SR report (Report of Sales of Securities and use of proceeds therefrom) was filed on September 21, 1992.
The Partnership began selling Units in October 1989 and began investing in mortgages in December 1989. At December 31, 2005, the Partnership had a balance in its secured loan portfolio totaling $5,448,401 with interest rates thereon ranging from 8.50% to 10.00%.
Currently, loans secured by First Trust Deeds comprise 71.96% of the amount of funds in the secured loan portfolio followed by Second Trust Deeds of 26.67% and third trust deeds of 1.37%. Single Family (1-4 unit) homes total 54.04% of the secured loans versus 60.82% in 2004. Commercial loans increased slightly from last year, now comprising 27.29% of the secured portfolio. Loans to apartments totaled 10.46%. Of the total secured loans, 75.07% are in six counties of the San Francisco Bay Area, and the adjacent counties of Monterey, San Joaquin, Santa Cruz, Stanislaus, and Solano Counties collectively make up 19.76% of the loans. The balance of loans 5.17% are primarily in Southern California. Loan size decreased the past year, and is now averaging $236,887 per loan, a decrease of $26,987. Some of the larger loans invested in by the Partnership are fractionalized between other affiliated partnerships with objectives similar to those of the Partnership to further reduce risk. Average equity per loan transaction based on appraised values and senior debt at the inception date of the loan, which is our loan plus any senior loans, divided by the property's appraised value, subtracted from 100%, stood at 32.82%. Generally, the more equity, the more protection for the lender. The Partnership's loan portfolio is in good condition with no property in foreclosure as of December 2005.
Delinquencies are discussed under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
In December 2004, the Partnership acquired undeveloped parcels of land through a deed in lieu of foreclosure. The land is located in Stanislaus County, California. It is comprised of three separate lots, which total approximately 14 acres. The parcels are currently for sale. As of December 31, 2005 the Partnership's investment in this property totaled $1,756,116, including accrued interest and advances, as of the date of the acquisition. Management believes that the full value of this investment will be recovered from the eventual sale of the property based upon its current estimate of the fair value of the property. As such, the Partnership has not allocated any reserve against the property. This property is jointly owned by two other affiliated partnerships.
In February, 2005, the Partnership acquired a multi-unit property through foreclosure. This property is located in an upscale neighborhood in San Francisco. At the time the Partnership took ownership of the property, the Partnership's investment totaled $836,701 including accrued interest and advances. This property is jointly owned by three other affiliated Partnerships.
Occasionally, to assist in protecting its own assets and to reduce liability, the Partnership may transfer properties acquired through the foreclosure process to newly formed Limited Liability companies or "LLC's". Upon acquisition the Partnership transferred its interest (principally land and building) to a limited liability company ("LLC"), Larkin Property Company, LLC ("Larkin"), which is 8% owned by the Partnership, and 92% owned by three other affiliates. No allowance for loss has been established for this property as management believes that the fair value of the property exceeds the combined Partnerships' investment in the property. The Partnership intends to undertake additional improvements to the property. As of December 31, 2005 the Partnership has capitalized approximately $45,940 in costs related to this property, aggregating a total investment of $882,641 as of December 31, 2005.
No property was taken back in 2003. During the year 2002, the Partnership acquired one piece of real estate property through foreclosure. To assist in protecting its own assets and reduce liability, the Partnership subsequently transferred the property to a newly formed LLC, called the Stockton Street Property Company, LLC. The Partnership owned a 34% minority interest in the Stockton Street Property Company, LLC, and another affiliated partnership owned the remaining interest. Assets of this LLC were sold during 2003 and the Partnership incurred a loss of approximately $42,000. The LLC was dissolved in December, 2005 when its final tax return for year 2005 was filed.
In prior years, the Partnership took back two additional properties through foreclosure. One was a commercial property which the Partnership sold in 2004. The Partnership realized a loss of approximately $613,800 on the sale of this property. This loss was offset against reserves previously set aside for real estate properties. The second property taken back in 1993 is a parcel of land located in East Palo Alto, CA, which is on the market for sale. The general partners believe that this property is worth considerably more than its carrying value, but it may take a considerable amount of additional time to sell the property and realize its full potential. The property is unique in that it may only be utilized for commercial or industrial uses. Until recently, land sales activity has been slow. Interest in land sales for commercial sites has been improving.
Competition and General Economic Conditions
The Partnership's major competitors in providing mortgage loans are banks, savings and loan associates, thrifts, conduit lenders, mortgage brokers, and other entities both larger and smaller than the Partnership. The Partnership is competitive in large part because the general partners generate all of their loans. The general partners have been in the business of making or investing in mortgage loans in Northern California since 1978 and have developed a quality reputation and recognition within the field.
Beginning in July of 2004, the Federal Reserve changed its interest rate policy from one of three years of continuously lowered interest rates, which hit a 40 year historic interest rate low, to one of tempered but gradual interest rate increases. In keeping with this new policy since July 2004, the Federal Reserve has increased the Federal Funds Rate by one quarter percentage point (1/4 of one percent) at each of its meetings to 5.25% as of December 31, 2005. This deliberate upward change in the Federal Funds Rate has caused short term interest rates to rise, and to a lesser degree, pushed longer term rates up as well. Nationally and more specifically in Northern California, the location of the majority of our lending activities, the economies have substantially recovered from the economic downturn lasting from 2000 through 2003. Employment and job creation has improved. During 2004 and 2005, the residential and commercial real estate markets in Northern California enjoyed solid price appreciation. During the latter half of 2005, long-term interest rates have begun to inch upward. Residential sales volumes have declined yet median home sales prices have remained at or near their record 2005 highs. While some concern exists as to whether real estate values will soften, interest rates continue to remain attractive by historical standards, unemployment remains low and the economy is strong. Management believes these factors will contribute to a real estate marketplace with lower appreciation in 2006 compared to 2004 and 2005. With less real estate transactions likely to exist competition for loans will be fierce. Since it appears that the bottom of the interest rate cycle was reached in 2004 we believe loan runoff to lower interest rates will be reduced allowing the Partnership to retain its loans for longer periods. Excess cash will be invested in short-term alternative investments, such as money market funds yielding considerably less than the current loan investment portfolio.
Secured Loan Portfolio
A summary of the Partnership's secured loan portfolio as of December 31, 2005 is set forth below.
Loans as a Percentage of Appraised Values
The following is a distribution of secured loans outstanding as of December 31, 2005 by California Counties.
Number of Secured Loans in Foreclosure: 0
Scheduled maturity dates of secured loans as of December 31, 2005 are as follows:
Year Ending December 31, Amount ----------------------------------- --------------
2006 $ 884,322 2007 447,054 2008 215,000 2009 1,324,441 2010 2,577,584 -------------- Total $ 5,448,401 ==============
The Partnership's largest loan in the principal amount of $634,479 represents 11.65% of outstanding secured loans and 6.78% of Partnership assets. Larger loans sometimes increase above 10% of the secured loan portfolio or Partnership assets as these amounts decrease due to limited partner withdrawals and loan payoffs.
The scheduled maturities for 2006 include two loans totaling approximately $64,322 which are past maturity at December 31, 2005. Interest payments on these past maturity loans were current. The Partnership allows borrowers to occasionally continue to make the payments on debt past maturity for periods of time. The Partnership, in most instances, receives the benefit of a higher interest rate than would otherwise be available in the currently existing loan marketplace.
The loan portfolio had one loan with principal outstanding of $298,545 where interest payment was overdue 90 days. The principal outstanding of this loan represents 5.48% of the Partnership's secured portfolio as of December 31, 2005.
In the fourth quarter of 2005, the Partnership's previously impaired loan with principal outstanding of $96,716 was repaid. A loan is considered impaired when events and/or changes in circumstances cause the management to have serious doubts about the collectibility of the contractual payments and interest is no longer accrued.
Item 2
Item 2 - Properties
In February, 2005, the Partnership acquired a multi-unit property through foreclosure. This property is located in an upscale neighborhood in San Francisco. This property is jointly owned by three other affiliated partnerships. Upon acquisition the Partnership transferred its interest (principally land and building) to a limited liability company, Larkin Property Company, LLC. No allowance for loss has been set aside as management believes that the fair value of the property exceeds the combined Partnerships' investment in the property. The Partnership intends to undertake additional improvements to the property. As of December 31, 2005 the Partnership's total investment in this property was $882,641.
