Q: What are the fund’s investment philosophy and investment process? A: We manage assets that are secured by real estate – both mortgages and real property. Vestin has three funds: Vestin Fund One, Vestin Fund Two, and the newest one is Vestin Fund Three. In America right now, only 10% of all average Americans have any real estate outside of their personal residence, so Vestin Fund One, Two, and Three are funds that are registered with the SEC and have a portfolio of either real estate loans or real estate. It is a diversified portfolio from coast to coast all the way to Hawaii. It has its own property and it lends on property, only commercial property. We will do construction loans, development loans, putting in the street curbs and gutters, we will do bridge loans, where someone might be buying an empty office building form a bank and getting a very good discount, and he knows that if he fills it up with tenants, then he made himself a very good profit. One of the things that intrigue most people about our company is our speed. We have been able to do loans up to $20 million in less than seven business days. Q: Primarily focused in the real estate sector? A: Absolutely. In our investment process right now we receive about 50 to 60 applications for loans across the country every three to four weeks. The most important thing to us is loan to value. We want to make sure that we are not lending over 70% loan to value. If you look at our portfolio in Vestin One and Two, right now it is about 56% loan to value. After it meets that criterion, our staff of underwriters does a breakdown of the loan and looks at the feasibility of it. They look at the appraisal that we do have on record, order an updated appraisal, and then, if we really like it, we go out to the property itself. Vestin Fund Three is the very first fund that we have that allows us to buy real estate. We are taking a little bit different direction and there is a reason for that. I can think of two loans off the top of my head where we made great loans, and the borrower made great money. When he purchased the property, we were offered a percentage of the ownership and we were never allowed to take it. Vestin Fund Three allows us to be part owners of the property or own the property ourselves and realize capital appreciation. Q: Going back to One and Two, is it safe to say that most of your investments are liquid in a sense or when do they become liquid? A: We don’t let anybody out of our investments for one year. They have to be in our funds for one year. But the thing that excites people about us is we have been in the lending business for twelve solid years, we’ve handled over $2 billion worth of lending in real estate investments and our clients have never received less than 9% on their money and never realized a loss of their principal. Q: So return has averaged about 9% a year? A: No, that is the worst. The return has averaged around 11%. The worst year we ever had was 9%. Q: Are your funds structured as mutual funds or are they structured as a private fund? A: They are structured more like a private fund. They are Limited Liability Companies (LLCs). Q: What is generally the default ratio that you have encountered in your structure? A: One of the things that I do if someone is a day late on their payments to us is we initiate the foreclosure process. And foreclosure ranges from state to state, but in all of our $2 billion worth of loans, we have not taken back more than $90 million worth of real estate. And on those properties, remember what I told you was the key element – the loan to value, we have been able to recoup all of our principal and interest. Q: What kind of indicators generally you look for to measure the health of the real estate market that you decide to participate in, what kind of signals you look for to decide to exit? A: One of the first things, well I would say a lot of the times is that I want to make sure that the population in the area is at least stable if not growing. The other thing I look at, believe it or not, we found this a long time ago, is when an area is growing in Mechanic’s Liens, the economy is getting tough. So what we do is when we go into a new area we go down to the county recorder’s office to try and find out how many mechanic’s liens have been filed recently. When subs aren’t being paIdent, that’s not good and that is just an indicator. And then the other thing is the movement of home prices. For example, Las Vegas has gone up 16% this last year. That is a good indicator. Q: Do you consider that as a positive or a negative indicator? A: Up 16% I still think is a positive. I remember when California was going through the 20% and 30%. That was a negative for me. Under 20% I am still comfortable with. Q: Let’s say a casino came to you and asked you for a loan what would happen then? A: We have a casino expert on staff. He used to be with Wells Fargo. We would hand it to him and ask him: “Well, do these numbers make sense? Are the slot machines key to the casino? Do these win dollars per day make sense?” And then we go from there. As a matter of fact, one of the loans we did made the front page of The Wall Street Journal one time. A gentleman got a chance to buy a horse race track in Louisiana, and he had the chance to buy it for $10 million. We knew it was at least worth $30 million, because it had the right to have slot machines, and the previous owners didn’t believe in plugging them in. Our gentleman happened to never plug them in either. He just happened to sell the casino, or horse track, for $130 million. So, we know the gaming industry backwards and forwards. Q: Still, Southern California and Houston has had its own boom and bust in the last 20 years. What other indicators do you look at? A: I want to see what is fueling the economy. For example, Houston was entirely dependent on one industry. This is why we want to be careful in Las Vegas, too. Las Vegas is a great industry, gaming is a great industry, but you know what I have noticed in the last couple of years, they have opened Indian casinos which will take its toll on Las Vegas someday if it hasn’t already. So, you want to make sure that an economy is not driven by just one industry. I believe they destroyed 40,000 apartment units in Harris County, Houston. The bank took back and that was the day of the RTC and the savings and loans. I should say that is when everyone got a little