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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C.  20549





FORM 10-K





(Mark one)





[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended December 31, 2010





Or





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





For the transition period from _________ to _________





Commission File Number 333-105017





VESTIN FUND III, LLC(Exact name of registrant as specified in its charter)





NEVADA

87-0693972(State or Other Jurisdiction of

(I.R.S. EmployerIncorporation or Organization)

Identification No.)








8880 WEST SUNSET ROAD, SUITE 200, LAS VEGAS, NEVADA 89148


(Address of Principal Executive Offices)(Zip Code)





Registrant’s telephone number, including area code 702.227.0965





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





None

None(Title of each class)

(Name of each exchange on which registered)





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





None(Title of class)








Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.


Yes [   ] No [X]





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.


Yes [   ] No [X]





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


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





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





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





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





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





State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.  Not applicable.





As of April 4, 2011, the Company had 2,024,424 units outstanding.











Table of Contents


TABLEOF CONTENTS





PagePART IITEM 1.
BUSINESS
1ITEM 1A.
RISK FACTORS
2ITEM 1B.
UNRESOLVED STAFF COMMENTS
4ITEM 2.
PROPERTIES
4ITEM 3.
LEGAL PROCEEDINGS
4ITEM 4.
REMOVED AND RESERVED
4PART IIITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
4ITEM 6.
SELECTED FINANCIAL DATA
5ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
5ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
10ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
12ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
30ITEM 9A.
CONTROLS AND PROCEDURES
30ITEM 9B.
OTHER INFORMATION
31PART IIIITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
31ITEM 11.
EXECUTIVE COMPENSATION
32ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
32ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
32ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
32PART IVITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
33EXHIBIT INDEX
34SIGNATURES
35











Table of Contents





PARTI







ITEM1.
BUSINESS





General





Vestin Fund III, LLC was organized in April 2003 as a Nevada limited liability company for the purpose of investing in commercial real estate loans (hereafter referred to as “real estate loans”) and income-producing real property.  In this report, we refer to Vestin Fund III, LLC as “the Company,” “our Company,” the “Fund,” “we,” “us,” or “our”.





We commenced operations in February 2004.  Prior to March 2007, we invested in revenue-generating commercial real estate and loans secured by real estate through deeds of trust or mortgages (hereafter referred to collectively as “deeds of trust” and as defined in our Operating Agreement as “Mortgage Assets”).  On March 5, 2007, a majority of our members approved the Third Amended and Restated Operating Agreement, which limited the Company’s investment objectives to investments in real estate loans.





At a special meeting of our members held on July 2, 2009, a majority of the members voted to approve the dissolution and winding up of the Fund, in accordance with the Plan of Complete Liquidation and Dissolution (the “Plan”) as set forth in Annex A of the Fund’s proxy statement filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 14(a) of the Securities and Exchange Act of 1934 on May 11, 2009.  The Plan became effective upon its approval by the members on July 2, 2009.  As a result, we have commenced an orderly liquidation and we no longer invest in new real estate loans.  We anticipate that the liquidation will be substantially completed by the second half of 2014.  However, because of numerous uncertainties, the liquidation may take longer or shorter than expected.  Because the liquidation of the Fund was not imminent, as of December 31, 2010, the financial statements are presented assuming the Fund will continue as a going concern.  Pursuant to the Plan, we will make liquidating distributions to members on a quarterly basis as funds become available, subject to a reasonable reserve established to provide for payment of the Company’s ongoing expenses and contingent liabilities.  Our members no longer have the right to have their units redeemed by us and we no longer honor any outstanding redemption requests effective as of July 2, 2009.





On January 26, 2010, April 8, 2010 and September 17, 2010, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million and $0.3 million, respectively, in accordance with the Plan.  To date, no subsequent distributions have been made as sufficient funds have not been available.  The amounts distributed to each Member of the Fund were calculated based upon the percentage ownership interest of such Member in the Fund.  See Note H – Members’ Equity of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





We are not a mutual fund or an investment company within the meaning of the Investment Company Act of 1940, nor are we subject to any regulation thereunder.