The Partnership took back vacant land through a deed in lieu of foreclosure in 2004. The land is located in Stanislaus County, California. It is comprised of three separate lots, which total approximately 14 acres. This property is owned together with two affiliated partnerships. The Partnership's net investment in the land at December 31, 2005 was $1,756,116. The property is on the market for sale. The general partners believe that the property will return the Partnership's investment upon sale.
The Partnership also owns (through previous foreclosure) one other property: an undeveloped parcel of land located in East Palo Alto. The land is owned with two other affiliated partnerships. The Partnership's net investment in the land at December 31, 2005 is $62,720. The Partnership's net investment of $62,720 is less than 1% of Partnership assets. The general partners believe that the property is worth considerably more than its net investment, but it may take a considerable amount of additional time to sell the property and realize its full potential. The property is unique in that it may only be utilized for commercial or industrial uses. Until recently, land sales activity has been slow. Interest in land sales for commercial sites has been improving.
During 2002, the Partnership took back the collateral security on one of its loans through foreclosure. This loan was originally fractionalized and owned with another affiliated Partnership. In order to reduce potential liabilities the Partnership transferred at its book value the real estate taken back to a newly formed Limited Liability Company called Stockton Street Property Company, LLC. The real estate security was six condominium units. Management of the LLC was through its managing member, Michael Burwell, a general partner of the Partnership. By the end of 2003 all the units were sold resulting in a loss to the Partnership of approximately $42,000. This LLC was formally wound up when its final tax return for 2005 was filed in December, 2005
Item 3
Item 3 - Legal Proceedings
In the normal course of business the Partnership may become involved in various types of legal proceedings such as assignments of rents, bankruptcy proceedings, appointments of receivers, unlawful detainers, judicial foreclosures, etc., to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes or to protect or recoup its investment from the real property secured by the deeds. As of the date hereof, the Partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business.
Item 4
Item 4 - Submission of Matters to a Vote of Security Holders (Partners)
No matters have been submitted to a vote of the Partnership.
Part II
Item 5
Item 5 - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters
120,000 Units at $100 each (minimum 20 Units) were offered through broker-dealer member firms of the National Association of Securities Dealers on a "best efforts" basis (as indicated in Part I item 1). Investors have the option of withdrawing earnings on a monthly, quarterly, or annual basis or reinvesting and compounding the earnings. Limited partners may withdraw from the Partnership in accordance with the terms of the Partnership Agreement subject to possible early withdrawal penalties. There is no established public trading market. As of December 31, 2005, 480 limited partners had a capital balance of $9,270,243.
A description of the Partnership Units, transfer restrictions and withdrawal provisions is more fully described under the section entitled "Description of Units" and "Summary of Limited Partnership Agreement", pages 47 to 50 of the Prospectus, a part of the referenced Registration Statement, which is incorporated by reference.
Item 6
Item 6 - Selected Financial Data
Redwood Mortgage Investors VII began operations in December 1989. Financial condition and results of operation for the Partnership as of and for the five years ended December 31, 2005 were:
Balance Sheets
ASSETS
LIABILITIES AND PARTNERS' CAPITAL
STATEMENTS OF INCOME
Annualized yields when income is compounded or distributed monthly for the years 2001 through 2005 are outlined in the table below:
Compounded Distributed --------------- ---------------
2001 8.50% 8.19% 2002 8.44% 8.13% 2003 6.66% 6.47% 2004 6.49% 6.30% 2005 5.94% 5.78%
Average annualized yield from inception through December 31, 2005, when income is compounded and retained, was 7.58%. Average annualized yield from inception through December 31, 2005, when income is distributed monthly was 7.35%.
Item 7
Item 7 - Management Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies.
In preparing the financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet dates and income and expenses during the reporting periods. Such estimates relate principally to the determination of (1) the allowance for loan losses (i.e. the amount of allowance established against loans receivable as an estimate of potential loan losses) including the accrued interest and advances that are estimated to be unrecoverable based on estimates of amounts to be collected plus estimates of the value of the property as collateral and (2) the valuation of real estate acquired through foreclosure. At December 31, 2005, we owned five pieces of real property.
Loans and the related accrued interest, late fees and advances are analyzed on a periodic basis for recoverability. Delinquencies are identified and followed as part of the loan system. A provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral value, to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable (unsecured). The Partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined that the full amount is not collectible.
If the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement and the shortfall in the amounts due are not insignificant, the carrying amount of the investment shall be reduced to the present value of future cash flows discounted at the loan's effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral. If events and or changes in circumstances cause management to have serious doubts about the further collectibility of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances including accrued interest and advances.
Recent trends in the economy have been taken into consideration in the aforementioned process of arriving at the allowance for loan losses. Actual results could vary from the aforementioned provisions for losses.
Forward Looking Statements.
Certain statements in this Report on Form 10-K which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Company's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward-looking statements include statements regarding future interest rates and economic conditions and their effect on the Partnership and its assets, future sales of properties held by the Partnership and the proceeds from such sales, trends in the California real estate market, estimates as to the allowance for loan losses, estimates of future limited partner withdrawals, 2006 annualized yield estimates, plans to develop certain properties, beliefs regarding the Partnership recovering the full value of its investment in certain properties, the expectation that borrower foreclosures will not have a material effect on liquidity, and the use of excess cash flow. Actual results may be materially different from what is projected by such forward-looking statements. Factors that might cause such a difference include unexpected changes in economic conditions and interest rates, the impact of competition and competitive pricing and downturns in the real estate markets in which the Company has made loans. All forward-looking statements and reasons why results may differ included in this Form 10-K are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results may differ.
Related Parties.
The general partners of the Partnership are Gymno Corporation and Michael R. Burwell. Most Partnership business is conducted through Redwood Mortgage Corp., an affiliate of the general partners, which arranges, services, and maintains the loan portfolio for the benefit of the Partnership. The fees received by the affiliate and the general partners are paid pursuant to the partnership agreement and are determined at the sole discretion of the general partners subject to limitations imposed by the partnership agreement. In the past, the general partners have elected not to take the maximum compensation. The following is a list of various Partnership activities for which related parties are compensated.
o Mortgage Brokerage Commissions For fees in connection with the review, selection, evaluation, negotiation and extension of loans, an affiliate of the general partners may collect an amount equivalent to 12% of the loaned amount until 6 months after the termination date of the offering. Thereafter, the loan brokerage commissions (points) will be limited to an amount not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the Partnership. For the years ended December 31, 2005, 2004 and 2003 loan brokerage commissions paid by borrowers were $137,913, $93,465, and $111,927, respectively.
o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% on an annual basis) of the unpaid principal of the Partnership's loans is paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. Once a loan is categorized as impaired, mortgage servicing fees are no longer accrued thereon. Additional servicing fees are recorded upon the receipt of any subsequent payments on impaired loans. Mortgage servicing fees of $68,906, $81,442, and $73,062 were incurred for the years ended December 31, 2005, 2004 and 2003, respectively.
These servicing fees were charged at 1%, on an annual basis, of the outstanding principal balances. If the maximum mortgage servicing fee of 1.5%, on an annual basis, had been charged to the Partnership, then net income would have been reduced by approximately $34,453, $46,733, and $36,531 for the years ended December 31, 2005, 2004, and 2003, respectively. Reducing net income reduces the annualized yields. An increase or decrease in this fee within the limits set by the partnership agreement directly impacts the yield to the limited partners.
o Asset Management Fees The general partners receive monthly fees for managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net asset value' (3/8 of 1% on an annual basis). Management fees to the general partners of $34,512, $34,073, and $34,011 were incurred by the Partnership for the years ended December 31, 2005, 2004 and 2003, respectively.
o Other Fees The Partnership agreement provides that the general partners may receive other fees such as reconveyance, mortgage assumption and mortgage extension fees. Such fees are incurred by the borrowers and are paid to the general partners.
o Income and Losses All income and losses are credited or charged to partners in relation to their respective Partnership interests. The allocation to the general partners (combined) shall not exceed 1%.
o Operating Expenses An affiliate of the Partnership, Redwood Mortgage Corp., is reimbursed by the Partnership for all operating expenses actually incurred by it on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners.
o Contributed Capital The general partners jointly and severally contributed cash equal to 1/10 of 1% of the total capital raised by the Partnership. The general partners contributed this cash as proceeds from the offerings were received from the limited partners. As of December 31, 2005 and 2004, a general partner, Gymno Corporation, had contributed $11,973 as capital in accordance with Section 4.02(a) of the partnership agreement.
