TD REO Fund, LLC and Subsidiary Consolidated Balance Sheet December 31, 2016 With Independent Auditors Report Thereon

Transcription

1 Consolidated Balance Sheet With Independent Auditors Report Thereon

2 Contents Independent Auditors Report Consolidated Balance Sheet

3 8012 Sky Park Circle, Suite 200 Irvine, California tel fax Independent Auditors Report The Management of TD REO Fund, LLC Laguna Hills, California We were engaged to audit the accompanying consolidated balance sheet of TD REO Fund, LLC, a California limited liability company and subsidiary (the Company ), which comprise the consolidated balance sheet as of, and the related notes to the consolidated balance sheet. Management s Responsibility for the Consolidated Balance Sheet Management is responsible for the preparation and fair presentation of the consolidated balance sheet and the related notes in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the consolidated balance sheet that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on this consolidated balance sheet based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Because of the matter described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Basis for Disclaimer of Opinion We were unable to obtain written representations from management in regards to the consolidated balance sheet. Such lack of written management representation represents a scope limitation on our audit. Accordingly, the scope of our audit procedures was not sufficient to warrant the expression of an opinion. As a result of this matter, we were unable to determine whether any adjustments might have been found necessary with respect to the consolidated balance sheet. 1

4 Disclaimer of Opinion Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the consolidated balance sheet. Irvine, California October 27,

5 Consolidated Balance Sheet ASSETS: Cash and cash equivalents $ 399,994 Mortgages receivable, net 16,556,438 Real estate owned and held for sale 3,213,437 Investment in real estate 1,600,000 Loan receivable 104,890 Due from affiliates 1,215,479 Total assets $ 23,090,238 LIABILITIES AND MEMBERS' DEFICIT: Liabilities Accounts payable and accrued expenses $ 115,550 Buyout payable 1,907,734 Accrued interest payable 2,951,524 Promissory notes with related party funds 37,482,441 Total liabilities 42,457,249 Commitment and contingencies Subsequent events Members' deficit (19,367,011) TOTAL LIABILITIES AND MEMBERS' DEFICIT $ 23,090,238 The accompanying notes are an integral part of this consolidated balance sheet. 3

6 1. Organization TD REO Fund, LLC, (the LLC ) is a California limited liability company located in Laguna Hills, California, which commenced operation on August 8, Pursuant to the limited liability company operating agreement (the Operating Agreement ), the LLC shall continue for a perpetual period, unless terminated sooner according to the provisions of the Operating Agreement. In accordance with the provisions of the Operating Agreement, no Member shall be obligated to make any additional contribution to the LLC s capital. The managing member of the LLC is WJA Asset Management, LLC, a California limited liability company (the Manager) (see Note 13). The LLC was formed to take over any defaulted trust deeds from related party funds (see Note 11) or lenders of the related party funds who used the mortgage loan protection service, also referred to as the Buyout Agreement (see Note 10) to handle the foreclosure and eventual sale of the underlying properties. The properties securing the LLC s loans are generally classified as residential or commercial real estate and, typically, are held for resale. Each loan is secured by a first mortgage lien on the related real estate and may also be secured with additional real estate collateral. As of, the LLC is no longer accepting or acquiring defaulted loan from related party funds. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated balance sheet has been prepared in accordance with accounting principles generally accepted in the United States of America ( GAAP ). The summary of significant accounting policies presented below is designed to assist in understanding the consolidated balance sheet. The consolidated balance sheet and accompanying notes are the representation of the LLC s management, who is responsible for their integrity and objectivity. Principles of Consolidation The consolidation balance sheet includes the accounts of the LLC and its wholly-owned subsidiary, Clariton Residential Renewal, LLC (collectively, the Company ). All intercompany transactions and balances have been eliminated in consolidation. 4