Vestin Group, Inc. (“Vestin Group”), a Delaware corporation, owns a significant majority of Vestin Mortgage, LLC, a Nevada limited liability company, who is our manager (the “manager” or “Vestin Mortgage”).  On January 7, 2011, Vestin Mortgage converted from a corporation to a limited liability company.  Michael Shustek, the CEO and managing member of our manager and CEO, President and a director of us, wholly owns Vestin Group, which is engaged in asset management, real estate lending and other financial services through its subsidiaries.  Our manager, prior to June 30, 2006, also operated as a licensed Nevada mortgage broker and was generally engaged in the business of brokerage, placement and servicing of commercial loans secured by real property.  On July 1, 2006, a mortgage broker license was issued to an affiliated company, Vestin Originations, Inc. (“Vestin Originations”), which Vestin Group owns a significant majority of, that has continued the business of brokerage, placement and servicing of real estate loans.  Effective February 14, 2011, the business of brokerage and placement of real estate loans will be performed by affiliated or non-affiliated mortgage brokers, which includes Advant Mortgage, LLC (“Advant”), a licensed Nevada mortgage broker, the significant majority of which is beneficially owned by Michael V. Shustek.


Pursuant to our Operating Agreement and the Plan of Complete Liquidation and Dissolution approved by a majority of our members on July 2, 2009, our manager will continue to manage our operations during the liquidation process.  Consequently, the orderly liquidation of our assets and our operating results are dependent upon our manager’s ability and performance in managing our liquidation.
 
 Vestin Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the successor by merger to Vestin Fund I, LLC, (“Fund I”) and Vestin Realty Mortgage II, Inc. (“VRM II”), as the successor by merger to Vestin Fund II, LLC, (“Fund II).  These entities have been formed to invest in real estate loans.
 
 During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services to us, VRM I and VRM II.  The CFO of our manager and other members of our accounting staff are employees of Strategix Solutions.  Strategix Solutions is managed by LL Bradford and Company, LLC ("LL Bradford"), a certified public accounting firm that has provided non-audit accounting services to us.  The principal manager of LL Bradford was a former officer of our manager from April 1999 through January 1, 2005.  Strategix Solutions is owned by certain partners of LL Bradford, none of whom are currently or were previously officers of our manager.  As used herein, “management” means our manager, its manager, its executive officers and the individuals at Strategix Solutions who perform accounting and financial reporting services on our behalf.




Business Objectives
 
 As a result of our members’ decision to liquidate the Company, we will not make any new loans and are in the process of winding up our affairs by collecting outstanding loans, pursuing remedies with respect to defaulted loans and preparing for sale/selling of our real estate held for sale.  Below is a brief description of our prior business activities.
 
 Real Estate Program Objectives (Prior to March 5, 2007)
 
 Prior to March 5, 2007, we sought to invest in income-producing multifamily residential units, office, industrial, and retail properties, assisted living facilities and other income-producing real property.  Such properties could have included hotels and resorts, restaurants, parking lots, amusement parks or other leasehold properties.  We intended to primarily lease the real property owned by us.  We sought to hold our properties until such time as we believed it was the optimal time to enable us to capitalize on the potential for appreciation of our properties.
 
 Real Estate Loan Objectives (Prior to July 2, 2009)
 
 After March 5, 2007, we sought to invest approximately 97% of our assets in five real estate loan products consisting of commercial, construction, acquisition and development, land and residential loans.  Approximately 3% of our assets were held as a working capital cash reserve.  Generally, the collateral on our real estate loans is the real property that the borrower was purchasing or developing, along with a guarantee of the main principal of the borrower, with the funds that we make available.  We sometimes refer to these real properties as the security properties.  While we may have invested in other types of loans, most of the loans in which we invested were made to real estate developers.  Our real estate investments are not insured or guaranteed by any government agency.
 
 The loans we invested in were selected for us by our manager from among loans originated by affiliated or non-affiliated mortgage brokers.  When a mortgage broker originated a loan for us, that entity identified the borrower, processed the loan application and brokered and sold, assigned, transferred or conveyed the loan to us.  We believed that our loans were attractive to borrowers because of the expediency of our manager’s loan approval process, which took about ten to twenty days.  For additional information regarding our current loan and real estate held for sale activity see Note D – Investments in Real Estate Loans and Note F – Real Estate Held for Saleof the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K. 
 Employees
 
 We have no employees.  Our manager, has provided and will continue to provide most of the employees necessary for our operations, except as described below regarding Strategix Solutions, LLC.  As of December 31, 2010, the Vestin entities had a total of 11 full-time and no part-time employees.  Except as hereinafter noted, all employees are at-will employees and none are covered by collective bargaining agreements.  John Alderfer, our former CFO, is a party to an employment, non-competition, confidentiality and consulting contract with Vestin Group, Inc., the parent company of our manager, through December 31, 2016.
 