Results of Operations - For the three years ended December 31, 2005, 2004 and
Changes in the Partnership's operating results for the years ended December 31, 2005 and December 31, 2004 are discussed below:
The decrease in interest income of $145,403 (17.76%) for the year ended December 31, 2005 versus 2004 is mainly due to a lower average loan portfolio balance of $6,394,464 in 2005 as compared to the average loan portfolio balance of $7,834,652 in 2004. This decline in interest income in 2005 was somewhat offset by the Partnership gaining interest income of $42,996 in 2005 on an impaired loan that was repaid in 2005. Prior to 2005, no interest was being accrued against this impaired loan. The increase in interest on loans of $69,902 (9.34%) for the year ended December 31, 2004, was primarily attributable to a higher average loan portfolio balance of $7,834,652 in 2004 compared to an average balance of $7,352,405 in 2003. The increase is also attributed to an interest rate increase of 1.5% on notes totaling $1,089,820 during 2004. Additionally, the average portfolio interest rate has been declining, from 9.45% in 2003 to 9.36% in 2004 and to 9.25% in 2005. This has the effect of reducing interest income or moderating interest income growth during periods when the portfolio increased and exacerbating interest income declines during periods of portfolio decreases.
The decline in late charge revenue by $8,919 (45%) and by $4,231 (18%) for the years ended December 31, 2005 and December 31, 2004, respectively, was primarily due to improved loan collections and reduced delinquencies.
The decrease in other income of $22,567 (75.41%) in 2005 compared to 2004 and the increase of $20,323 (211.65%) is due largely to the sale of real estate owned in 2004 which had been generating fee income. Upon sale in 2004, this income ceased. The fee income in 2004 totaled $23,143. The decrease in other income is also due to a decline in early withdrawal penalties to $2,014 in 2005 compared to $2,741 in 2004, offset by an increase in miscellaneous income of $273 in 2005.
The decrease in mortgage servicing fees of $12,536 (15.39%) in 2005 and an increase of $8,380 (11.47%) in 2004 is largely attributable to the Partnership's fluctuating average portfolio balances of $6,394,464 in 2005 and $7,834,652 in 2004. The decrease in mortgage servicing fees in 2005 was offset by collection of interest, and hence the mortgage servicing fees $8,870, from an impaired loan which paid off in 2005. The Partnership does not accrue servicing fees due or payable to Redwood Mortgage on impaired loans. Rather, servicing fees on impaired loans are incurred as borrower payments are received.
Interest expense decreased $10,111 (93.59%) for the year ended December 31, 2005 as compared to 2004. The weighted average line of credit borrowing for the year ended December 31, 2005 was $12,500 as compared to weighted average borrowing of $382,265 for December 31, 2004. The weighted average interest rate for 2005 was 5.55%, whereas the weighted average interest rate during 2004 was 4.93%. The line of credit borrowing in 2005 was substantially low because of the decline in average loan portfolio of $6,394,464 as compared to an average portfolio balance of $7,834,652 in 2004. This lower average balance in 2005 was due to more loan pay-offs than the Partnership's ability to fund additional loans. Hence, loan pay-off proceeds were mainly used to fund loans without resorting to the line of credit facility.
The decrease in clerical costs of $4,163 (23.35%) and $5,188 (22.54%) for the years ended December 31, 2005 and 2004, respectively, was primarily due to lower clerical costs servicing the Partnership.
Loan loss provisions/(recoveries) were $(49,745), $65,007, and $(18,299) for the years ended December 31, 2005, 2004, and 2003, respectively. The increase in provision for 2004 was precautionary due to the foreclosure that existed at December 31, 2004. A negative provision of $49,745 and $18,299 in 2005 and 2003 was due to management's assessment of the appropriate loan loss allowance at such dates the lower existing delinquencies and lower loan balances. The general partners believe that the allowance for loan losses of $700,536 at December 31, 2005 was adequate to offset potential losses on loans.
Increases in professional fees of $877 (1.78%) and $5,591 (12.78%) for the years ended December 31, 2005 and 2004, respectively, were primarily due to general accounting cost increases in 2005 and 2004 in relation to its legal services, audit and tax return processing.
Increases in other expenses of $4,448 (14.29%) and $6,006 (23.90%) for the years ended December 31, 2005 and 2004, respectively, were primarily attributable to the upkeep costs of the real estate held for sale properties. The Partnership expensed $26,242 and $20,567 for the years ended December 31, 2005 and 2004, respectively, on the properties.
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the status of delinquencies, the underlying collateral securing these properties, the real estate held for sale expenses and sales activities, borrowers payment records, etc. Data on the local real estate market and on the national and local economy are studied. Based upon this information and other data, loss reserves are increased or decreased. The Partnership is not a credit based lender and hence while it reviews the credit history and income of borrowers, and if applicable, the income from income producing properties, the general partners expect that we will on occasion take back real estate security. During 2004 and 2005 the local and national economies have been strong. Borrower foreclosures, as set forth under Results of Operations, are a normal aspect of Partnership operations and the general partners anticipate that they will not have a material effect on liquidity. As of December 31, 2005, the Partnership had two loans with outstanding principal totaling $64,322 90 days past maturity. Interest payments on these two past maturity loans were not delinquent over 90 days. In addition, the loan portfolio had one loan with principal outstanding of $298,545 where interest payments were overdue 90 days. There were no loans against which the Partnership had notice of default filed at December 31, 2005. At December 31, 2005, total 90 days past maturity loans, and loans with interest payments 90 days overdue, totaled $362,867 representing 3 loans which were 6.66% of the secured loan portfolio. The Partnership enters into workout agreements with borrowers who are past maturity or delinquent in their regular payments. The Partnership had no workout agreements as of December 31, 2005. Typically, a workout agreement allows the borrower to extend the maturity date of the balloon payment, allows the borrower to make current monthly payments while deferring for periods of time, past due payments, or allows time to pay the loan in full. These workout agreements and foreclosures generally exist within our loan portfolio to greater or lesser degrees, depending primarily on the health of the economy. The number of foreclosures and workout agreements will rise during difficult times and conversely fall during good economic times. These workouts have been considered when management arrived at appropriate loan loss reserves and based on our experience, are reflective of our loan marketplace segment. Because of the number of variables involved, the magnitude of the possible swings and the general partners' inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners. Management provided for ($49,745), $65,007, and ($18,299), as provisions (recoveries) for losses on loans and real estate for the years ended December 31, 2005, 2004 and 2003, respectively. The general partners believe that current reserves for losses are adequate to handle potential losses. If conditions change, the Partnership may increase its provisions for loan losses and real estate held for sale.
The Partnership may restructure loans. This is done either through the modification of an existing loan or by rewriting a whole new loan. A modification could involve, among other conditions, an extension in maturity date, a reduction in repayment amount, a change in interest rate, or granting of additional loan funds.
The Partnership did not restructure any loan in 2005 or 2004. During 2003 the Partnership restructured two loans into one existing loan with a lower interest rate. This resulted in an increase to loans receivable of $107,198 and a decrease to accrued interest and late fees and advances of $88,685 and $18,513, respectively.
Borrower Liquidity and Capital Resources.