7 2. Summary of Significant Accounting Policies (continued) Use of Estimates The preparation of the consolidated balance sheet requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated balance sheet. Management basis the use of its estimates on (a) various assumptions that consider past and historical experience, (b) general financial market conditions, and (c) local and general economic conditions. Actual results could differ materially from these estimates and assumptions. Cash and Cash Equivalents Cash and cash equivalents include cash and highly liquid instruments purchased with original maturities of 90 days or less. The Company maintains its cash with one major financial institution. Accounts at financial institutions are insured by the Federal Deposit Insurance Corporation up to $250,000. At times, the Company s cash balances may exceed federally insured amounts. The Company has not experienced any losses related to uninsured cash balances. Mortgages Receivable The Company acquired non-performing secured nonbanking loans from related party funds (see Note 11) that manage a portfolio of first mortgage loans throughout the United States. The loans were initially transferred from the related party funds and the fund s historical costs. As of, the mortgages receivable has been recorded at the lower of cost or net realizable value (market). The loans are principally secured by first mortgages on real estate and, generally are also personally guaranteed by the borrower or its principals. The loans are generally for a term of one to three years. Most of the loans provide for monthly payments of interest only (in arrears) during the term of the loan, and a balloon payment of the principal on the maturity date. Allowance for Mortgages Receivable The Company records an allowance to adjust the mortgages receivable to the amount the Company expects to collect. The Company maintains allowance for mortgages receivable for estimated losses resulting from the inability of its borrower to make required payments, and if the collateral is valued below the outstanding principal balance of the mortgages receivable. Management considers the following factors when determining the collectability of specific borrower accounts: specifically, if the mortgage is current and the value of the underlining property exceeds the cost of mortgage receivable. If the financial condition of the Company s borrower and collateral were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to an allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the allowance and a credit to the mortgage receivable. The allowance for mortgages receivable at was $350,000. 5

8 2. Summary of Significant Accounting Policies (continued) Real Estate Owned and Held for Sale Real estate owned has been acquired through foreclosure proceedings and is classified as held for sale and stated at the lower of cost or market, less cost to sell. Certain real estate owned market values may be above the acquisition costs of the related properties (see Note 5). Cost is determined by the acquisition cost of the property or the carrying value of the property assigned to the Company from the related party funds. Pursuant to Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) Topic 360, Property, Plant and Equipment, a long-lived asset classified as held for sale shall be measured at the lower of its carrying amount or fair value, less cost to sell. A long-lived asset shall not be depreciated (amortized) while it is classified as held for sale. Interest and other expenses attributable to the liabilities of a long-lived asset classified as held for shall continue to be accrued. Impairment of Long-Lived Assets The Company continually monitors events or changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted cash flows is less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair market value of the assets. Revenue Recognition The Company recognizes revenues in accordance with FASB ASC Topic 605, Revenue Recognition. ASC 605 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of the product has occurred or services have been rendered, (iii) the sales prices charged is fixed or determinable, and (iv) collectability is reasonably assured. The Company records interest income when the interest is received due to the fact the mortgages receivable are non-performing loans, and interest income is not realized until collection is reasonably assured. 6

9 2. Summary of Significant Accounting Policies (continued) Fair Value of Financial Instruments The estimated fair value of the Company s cash and cash equivalents, loan receivable, accounts payable and accrued liabilities, buyout payable and accrued interest payable to approximate their carrying values due to the relatively short period of time between their origination and expected realization. It is not practicable to estimate the fair value of the Company s due from affiliates and promissory notes due to the related party funds nature of such balances. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based on the lowest level of input that is a significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows: Level 1 Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This include certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs. The Company measures its mortgages receivable and real estate owned using Level 3 inputs, generally independent appraisals or independent broker price opinions of value for these properties, or other valuation methodologies employed by the Company, including but not limited to, pending sales contracts, current listing agreements, projected cash flows, tax assessor s valuation, and third party real estate specialists. The following tables summarize the Company s assets measured at fair value on a nonrecurring basis as of : Balance at December 31, 2016 Level 1 Level 2 Level 3 Assets: Mortgages receivable $ 6,611,906 $ - $ - $ 6,611,906 Real estate owned And held for sale 1,365, ,365,350 Total assets at fair value $ 7,977,256 $ - $ - $ 7,977,256 7