crazy on lending. We are very conservative here. Just because we do a loan rapidly – within a week or seven business days, – it doesn’t mean that we are not dotting our i’s and crossing out t’s. Q: You mentioned that you look for first mortgage. If that is what you are looking for, essentially your opportunity comes solely at the time of the transaction, when somebody is buying? A: That’s the thing, believe it or not, it is still sixty applications or requests for loans every three weeks and we only take the top six deals. One thing about being a private institution, we don’t have any government money involved here, so we don’t have to do Community Reinvestment Act (CRA) loans, we make the loans where we want to make them. Q: What was the reasoning behind being a short-term lender? A: Two reasons. By doing one-year loans I reduce economic and environmental risk. I know what a year from now is going to be a great area. Thirty years from now, I can’t tell you what it is going to be like. The other reason is interest rates. In 1976, interest rates went through the roof. One thing people have to worry about all the time when they buy bonds is which way interest rates are going to go. By doing one-year loans, I know I am not going to get behind the interest rate curve. And that is the key. Q: You obviously make money when you get paid back your interest and principal. When they pay you back, who is giving them the money? A: Usually banks. For example, with that gentleman, who bought the racetrack in Louisiana, there Boyd Gaming, a publicly traded company, paid me off. When I did the Terribles Casino, one of the big investment banking firms paid me off. I have had New York Life pay me off, Mutual of New York, too. My projects are quality projects. Q: So you really have to look for good quality developers or real estate entrepreneurs because many times their success or their ability to find good real estate projects minimizes some of the risk? A: Right. You can never eliminate every ounce of risk but you sure can do everything in the world to minimize it. Q: Now why would they go and take a one-year loan when there are other 20-year lenders out there? A: Just the speed. For example, one time I got a $40 million loan that Merrill Lynch had on their desk for nine months and they couldn’t get it done. We did it in about 11 days, and at the end of the day, Merrill Lynch was the one paying me off. The people wanted to get the project going and one year is not going to kill anybody. 38% of our borrowers are repeat borrowers. Q: What happens when you have difficulties with your loans and it is difficult for you to collect? You start a foreclosure procedure and how long does that take? A: In some states like Texas it is about a 60-day process. In other states it is seven months, so that’s why you have to initiate the foreclosure as soon as possible, because every month someone doesn’t pay you it hurts your loan to value. The sooner the better, and this way it trains the borrowers to let them know you are not babysitting them. Q: What percentage of properties do you end up selling? A: Right now, there is close to $800 million under management. We own $30 million. So, I think it is a little less that 4%. There is no loss in that. It just means that it is a pain in the neck for a couple of weeks. Q: How do you build your portfolio? Do you follow a framework or structure? A: First, we have the NASAA guidelines, our funds meet the North American Securities Administration Act, which says the funds have to be diversified four different ways: geographically, product type, borrower, and the other thing is timing. And that’s what we do. So we can’t do all our loans in San Diego, California to the same borrower on assisted living. And then we have to divide it up into five different groups on lending and on purchasing. We can’t buy just mini warehouses, for instance. We have to diversify. Q: Let’s say you raise $100 million in equity in your fund and then you go out and borrow from the banks. Have you done that? A: We never have borrowed a dime. Q: What about Vestin Three? Is that going to be the same way? A: We have never contemplated borrowing. We put it in our documents if an opportunity comes up, but we have never leveraged yet. Q: So leverage is not your game? A: At presently that is not my game. Q: How is Vestin Three likely to be different from One and Two in terms of the philosophy or the process? A: Vestin One and Two were just strictly lending funds. Vestin Fund Three enables us to go out and buy real estate. We see at least one deal a month that we can put $1 million or $2 million on, and Vestin One and Two never allowed us to buy real estate. So one of the things that we always have is great relationships with our banks where they take a property back and banks don’t want it on their books, so they will discount it and sell it to us. That’s a key element. Another thing it allows us to do is if there’s bankrupt properties we can make a deal and that’s also important. I believe apartment buildings are going to be key and we can partner with our borrowers and do those kinds of deals all day long. And this way Vestin Three allows the depreciation of the real estate to flow through to the investors, which is also a plus. And the other thing that is really critical is that Vestin One and Two, One was a $100 million fund and the other was a $500 million fund, they were only sold by us. With Vestin Three, we are going to allow outside brokers to sell our fund for the first time. Q: Do you see a situation where Vestin Three owns a property but Vestin One and two loans the money to Vestin Three? A: It cannot happen because that would be leveraging Vestin Fund Three. It is one of the guidelines of NASAA, we can’t borrow. Any officer or any entity that we are related to cannot borrow from one of our other affiliates. Q: Now what would be your advice to advisors, who are looking towards retirement money or 401(k) types of money to these funds? Is that structurally different from any of those things? A: No, as a matter of fact we encourage that. I look at so many 401(k)s across the United States, they were destroyed the last two and a half three years. Like I saIdent, there is no such thing as the perfect investment vehicle, but this is darn close for someone who wants to preserve their capital, get appreciation in a real estate market, and also get quarterly income.