The Partnership relies upon loan payoffs, borrowers' mortgage payments, and, to a lesser degree, its line of credit for the source of funds for loans. Over the past several years, mortgage interest rates have decreased somewhat from those available at the inception of the Partnership. If interest rates were to increase substantially, the yield of the Partnership's loans may provide lower yields than other comparable debt-related investments. Additionally, since the Partnership has made primarily fixed rate loans, if interest rates were to rise, the likely result would be a slower prepayment rate for the Partnership. This could cause a lower degree of liquidity as well as a slowdown in the ability of the Partnership to invest in loans at the then current interest rates. Conversely, in the event interest rates were to decline, the Partnership could see significant borrower prepayments, which, if the Partnership can only obtain the then existing lower rates of interest, may cause a dilution of the Partnership's yield on loans, thereby lowering the Partnership's overall yield to the limited partners. The Partnership to a lesser degree relies upon its line of credit to fund loans. Generally, the Partnership's loans are fixed rate, whereas the credit line is a variable rate loan. In the event of a significant increase in overall interest rates, the credit line rate of interest could increase to a rate above the average portfolio rate of interest. Should such an event occur, the general partners would desire to pay off the line of credit. Retirement of the line of credit would reduce the overall liquidity of the Partnership. Cash is constantly being generated from borrower payments of interest, principal and loan payoffs. Currently, cash flow greatly exceeds Partnership expenses and earnings distribution requirements. Excess cash flow is invested in new loan opportunities, when available, and is used to reduce the Partnership credit line or for other Partnership business.
At the time of subscription to the Partnership, limited partners made an irrevocable decision to either take distributions of earnings monthly, quarterly or annually or to compound earnings in their capital account. For the years ended December 31, 2005, 2004 and 2003, the Partnership made following allocations of earnings both to the limited partners who elected to compound their earnings, and those that chose to distribute:
2005 2004 2003 -------------- ------------- -------------
Compounding $ 348,748 $ 374,066 $ 375,105 Distributing $ 183,432 $ 198,794 $ 211,610
As of December 31 2005, 2004 and 2003, limited partners electing to withdraw earnings represented 36%, 35% and 34% of the limited partners' capital.
The Partnership agreement also allows the limited partners to withdraw their capital account subject to certain limitations. For the years ended December 31, 2005, 2004 and 2003, $30,727, $34,267, and $22,690 were liquidated subject to the 10% penalty for early withdrawal. These withdrawals are within the normally anticipated range that the general partners would expect in their experience in this and other partnerships. The general partners expect that a small percentage of limited partners will elect to liquidate their capital accounts over one year with a 10% early withdrawal penalty. In originally conceiving the Partnership, the general partners wanted to provide limited partners needing their capital returned a degree of liquidity. Generally, limited partners electing to withdraw over one year need to liquidate their investment to raise cash. The trend the Partnership is experiencing in withdrawals by limited partners electing a one year liquidation program represents a small percentage of limited partner capital as of December 31, 2005, 2004, and 2003, respectively.
Additionally, for the years ended December 31, 2005, 2004, and 2003, $164,220, $239,547, and $376,514, respectively, were liquidated by limited partners who have elected a liquidation program over a period of five years or longer. This ability to withdraw after five years by limited partners has the effect of providing limited partner liquidity. The general partners expect a portion of the limited partners to take advantage of this provision. This has the anticipated effect of the Partnership growing, primarily through reinvestment of earnings in years one through five. The general partners expect to see increasing numbers of limited partner withdrawals in years five through eleven, after which time the bulk of those limited partners who have sought withdrawal have been liquidated. After year eleven, liquidation generally subsides.
Earnings and capital liquidations, including early withdrawals, during the three years ended December 31, 2005 were:
Years ended December 31,
Earnings Capital Liquidation Liquidation Total -------------- -------------- ---------------
2005 $ 183,432 *$ 194,947 $ 378,379
2004 $ 198,794 *$ 273,814 $ 472,608
2003 $ 211,610 *$ 399,204 $ 610,814
* These are gross amounts, which are not net of early withdrawal penalties.
In some cases in order to satisfy Broker Dealers and other reporting requirements, the general partners have valued the limited partners' interest in the Partnership on a basis which utilizes a per Unit system of calculation, rather than based upon the investors' capital account. This information has been reported in this manner in order to allow the Partnership to integrate with certain software used by the Broker Dealers and other reporting entities. In those cases, the Partnership will report to Broker Dealers, Trust Companies and others a "reporting" number of Units based upon a $1.00 per Unit calculation. The number of reporting Units provided will be calculated based upon the limited partner's capital account value divided by $1.00. Each investor's capital account balance is set forth periodically on the Partnership account statement provided to investors. The reporting Units are solely for Broker Dealers requiring such information for their software programs and do not reflect actual Units owned by a limited partner or the limited partners' right or interest in cash flow or any other economic benefit in the Partnership. Each investor's capital account balance is set forth periodically on the Partnership account statement provided to investors. The amount of Partnership earnings each investor is entitled to receive is determined by the ratio that each investor's capital account bears to the total amount of all investor capital accounts then outstanding. The capital account balance of each investor should be included on any NASD member client account statement in providing a per Unit estimated value of the client's investment in the Partnership in accordance with NASD Rule 2340.
While the general partners have set an estimated value for the Partnership Units, such determination may not be representative of the ultimate price realized by an investor for such Units upon sale. No public trading market exists for the Partnership's Units and none is likely to develop. Thus, there is no certainty that the Units can be sold at a price equal to the stated value of the capital account. Furthermore, the ability of an investor to liquidate his or her investment is limited subject to certain liquidation rights provided by the Partnership, which may include early withdrawal penalties.
Current Economic Conditions.
During 2005, the United States economy as a whole performed well. Gross Domestic Product estimates for 2005 of 3.5% show a slight slowdown from the 4.2% Gross Domestic Product of 2004. The United States average annual unemployment rate for 2005 was 4.9% and has trended downward throughout 2005. Regionally, the San Francisco Bay Area demonstrated a very similar unemployment rate with an average annual unemployment rate of 5.1% for 2005 down 0.9% from 2004. The rate of inflation concerns many with energy costs having risen significantly over the last year. The consumer price index rose 3.4% in 2005 compared to 3.3% for 2004. These statistics indicate an economy that is continuing to grow, which is good for both mortgage lenders and the real estate industry as a whole. The 10 year treasury rate is hovering around 4.5% at year end but is expected to increase in the future. Should this occur, real estate markets may slow due to the higher costs of money.
The Partnership makes loans primarily in Northern California. As such the regional real estate market is of primary concern to the Partnership. As of December 31, 2005, approximately 71.78%, ($153,632,000) of the loans held by the Partnership were in six San Francisco Bay Area Counties. The remainder of the loans held was secured primarily by Northern California real estate outside of the San Francisco Bay Area.
In general, California residential real estate continued to appreciate in value during 2005. In California the median price of a single family home in December, 2005 was $548,430 which was 15.6% higher than in December, 2004. In the nine county San Francisco Bay Area, the median price of a single-family home in December, 2005 was $633,000 14.3% above the December, 2004 median single-family home sales price of $554,000. The total sales volumes, the number of homes sold, has recently been declining. This slow down in the number of homes sold has not significantly impacted residential sales prices. Mortgage interest rates for both fixed and adjustable rate loans have been rising, decreasing housing affordability. Rising interest rates and decreasing sales volumes will likely slow down the rate of housing appreciation we have seen over the last two years. Nonetheless, a strong residential real estate marketplace exists and as such increases lending opportunities and assists in providing adequate equity to help repay mortgage debt should borrowers become delinquent in their payments.
Commercial real estate in the San Francisco Bay Area continued its rebound. Occupancy rates and rents increased during 2005 in most markets throughout the San Francisco Bay Area. CB Richard Ellis reports that San Francisco Class A office rents averaged $34.54, up from $32.52 in 2004 and that vacancy decreased from 15.4% in 2004 to approximately 12% in 2005. The San Francisco leasing market absorbed an estimated 1.5 million square feet net during 2005 according to Grubb and Ellis. Sales of San Francisco commercial office buildings are brisk with record per square foot prices being attained and 2005 being a record volume sales year (Grubb & Ellis Research Fourth Quarter 2005). A healthy commercial real estate market increases lending opportunities and assists in providing adequate equity to repay mortgage debt should borrowers become delinquent in their payments.