10 2. Summary of Significant Accounting Policies (continued) Income Taxes The Company is not a taxpaying entity for Federal and state income tax purposes, and thus no income tax expense has been recorded in the consolidated balance sheet. The income or loss of the Company is taxed to the members on their respective income tax returns based on their proportionate share. The Company has adopted the provision of FASB ASC Topic , Accounting for Uncertainty in Income Taxes ( ASC 740 ). This standard prescribes a recognition threshold and measurement attribute for consolidated balance sheet recognition and measurement of a tax position taken or expected to be taken in a tax return. Under this standard, an entity may only recognize or continue to recognize tax positions that meets a more likely than not threshold. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in interest expense. The Company has determined that there are no uncertain tax positions requiring accrual or disclosure in the accompanying consolidated balance sheet as of. The Company s Federal and state income tax returns since inception remain subject to examination by the taxing authorities. 3. Going Concern The Company s consolidated balance sheet is prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of, the Company had total liabilities that exceeded total assets, a member deficit of $19,371,36367,011 as of December 31, 2016 and filed Chapter 11 of the United States Bankruptcy Code (see Note 13) that raises substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital and liquidity through the sale of its real estate owned and mortgages receivable to fund the ongoing operations. If the Company is unable to obtain adequate liquidity from the sale of its real estate owned and mortgages receivable, it could be forced to cease or reduce its operations. In order to continue as a going concern, the Company will need, among other things, additional capital resources or liquidity from the sale and disposition of its real estate owned and mortgages receivable. The Company is dependent upon its ability to realize positive cash flows from the sale and disposition of its real estate owned and mortgages receivable. There are no assurances that the Company will be successful in generating revenue and realizing positive cash flow from its operations. Without sufficient positive cash flow from operations, it would be unlikely that the Company will continue as a going concern. 8

11 3. Going Concern (continued) Based on the Company s current rate of cash flow, cash on hand and proceeds from the sale of mortgages receivable and real estate owned, management believes that its current cash will not be sufficient to meet the anticipated cash needs for working capital for the next 12 months. The Company s plans with respect to its liquidity issues include, but are not limited to the following: 1. The Company has currently stopped making all principal and interest payments on its promissory notes to related party funds. 2. On May 18, 2017, the Company filed Chapter 11 of the United States Bankruptcy Code (see Note 13). It is currently the expectations of the Company that the promissory notes to related party funds will not return 100% of the principal to the note holders, although the exact amount is not presently known or determinable. The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph, and eventually secure other sources of financing and achieve profitable operations. This consolidated balance sheet does not include any adjustment relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty. 4. Mortgages Receivable As of, the aggregate amounts of mortgages receivable held by the Company were $16,556,438, net of an allowance of $350,000. The Company mortgages receivable ranged from $4,900 to $2,633,000, with stated interest rates ranging from 9% to 12% and a default interest rate for nonpayment of 18%. At, two borrowers had mortgages receivable representing more than 10% of the total principal balance of the mortgages receivable. The Company uses its Manager, outside counsel, and other independent professionals to verify title and ownership, to file liens and to consummate transactions. Independent appraisers and licensed real estate professionals are also used to value the real estate underlying the mortgages receivable. Nevertheless, no assurances can be given that existing or future loans may not go into default or prove to be uncollectible in the future. 9

12 4. Mortgages Receivable (continued) Credit Risk The credit risk profile based on mortgages receivable activity as of is as follows: Residential Commercial Land Total Outstanding Mortgages Receivable Performing Loans $ 220,500 $ - $ - $ 220,500 Non-Performing Loans 10,648,355 3,106,743 2,580,340 16,335,938 $ 10,869,855 $ 3,106,743 $ 2,580,340 $ 16,556,438 As of, the following represents the future maturities of mortgages receivable: 5. Real Estate Owned and Held for Sale 2017 $ 16,162, , Thereafter 58,800 Total $ 16,556,438 Real estate owned represents real estate foreclosed by the Company and included on the consolidated balance sheet at the lower of cost or market, less cost to sell. As of, real estate owned totaled $3,213,437, and ranged from $14,100 to $1,175,000. At, three real estate owned properties represented more than 10% of the total real estate owned balance. In February 2016, a real estate owned property in Baytown, Texas was demolished by the city of Baytown based on an order of the court previously obtained by the city. The demolition resulted in a decrease in value of approximately $3.7 million to $730,000. The Company believed the value of the property at the time of demolition was approximately $9 million - $13 million (unaudited). 10