For Partnership loans outstanding as of December 31 2005, the Partnership had an average loan-to-value ratio of 67.18%, computed based on appraised values and senior liens as of the date the loan was made. This percentage does not account for any increases or decreases in property values since the date the loan was made, nor does it include any reductions in principal on senior indebtedness through amortization of payments after the loan was made. Management expects this low loan-to-value ratio will assist the Partnership in weathering loan delinquencies and foreclosures should they eventuate.
Contractual Obligations Table. None
Item 7a
Item 7a - Quantitative and Qualitative Disclosures About Market Risk
The following table contains information about the cash held in money market accounts, secured loans held in the Partnership's portfolio and on our line of credit as of December 31, 2005. The presentation, for each category of information, aggregates the assets and liabilities by their maturity dates for maturities occurring in each of the years 2006 through 2010 and separately aggregates the information for all maturities arising after 2010. The carrying values of these assets and liabilities approximate their fair market values as of December 31, 2005:
Market Risk.
The Partnership's line of credit bears interest at a variable rate, tied to the prime rate. As a result, the Partnership's primary market risk exposure with respect to its obligations is to changes in interest rates, which will affect the interest cost of outstanding amounts on the line of credit. The Partnership may also suffer market risk tied to general trends affecting real estate values that may impact the Partnership's security for its loans.
The Partnership's primary market risk in terms of its profitability is the exposure to fluctuations in earnings resulting from fluctuations in general interest rates. The majority of the Partnership's mortgage loans earn interest at fixed rates. Changes in interest rates may also affect the value of the Partnership's investment in mortgage loans and the rates at which the Partnership reinvests funds obtained from loan repayments and new capital contributions from limited partners. If interest rates increase, the interest rates the Partnership obtains from reinvested funds will generally increase, but the value of the Partnership's existing loans at fixed rates will generally tend to decrease. The risk is mitigated by the fact that the Partnership does not intend to sell its loan portfolio, rather such loans are held until they are paid off. If interest rates decrease, the amounts becoming available to the Partnership for investment due to repayment of Partnership loans may be reinvested at lower rates than the Partnership had been able to obtain in prior investments, or than the rates on the repaid loans. In addition, interest rate decreases may encourage borrowers to refinance their loans with the Partnership at a time where the Partnership is unable to reinvest in loans of comparable value.
The Partnership does not hedge or otherwise seek to manage interest rate risk. The Partnership does not enter into risk sensitive instruments for trading purposes.
PORTFOLIO REVIEW - For the years ended December 31, 2005, 2004 and 2003
Loan Portfolio
The Partnership's loan portfolio consists primarily of short-term (one to five years), fixed rate loans secured by real estate. As of December 31, 2005, 2004 and 2003 the Partnership's loans secured by real property collateral in six of the San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Marin, Alameda and Contra Costa) represented $4,090,089 (75.07%), $4,902,146 (66.34%), and $5,982,000 (72.24%), respectively, of the outstanding secured loan portfolio. The remainder of the portfolio represented loans secured by real estate located primarily in Northern California.
The following table sets forth the distribution of loans held by the Partnership by property type for the years ended December 31, 2005, 2004 and 2003:
As of December 31, 2005, the Partnership held 23 loans secured by deeds of trust. The following table sets forth the priorities, asset concentrations and maturities of the secured loans held by the Partnership as of December 31, 2005.
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF SECURED LOANS As of December 31, 2005
The Partnership's largest secured loan in the principal amount of $634,479 represents 11.65% of outstanding secured loans and 6.78% of Partnership assets. Larger loans sometimes increase above 10% of the secured loan portfolio or Partnership assets as these amounts decrease due to limited partner withdrawals and loan payoffs.
ASSET QUALITY
A consequence of lending activities is that occasionally losses will be experienced and that the amount of such losses will vary from time to time, depending upon the risk characteristics of the loan portfolio as affected by economic conditions and the financial experiences of borrowers. Many of these factors are beyond the control of the general partners. There is no precise method of predicting specific losses or amounts that ultimately may be charged off on particular segments of the loan portfolio, especially in light of the current economic environment.
The conclusion that a loan may become uncollectible, in whole or in part, is a matter of judgment. Although institutional lenders are subject to requirements and regulations that, among other things, require them to perform ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and to obtain and maintain current information regarding their borrowers and the securing properties, the Partnership is not subject to these regulations and has not adopted certain of these practices.
Instead, the general partners, in connection with the periodic closing of the accounting records of the Partnership and the preparation of the financial statements, determine whether the allowance for loan losses is adequate to cover potential loan losses of the Partnership. As of December 31, 2005 the general partners have determined that the allowance for loan losses of $700,536 (7.55% of net assets) is adequate in amount. Because of the number of variables involved, the magnitude of the swings possible and the general partners' inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners. As of December 31, 2005, three loans were delinquent 90 days and/or matured with outstanding principal of $362,867.
The Partnership also makes loans requiring periodic disbursements of funds. As of December 31, 2005 there were no such loans. These loans include ground up construction of buildings and loans for rehabilitation of existing structures. Interest on such loans is computed at simple interest method and only on the amounts disbursed on a daily basis.
Item 8
Item 8 - Financial Statements and Supplementary Data
A - Financial Statements
The following financial statements of Redwood Mortgage Investors VII are included in Item 8:
o Report of Independent Registered Public Accounting Firm o Balance Sheets - December 31, 2005, and December 31, 2004 o Statements of Income for the years ended December 31, 2005, 2004 and 2003 o Statements of Changes in Partners' Capital for the years ended December 31, 2005, 2004 and 2003 o Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 o Notes to Financial Statements
B - Financial Statement Schedules
The following financial statement schedules of Redwood Mortgage Inventors VII are included in Item 8.
o Schedule II - Valuation and Qualifying Accounts o Schedule IV - Mortgage Loans on Real Estate
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
REDWOOD MORTGAGE INVESTORS VII (A CALIFORNIA LIMITED PARTNERSHIP) FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION DECEMBER 31, 2005 AND 2004 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2005
ARMANINO McKENNA LLP CERTIFIED PUBLIC ACCOUNTANTS 12667 Alcosta Blvd., Suite 500 San Ramon, CA 94583 (925) 790-2600
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners Redwood Mortgage Investors VII Redwood City, California
We have audited the accompanying balance sheets of Redwood Mortgage Investors VII (a California limited partnership) as of December 31, 2005 and 2004 and the related statements of income, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of Redwood Mortgage Investors VII's management. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Redwood Mortgage Investors VII 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 Redwood Mortgage Investors VII'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, and 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 financial position of Redwood Mortgage Investors VII as of December 31, 2005 and 2004 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedules II and IV are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
ARMANINO McKENNA LLP San Ramon, California March 3, 2006
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Balance Sheets December 31, 2005 and 2004
ASSETS
LIABILITIES AND PARTNERS' CAPITAL
The accompanying notes are an integral part of these financial statements.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Statements of Income For the Years Ended December 31, 2005, 2004 and 2003
The accompanying notes are an integral part of these financial statements.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Statements of Changes in Partners' Capital For the Years Ended December 31, 2005, 2004 and 2003
The accompanying notes are an integral part of these financial statements.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Statements of Cash Flows For the Years Ended December 31, 2005, 2004 and 2003
The accompanying notes are an integral part of these financial statements.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003
1. Organization and General
Redwood Mortgage Investors VII, (the "Partnership") is a California Limited Partnership organized on June 30, 1989. The general partners are Michael R. Burwell, an individual, and Gymno Corporation, a California corporation. The Partnership was organized to engage in business as a mortgage lender for the primary purpose of making loans secured by deeds of trust on California real estate. Loans are being arranged and serviced by Redwood Mortgage Corp., an affiliate of the general partners.
Term of the Partnership
The Partnership is scheduled to terminate on December 31, 2029, unless sooner terminated as provided in the Partnership Agreement.
2. Summary of Significant Accounting Policies
Management estimates
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 about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Such estimates relate principally to the determination of the allowance for loan losses, including the valuation of impaired loans and the valuation of real estate held for sale. Actual results could differ significantly from these estimates.
Loans, secured by deeds of trust
Loans generally are stated at their outstanding unpaid principal balance with interest thereon being accrued as earned.
If the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement, and the shortfall in the amounts due are not insignificant, the carrying amount of the loan is reduced to the present value of future cash flows discounted at the loan's effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003
2. Summary of Significant Accounting Policies (continued)
Loans, secured by deeds of trust (continued)
If events and or changes in circumstances cause management to have serious doubts about the further collectibility of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances including accrued interest and advances. At December 31, 2004, there was one loan categorized as impaired by the Partnership of $96,710. In addition, the impaired loan had accrued interest and advances totaling $6,936 at December 31, 2004. In 2005, the loan was paid-off in full. The average recorded investment in impaired loans was $48,355 and $96,710 for December 31, 2005 and 2004, respectively.
At December 31, 2005, the Partnership had three loans 90 days past maturity or past due 90 days or more, totaling $362,867. In addition, accrued interest and advances on these loans totaled $8,226 at December 31, 2005. The Partnership does not consider any of these loans to be impaired because there is sufficient collateral to cover the amount outstanding to the Partnership and is still accruing interest on these loans. At December 31, 2004, the Partnership had five loans 90 days past maturity or past due 90 days or more, including one impaired loan, totaling $1,049,730. In addition, accrued interest and advances on these loans totaled $60,233 at December 31, 2004. The Partnership does not consider four of these loans to be impaired because there is sufficient collateral to cover the amount outstanding to the Partnership and is still accruing interest on these loans. At December 31, 2005 and 2004, as presented in Note 11, the average loan to appraised value of security based upon appraised values and prior indebtedness at the time the loans were consummated was 67.18.% and 71.30%, respectively. When loans are considered impaired, the allowance is updated to reflect the change in the valuation of collateral security. However, a low loan to value ratio has the tendency to minimize reductions for impairment.
Allowance for loan losses
Loans and the related accrued interest, late fees and advances are analyzed on a periodic basis for recoverability. Delinquencies are identified and followed as part of the loan system. Delinquencies are determined based upon contractual terms. A provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral value, to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable. The Partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined that the full amount is not collectible.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003
2. Summary of Significant Accounting Policies (continued)
Allowance for loan losses (continued)
The composition of the allowance for loan losses was as follows:
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003
2. Summary of Significant Accounting Policies (continued)
Allowance for loan losses (continued)
Activity in the allowance for loan losses is as follows:
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003
2. Summary of Significant Accounting Policies (continued)
Cash and cash equivalents
The Partnership considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents.
Real estate held for sale
Real estate held for sale includes real estate acquired through foreclosure and is stated at the lower of the recorded investment in the loan, plus any senior indebtedness, or at the property's estimated fair value, less estimated costs to sell.
The Partnership periodically compares the carrying value of real estate to expected future undiscounted cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to fair value. During 2003, the Partnership transferred $50,083 from the allowance for loan losses to the allowance for losses on real estate held for sale.
Investment in limited liability company
Investment in limited liability company is accounted for using the equity method. In 2005, the Company had an 8% interest in the Larkin Street Property Company, LLC (see Note 6). In 2003, the Company had a 34% interest in the Stockton Street Property Company, LLC (see Note 6).
Income taxes
No provision for federal and state income taxes (other than an $800 state minimum tax) is made in the financial statements since income taxes are the obligation of the partners if and when income taxes apply.
Net income per $1,000 invested
Amounts reflected in the statements of income as net income per $1,000 invested by limited partners for the entire period are amounts allocated to limited partners who had their investment throughout the period and have elected to either leave their earnings to compound or have elected to receive periodic distributions of their net income. Individual income is allocated each month based on the limited partners' pro rata share of partners' capital. Because the net income percentage varies from month to month, amounts per $1,000 will vary for those individuals who made or withdrew investments during the period, or select other options.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003
2. Summary of Significant Accounting Policies (continued)
Late fee revenue
Late fees are generally charged at 6% of the monthly installment payment past due. During 2005, 2004 and 2003, late fee revenue of $10,903, $19,822 and $24,053, respectively, was recorded. The Partnership has a late fee receivable at December 31, 2005 and 2004 of $891 and $4,513, respectively.
Recently issued accounting pronouncements
In June 2005, the FASB issued FAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB No. 3, Reporting Accounting Changes in Interim Financial Statements. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. FAS 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable. It is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June 1, 2005. The Partnership does not expect the effect of FAS 154 will have material impact on its financial statements.
3. Other Partnership Provisions
The Partnership is a California Limited Partnership. The rights, duties and powers of the general and limited partners of the Partnership are governed by the limited partnership agreement and Sections 15611 et seq. of the California Corporations Code.
The general partners are in complete control of the Partnership business, subject to the voting rights of the limited partners on specified matters. Any one of the general partners acting alone has the power and authority to act for and bind the Partnership.
A majority of the outstanding limited partnership interests may, without the permission of the general partners, vote to: (i) terminate the Partnership, (ii) amend the limited partnership agreement, (iii) approve or disapprove the sale of all or substantially all of the assets of the Partnership and (iv) remove or replace one or all of the general partners.
The approval of the majority of limited partners is required to elect a new general partner to continue the Partnership business where there is no remaining general partner after a general partner ceases to be a general partner other than by removal.
Election to receive monthly, quarterly or annual distributions
At subscription, investors elected either to receive monthly, quarterly or annual distributions of earnings allocations, or to allow earnings to compound. Subject to certain limitations, a compounding investor may subsequently change his election, but an investor's election to have cash distributions is irrevocable.
Profits and losses
Profits and losses are allocated among the limited partners according to their respective capital accounts monthly after 1% of the profits and losses are allocated to the general partners.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003
3. Other Partnership Provisions (continued)
Liquidity, capital withdrawals and early withdrawals
There are substantial restrictions on transferability of Partnership units and accordingly an investment in the Partnership is not liquid. Limited partners have no right to withdraw from the Partnership or to obtain the return of their capital account for at least one year from the date of purchase of units.
In order to provide a certain degree of liquidity to the limited partners after the one-year period, limited partners may withdraw all or part of their capital accounts from the Partnership in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given, subject to a 10% early withdrawal penalty. The 10% penalty is applicable to the amount withdrawn early and will be deducted from the capital account.
After five years from the date of purchase of the units, limited partners have the right to withdraw from the Partnership, on an installment basis. Generally this is done over a five-year period in twenty quarterly installments. Once a limited partner has been in the Partnership for the minimum five-year period, no penalty will be imposed if withdrawal is made in twenty quarterly installments or longer. Notwithstanding the five-year (or longer) withdrawal period, the general partners may liquidate all or part of a limited partner's capital account in four quarterly installments beginning on the last day of the calendar quarter following the quarter in which the notice of withdrawal is given. This withdrawal is subject to a 10% early withdrawal penalty applicable to any sums withdrawn prior to the time when such sums could have been withdrawn without penalty.
The Partnership will not establish a reserve from which to fund withdrawals and, accordingly, the Partnership's capacity to return a limited partner's capital account is restricted to the availability of Partnership cash flow. Furthermore, no more than 20% of the total limited partners' capital accounts outstanding at the beginning of any year, shall be liquidated during any calendar year.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003
4. General Partners and Related Parties
The following are commissions and fees which will be paid to the general partners and affiliates:
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation and extension of loans, an affiliate of the general partners may collect an amount equivalent to 12% of the loaned amount until 6 months after the termination date of the offering. Thereafter, loan brokerage commissions (points) will be limited to an amount not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers and thus, are not an expense of the Partnership. During 2005, 2004 and 2003, loan brokerage commissions paid by the borrowers to Redwood Mortgage Corp. were $137,913 and $93,465 and $111,927, respectively.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the unpaid principal are paid to Redwood Mortgage Corp., an affiliate of the general partners, based on the unpaid principal balance of the loan portfolio, or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. Once a loan is categorized as impaired, mortgage servicing fees are no longer accrued. Additional service fees are recorded upon the receipt of any subsequent payments on impaired loans. Mortgage servicing fees of $68,906, $81,442 and $73,062 were incurred for 2005, 2004 and 2003, respectively. The Partnership has a payable to Redwood Mortgage Corp. for servicing fees of $71,998 and $74,987 at December 31, 2005 and 2004, respectively.