13 5. Real Estate Owned and Held for Sale (continued) Real estate owned and held for sale as of, consisted of the following: Categories Cost Fair Value Lower of Cost or Market Residential (multiple properties) $ 2,900,817 $ 2,930,545 $ 2,527,237 Land 686, , ,200 Total $ 3,587,017 $ 3,616,745 $ 3,213,437 Location (multiple properties) Cost Fair Value Lower of Cost or Market Ohio $ 125,866 $ 292,246 $ 123,328 Georgia 59,220 32,900 32,900 Pennsylvania 75,764 23,500 23,500 Mississippi 173, , ,900 Michigan 183, , ,900 Washington 66, ,300 66,599 Maryland 65,800 14,100 14,100 Indiana 39,715 22,090 22,090 Louisiana 293, , ,280 California 1,391,200 1,175,000 1,175,000 Texas 686, , ,200 Illinois 428, , ,640 Total $ 3,589,555 $ 3,616,745 $ 3,213, Investment in Real Estate The investment in real estate represents real estate owned that is currently not available for sale. The investment has been recorded at cost of $1,600,000 as of. 7. Loan Receivable In January 2016, Urban Produce Fund, LLC, a related party of the Company, borrowed $100,000 from the Company for working capital purposes. The loan receivable has an automatic renewal unless the Company was notified 30 days prior to maturity. Interest rate is 7% per annum. At, the outstanding balance was $104,890, including accrued interest. 11

14 8. Due from Affiliates Certain defaulted trust deeds obtained by the Company from related party funds were subject to a Foreclosure Agreement (the Foreclosure Agreement ). The Foreclosure Agreement contains a look back provision which requires the Company to split, with the related party funds, the gains or losses greater than 10% of actual proceeds received. As of, the Company had recorded a due from affiliates of $1,215, Joint Venture In 2016, the borrower of a mortgage receivable approached the Company for an additional loan secured by the property. The Company proposed an equity investment where by the borrower would sell a 70% interest in Luxury Asset Purchasing International, LLC ( Luxury Asset ) in exchange for additional cash which to be used for the development of the property. The Company was able to obtain 35% of the equity in the property, and two other related funds (5827 Winland Hills Drive Development, LLC and CA Real Estate Opportunity III) collectively acquired the remaining 35% in exchange for the equity capital. The Company has concluded that this joint venture is not material to the consolidated balance sheet. 10. Buyout Payable The Company provided a mortgage loan protection service to third party lenders (the Lender ) through its protection performance plans (also known as Buyout Agreements ) whereby the Company acts as a guarantor for the third-party borrowers ( Borrower ) on any mortgage loan issued by the Lender. The Company receives an upfront buyout fee based on the loan to value ratio of the loan. The Company amortizes the buyout fee as income over the remaining term of the loan. Once the underlying property is foreclosed on or sold, any unamortized buyout fee would be realized as income. In exchange for the Lender s interest in the property securing the mortgage loan and any future principal payments and interest to be received from the Borrower, the Company agrees to make monthly interest payments to the Lender in the amount of the net interest received by the Lender under the original terms of the loan agreement at a maximum rate of 10% annually. In addition, the Company agrees to return to the Lender the outstanding principal balance, less any principal payments received without regard to the value received when the property is sold. The Company shall return to the Lender the outstanding principal due to the Lender at the earlier of (1) two years from the date the Company makes its initial interest payment to the Lender or (2) within 24 hours after the Company has sold the property. The Company was not in compliance with the repayment terms of certain Buyout Agreements as of. As of, the Company has recorded a buyout payable in the amount of $1,907,

15 11. Related Party Transactions The following funds represent related parties to the Company (see Note13): California Indexed Growth Fund PMB Managed Fund, LLC Prosper Fund Equity Indexed Managed Fund Secured California Income Fund TD Opportunity Fund WJA Asset Management Trust WJA Real Estate Opportunity Fund I WJA Real Estate Opportunity Fund II WJA Secure Real Estate Fund WJA Secure Income Fund, LLC Urban Produce Fund, LLC All of the Company s mortgage receivables, real estate owned and promissory notes were transferred to the Company from the above noted related parties. The amounts transferred was recorded originally at the related party s historical cost. Promissory Notes with Related Party Funds Promissory notes with related parties consist of the following as of : California Indexed Growth Fund - Term: payable upon disposition of underlying assets. Interest rate of 7%, and interest expense for the year ended was $18,997. Accrued interest payable of $28,496, as of. $ 270,650 Equity Indexed Managed Fund - Term: payable upon disposition of underlying assets. Interest rate of 7%, and interest expense for the year ended was $47,233. Accrued interest receivable of $10,447, as of December 31, ,750 PMB Managed Fund, LLC - Term: payable upon disposition of underlying assets. Interest rate of 7%, and interest expense for the year ended was $242,034. Accrued interest payable of $592,027, as of December 31, ,367,101 Prosper Fund - Term: payable upon disposition of underlying assets. Interest rate of 7%, and interest expense for the year ended was $27,231. Accrued interest payable of $49,922, as of. 387,950 13