Asset management fee
The general partners receive monthly fees for managing the Partnership's loan portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8 of 1% annually). Asset management fees of $34,512, $34,073 and $34,011 were incurred for 2005, 2004 and 2003, respectively.
Other fees
The Partnership Agreement provides for other fees such as reconveyance, mortgage assumption and mortgage extension fees. Such fees are incurred by the borrowers and are paid to parties related to the general partners.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003
4. General Partners and Related Parties (continued)
Operating expenses
Redwood Mortgage Corp. is reimbursed by the Partnership for all operating expenses actually incurred by it on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners. During 2005, 2004 and 2003, operating expenses totaling $13,663, $17,826 and $23,014, respectively, were reimbursed to Redwood Mortgage Corp.
5. Real Estate Held for Sale
In December 2004, the Partnership acquired land through a deed in lieu of foreclosure. At this date, the Partnership's investment totaled $1,752,835 including accrued interest and advances. Management believes the full amount of the Partnership's investment, $1,807,307 at December 31, 2005, will be recovered based on its current estimate of the property's fair value.
During 2004, the Partnership sold real estate with an original investment of $1,200,518, and a carrying value of $586,713, for $586,713. The original investment in this property had been reduced in prior years to management's estimate of the ultimate realizable value of the property.
During 1993, the Partnership acquired land through a deed in lieu of foreclosure. Management believes the full amount of the Partnership's investment, $62,720 at December 31, 2005, will be recovered based on its current estimate of the property's fair value.
The following schedule reflects the costs of real estate acquired through foreclosure and the recorded reductions to estimated fair values, including estimated costs to sell as of December 31, 2005 and 2004:
2005 2004 -------------- --------------
Costs of properties $ 1,870,027 $ 1,815,555 Reduction in value - (33,373) -------------- --------------
Real estate held for sale, net $ 1,870,027 $ 1,782,182 ============== ==============
6. Investment in Limited Liability Company
As a result of acquiring real properties through foreclosure, the Partnership transferred its interests (principally land and building) to two limited liability companies, Stockton Street Property Company, LLC ("Stockton") and Larkin Street Property Company, LLC ("Larkin").
Larkin was created during 2005. It is owned 8% by the Partnership and 92% by affiliates. The property is under development and development costs were capitalized. No income or expense was recognized by Larkin during 2005.
Stockton was created in 2002. It was owned 34% by the Partnership and 66% by an affiliate. During 2003, the LLC completed construction and the property was sold. The Partnership recognized a loss of $42,518 during 2003 related to this property.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003
7. Bank Line of Credit
The Partnership has a bank line of credit secured by its loan portfolio of up to $2,500,000 at .25% over prime. There were no balances outstanding on this line as of December 31, 2005 and 2004, and the interest rate was 7.50% at December 31, 2005 and 5.25% at December 31, 2004. This line of credit expires December 2, 2011 and requires the Partnership to meet certain financial covenants. As of December 31, 2005 and 2004, the Partnership was in compliance with all loan covenants.
8. Income Taxes
The following reflects a reconciliation of partners' capital reflected in the financial statements to the tax basis of the Partnership capital:
2005 2004 -------------- --------------
Partners' capital per financial statements $ 9,282,216 $ 9,128,416 Allowance for loan losses 700,536 745,476
Allowance for real estate losses - 33,373 -------------- -------------
Partners' capital tax basis $ 9,982,752 $ 9,907,265 ============== =============
In 2005 and 2004, approximately 68% and 69%, respectively, of taxable income was allocated to tax-exempt organizations (i.e., retirement plans).
9. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of financial instruments:
(a) Cash and cash equivalents - The carrying amount equals fair value. All amounts, including interest bearing, are subject to immediate withdrawal.
(b) Secured loans had a carrying value of $5,448,401 and $7,388,478 at December 31, 2005 and 2004, respectively. The fair value of these loans of $5,566,133 and $7,531,668, respectively, was estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made. The applicable amount of the allowance for loan losses along with accrued interest and advances related thereto should also be considered in evaluating the fair value versus the carrying value.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003
10. Non-cash Transactions
During 2005, the Partnership foreclosed on property (see Note 6), which resulted in an increase in investment in limited liability company of $831,178 and a decrease in loans receivable, accrued interest and advances of $776,228, $49,422 and $5,528, respectively. In addition, an unsecured loan was written-off against the allowance for loan losses in the amount of $28,568.
During 2004, the Partnership foreclosed on property (see Note 5), which resulted in an increase in real estate held for sale of $1,752,836 and a decrease in loans receivable, accrued interest and advances of $1,196,509, $552,044 and $4,283, respectively.
During 2003, the Partnership restructured two loans that resulted in an increase to loans receivable of $107,198 and a decrease to accrued interest and late fees and advances of $88,685 and $18,513, respectively.
11. Asset Concentrations and Characteristics
Most loans are secured by recorded deeds of trust. At December 31, 2005 and 2004, there were 23 and 28 secured loans outstanding, respectively, with the following characteristics:
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003
11. Asset Concentrations and Characteristics (continued)
The following categories of secured loans were held at December 31, 2005 and 2004:
The interest rates on these loans ranged from 8.50% to 10.00% at December 31, 2005 and 6.50% to 10.50% at December 31, 2004.
Scheduled maturity dates of secured loans as of December 31, 2005 are as follows:
Year Ending December 31, - ----------------------------------
2006 $ 884,322 2007 447,054 2008 215,000 2009 1,324,441 2010 2,577,584 --------------
Total $ 5,448,401 ==============
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003
11. Asset Concentrations and Characteristics (continued)
The scheduled maturities for 2006 above include approximately $64,322 in two loans which were 90 days past maturity at December 31, 2005. None of these loans had interest payments categorized as delinquent over 90 days. Occasionally, the Partnership allows borrowers to continue to make the payments on debt past maturity for periods of time.
At times, the Partnership's cash deposits exceed federally insured limits. Management believes deposits are maintained in financially secure financial institutions.
In 2004 the Partnership had a substantial amount of its loan receivable balance due on two loans from one borrower. During 2005, these loans were paid in full. This borrower accounted for approximately 17% of the secured loan balance at December 31, 2004. This borrower accounted for approximately 16% and 34% of interest on loans for the years ended December 31, 2005 and 2004, respectively. The value of collateral securing these loans was less than the principal balance due under the loans. Redwood Mortgage Corp. had provided an indemnity to the Partnership whereby it has agreed to indemnify and hold harmless the Partnership from any expenses or losses incurred by the Partnership by reason of the Partnership's inability to collect all principal due under the loans after the Partnership has exhausted all reserves set aside for these loans and all remedies available to it including foreclosure of the underlying collateral. Therefore, these loans were not considered impaired solely because the value of the collateral securing the loans was less than the principal balance due to the Partnership.
The Partnership also has 22% and 21% of its receivable balance due from two borrowers at December 31, 2005 and 2004, respectively. Loans to the two borrowers in 2005 were funded late in the year, hence income derived from these investments accounted for 3.10% of the interest revenue for the year ended December 31, 2005. The other two borrowers had their loans with the Partnership for the full term in 2004 and interest revenue accounted for approximately 19% for the year ended December 31, 2004.
12. Commitments and Contingencies
Workout agreements
The Partnership has negotiated various contractual workout agreements with borrowers whose loans are past maturity or who are delinquent in making payments. The Partnership is not obligated to fund additional money as of December 31, 2005. As of December 31, 2005 there are no loans under workout agreement.
Construction / rehabilitation loans
The Partnership makes construction and rehabilitation loans which are not fully disbursed at loan inception. The Partnership has approved the borrowers up to a maximum loan balance; however, disbursements are made periodically during completion phases of the construction or rehabilitation or at such other times as required under the loan documents. At December 31, 2005, there were no undisbursed loan funds. The Partnership does not maintain a separate cash reserve to hold the undisbursed obligations, which are intended to be funded.