16 11. Related Party Transactions (continued) Secured California Income Fund - Term: payable upon disposition of underlying assets. Interest rate of 7%, and interest expense for the year ended was $3,615. Accrued interest payable of $14,898, as of. $ 141,500 TD Opportunity Fund - Term: payable upon disposition of underlying assets. Interest rate of 7%, and interest expense for the year ended was $1,517,442. Accrued interest payable of $2,019,584, as of. 26,568,238 WJA Real Estate Opportunity Fund I - Term: payable upon disposition of underlying assets. Interest rate of 7%, and interest expense for the year ended was $20,004. Accrued interest payable of $46,729, as of. 285,000 WJA Real Estate Opportunity Fund II - T Term: payable upon disposition of underlying assets. Interest rate of 7%, and interest expense for the year ended was $17,295. Accrued interest payable of $17,295, as of. 540,000 WJA Secure Income Fund, LLC - Term: payable upon disposition of underlying assets. Interest rate of 7%, and interest expense for the year ended was $44,248. Accrued interest payable of $59,322, as of. 353,350 WJA Secure Real Estate Fund - Term: payable upon disposition of underlying assets. Interest rate of 7%, and interest expense for the year ended was $161,913. Accrued interest payable of $111,473, as of. 2,113,646 Equity Indexed Managed Fund - Term: payable upon disposition of underlying assets. Interest rate of 0%. 1,265,947 PMB Managed Fund, LLC - Term: payable upon disposition of underlying assets. Interest rate of 0%. 138,980 Secured California Income Fund - Term: payable upon disposition of underlying assets. Interest rate of 0%. 556,975 WJA Secure Income Fund, LLC - Term: payable upon disposition of underlying assets. Interest rate of 0%. 616,179 WJA Secure Real Estate Fund - Term: payable upon disposition of underlying assets. Interest rate of 0%. 202,175 Total $37,482,441 14

17 12. Commitments and Contingencies The Company is subject to various claims, lawsuits and complaints arising during the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on the Company s consolidated financial position or consolidated results of operations. Although there can be no assurance, the Company is not aware of any material environmental liabilities relating to its investments in real estate properties that could have a material adverse effect on its consolidated financial position or results of operations. However, changes in applicable environmental laws and regulations or other environmental conditions with respect to the Company s investments in real estate properties could result in future environmental liabilities. There is currently an open investigation by the United States Securities and Exchange Commission and the California Department of Business Oversight related to WJA Asset Management, the managing member of the Company, and other related party funds. As of the time of this audit, it investigation is still ongoing. 13. Subsequent Events The Company evaluated subsequent through October 27, 2017, the date the consolidated balance sheet was available for issuance. There were no material subsequent events that required recognition or additional disclosure in the consolidated balance sheet, except as follows: 1. On February 1, 2017, the Company issued a promissory note in the amount of $150,000 to a related party Urban Produce, LLC. The promissory note bears interest at 9% per annum and is due on January 31, On May 8, 2017, Howard Grobstein of Grobstein Teeple, LLP was appointed as the Chief Restructuring Officer ( CRO ) of WJA Asset Management, LLC ( WJA ), the Company s managing member. As the CRO of the managing member of the Company, Mr. Grobstein became the de facto manager of the Company. 3. On May 18, 2017, the Company filed for bankruptcy protection under Chapter 11 Title 11 of the United States Code. The Company remains in bankruptcy through the date of this report. It is the CRO s intention to liquidate the Company s remaining assets in an orderly fashion and thereafter terminate the Company s business operations. 15