Legal proceedings
The Partnership is involved in various legal actions arising in the normal course of business. In the opinion of management, such matters will not have a material effect upon the financial position of the Partnership.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Notes to Financial Statements December 31, 2005, 2004 and 2003
13. Selected Financial Information (Unaudited)
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Schedule II Valuation and Qualifying Accounts for the years ended December 31, 2005, 2004 and 2003
(a) - Represents write-offs on loans.
(b) - Represents sales of REO.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Schedule IV Mortgage Loans on Real Estate Rule 12-29 Loans on Real Estate December 31, 2005
Note: Most loans have balloon payments due at maturity.
REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) Schedule IV (continued) Mortgage Loans on Real Estate Rule 12-29 Loans on Real Estate December 31, 2005
Reconciliation of carrying amount (cost) of loans at close of periods
Item 9
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no disagreements with the Partnership's independent registered public accounting firm during the years ended December 31, 2005 and 2004.
Item 9a.
Item 9a. - Controls and Procedures
The Partnership carried out an evaluation, under the supervision and with the participation of the general partners of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended Based upon that evaluation, the general partners concluded that the Partnership's disclosure controls and procedures were effective in timely alerting the general partners to material information related to the Partnership that is required to be included in our periodic filings with the Securities and Exchange Commission.
There were no significant changes in the Partnership's internal control over financial reporting during the Partnership's fourth fiscal quarter that have materially affected, or are likely to materially affect, the Partnership's internal control over financial reporting.
Item 9b.
Item 9b. - Other Information
None
Part III
Item 10
Item 10 - Directors and Executive Officers of the Registrant
The Partnership has no Officers or Directors. Rather, the activities of the Partnership are managed by the two general partners, one of whom is an individual, Michael R. Burwell. The second general partner is Gymno Corporation, a California corporation, formed in 1986. Mr. Burwell is one of the two shareholders of Gymno Corporation, a California corporation, and has a 50% interest in the corporation.
The General Partners.
Michael R. Burwell. Michael R. Burwell, age 49, General Partner, past member of Board of Trustees and Treasurer, Mortgage Brokers Institute (1984-1986); President, Director, Chief Financial Officer, Redwood Mortgage Corp. (1979-present); Director, Secretary and Treasurer A & B Financial Services, Inc. (1980-present); President, Director, Chief Financial Officer and Secretary (since 1986) of Gymno Corporation; President, Director, Secretary and Treasurer of The Redwood Group, Ltd. (1979-present). Mr. Burwell is licensed as a real estate sales person.
Gymno Corporation. Gymno Corporation, General Partner, is a California corporation formed in 1986 for the purpose of acting as a general partner of this Partnership and of other limited partnerships formed by the individual general partners. The shares in Gymno Corporation are held equally by Michael R. Burwell and the Burwell trusts. Michael R. Burwell is a director of Gymno and the director position held by D. Russell Burwell is currently vacant. Michael R. Burwell is its President, Chief Financial Officer, and Secretary. Michael R. Burwell has a controlling interest in this company through his ownership of stock and as trustee of the Burwell trusts.
Financial Oversight by General Partners.
The Partnership does not have a board of directors or an audit committee. Accordingly, the general partners serve the equivalent function of an audit committee for, among other things, the following purposes: appointment, compensation, review and oversight of the work of our independent public accountants, and establishing the enforcing of the Code of Ethics. However, since the Partnership does not have an audit committee and the general partners are not independent of the Partnership, the Partnership does not have an "audit committee financial expert."
Code of Ethics.
The general partners have adopted a Code of Ethics applicable to the general partners and to any agents, employees or independent contractors engaged by the general partners to perform the functions of a principal financial officer, principal accounting officer or controller of the Partnership, if any. You may obtain a copy of this Code of Ethics, without charge, upon request by calling our Investor Services Department at (650) 365-5341.
Item 11
Item 11 - Executive Compensation
COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP
As indicated above in Item 10, the Partnership has no Officers or Directors. The Partnership is managed by the general partners. There are certain fees and other items paid to management and related parties.
A more complete description of management compensation is found in the Prospectus, pages 12-13, under the section "Compensation of the General Partners and the Affiliates", which is incorporated by reference. Such compensation is summarized below.
The following compensation has been paid to the general partners and affiliates for services rendered during the year ended December 31, 2005. All such compensation is in compliance with the guidelines and limitations set forth in the partnership agreement.
II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY COMPANIES RELATED TO THE GENERAL PARTNERS (EXPENSES OF BORROWERS NOT OF THE PARTNERSHIP) DURING THE YEAR ENDED DECEMBER 31, 2004
III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE STATEMENT OF INCOME DURING THE YEAR ENDED DECEMBER 31, 2005 . . . . . . $13,663
Item 12
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The general partners are to own an aggregate total of 1% of the Partnership including a 1% portion of income and losses.
Item 13
Item 13 - Certain Relationships and Related Transactions
Refer to footnotes 3 and 4 of the Notes to Financial Statements in Part II item 8, which describes related party fees and data.
Also refer to the Prospectus dated October 20, 1989 (incorporated herein by reference) on page 12 "Compensation of General Partners and Affiliates" and page 14 "Conflicts of Interest".
Item 14
Item 14 - Principal Accountant Fees and Services
Fees for services performed for the Partnership by the principal accountant for 2005 and 2004 are as follows:
Audit Fees The aggregate fees billed during the years ended December 31, 2005 and 2004 for professional services rendered for the audit of the Partnership's annual financial statements included in the Partnership's Annual Report on Form 10-K and review of financial statements included in the Partnership's Quarterly Reports on Form 10-Q were $38,054 and $40,643, respectively.
Audit Related Fees There were no fees billed during the years ended December 31, 2005 and 2004 for audit-related services.
Tax fees The aggregate fees billed for tax services for the years ended December 31, 2005 and 2004, were $3,588 and $4,854, respectively. These fees relate to professional services rendered primarily for tax compliance.
All Other Fees There were no other fees billed during the years ended December 31, 2005 and 2004.
All audit and non-audit services are approved by the general partner prior to the accountant being engaged by the Partnership.
Part IV
Item 15
Item 15 - Exhibits, Financial Statements and Schedules
A. Documents filed as part of this report are incorporated:
1. In Part II, Item 8 under A - Financial Statements.
2. The Financial Statement Schedules are listed in Part II - Item 8 under B - Financial Statement Schedules.
3. Exhibits.
All of the above exhibits, other than 31.1, 31.2, 32.1 and 32.2, were previously filed as the exhibits to Registrant's Statement on Form S-11 (Registration No. 33-30427 and incorporated by reference herein).
B. See A (3) above.
C. See A (2) above. Additional reference is made to the prospectus (S-11 filed as part of the Registration statement) dated October 20, 1989 to pages 65 through 67 and Supplement #5 dated February 14, 1992 for financial data related to Gymno Corporation, a general partner.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized on the 30st day of March 2006.
REDWOOD MORTGAGE INVESTORS VII
By: /S/ Michael R. Burwell --------------------------------------------- Michael R. Burwell, General Partner
By: Gymno Corporation, General Partner
By: /S/ Michael R. Burwell ------------------------------------------- Michael R. Burwell, President, Secretary & Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity indicated on the 30st day of March 2006.
Signature Title Date
/S/ Michael R. Burwell - ------------------------ Michael R. Burwell General Partner March 30, 2006
/S/ Michael R. Burwell - ------------------------ Michael R. Burwell President, Secretary & Chief March 30, 2006 Financial Officer of Gymno Corporation (Principal Financial and Accounting Officer); Director of Gymno Corporation
Exhibit 31.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner of the Partnership, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.
/s/ Michael R. Burwell - ---------------------------- Michael R. Burwell, General Partner March 30, 2006
Exhibit 31.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner of the Partnership, certify that:
1. I have reviewed this annual report on Form 10-K of Redwood Mortgage Investors VII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.
/s/ Michael R. Burwell - -------------------------- Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner March 30, 2006
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VII (the "Partnership") on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the Partnership, certify, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission.
/s/ Michael R. Burwell - ----------------------------- Michael R. Burwell, General Partner March 30, 2006
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Redwood Mortgage Investors VII (the "Partnership") on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner of the Partnership, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission.
/s/ Michael R. Burwell - ----------------------------- Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner March 30, 2006