 During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services to us, VRM I and VRM II.  The CFO of our manager and other members of our accounting staff are employees of Strategix Solutions.  Strategix Solutions is managed by LL Bradford and Company, LLC ("LL Bradford"), a certified public accounting firm that has provided non-audit accounting services to us.  The principal manager of LL Bradford was a former officer of our manager from April 1999 through January 1, 2005.  Strategix Solutions is owned by certain partners of LL Bradford, none of whom are currently or were previously officers of our manager.  As of December 31, 2010, Strategix Solutions dedicates to us a total of three employees.












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Available Information
 
 Our Internet website address is http://www.vestinmortgage.com/Products/Product_FundIII.aspx.  Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available through the SEC’s Electronic Data Gathering, Analysis and Retrieval website (“EDGAR”)  at  http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001230634&owner=include, after such material is electronically filed with or furnished, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, to the SEC.  Further, a copy of this annual report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.  Information on the operations of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.  The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.  Information contained on our website does not constitute a part of this Annual Report on Form 10-K.
 
 ITEM1A.
RISK FACTORS
 
 In considering our future performance and any forward-looking statements made in this report, the material risks described below should be considered carefully.  These factors should be considered in conjunction with the other information included elsewhere in this report.
 
 RISK FACTORS RELATING TO THE PLAN AND DISSOLUTION
 
 Our status as a dissolving company may adversely affect our dealings with potential buyers of foreclosed properties, existing borrowers and other third parties.
 
 We may have a more difficult time dealing with potential buyers of foreclosed properties, existing borrowers and other third parties who are aware of our status as a dissolving company.  In particular, we may not be able to locate a buyer willing to pay full fair market value on our real estate held for sale if such buyer is aware of our status as a dissolving company and our interest in liquidating such assets as promptly as is practicable.  Further, although our borrowers are bound by the existing terms of their real estate loans, some borrowers may seek to leverage our status as a dissolving company in negotiating settlements and compromises relating to their existing debt.  Accordingly, the amount we distribute to our members may be less than anticipated if our dealings with potential buyers, our borrowers and other third parties are adversely affected as a result of our status as a dissolving company.


We cannot determine with certainty the amount of distributions that we will make to our members.
 The amount of distributions that we will make to our members will depend on a variety of factors, including, but not limited to, the net proceeds we will receive from the sale of our remaining assets and from funds received on our Mortgage Assets in accordance with their terms, the resolution of any litigation and other contingent liabilities, the amount of expenses being incurred in connection with the Dissolution, the amount required to settle known and unknown debts and liabilities, and other factors.  Due to uncertainties regarding payoff of our outstanding loans and the amounts we will receive from sales of our real estate held for sale, we cannot predict the amount of distributions that we will make to our members upon our Dissolution.
 Defaults on our real estate loans and any failure to recover the full value of our investment in defaulted loans through foreclosure will reduce the amount of distributions that we will make to our members.
 In accordance with the Plan, our manager will liquidate the Company’s assets as promptly as is consistent with recovering the fair market value thereof.  Therefore, the amount of distributions will depend, in significant part, upon the ability of borrowers to pay off our existing real estate loans in a timely manner and the amounts we receive from the sale or other disposition of real estate we acquired through foreclosures.
 
 As of December 31, 2010, non-performing assets totaled approximately $2.1 million, representing approximately 64% of our total members’ equity and 48% of our total assets.  Non-performing assets included approximately $1.3 million in non-performing loans, net of allowance for loan losses of approximately $0.4 million, which does not include allowances of approximately $0.5 million relating to the decrease in the property value for performing loans, and approximately $0.8 million of real estate held for sale.  We believe the high level of non-performing assets is largely attributable to difficulties in the real estate and credit markets.  At this time, we are not able to predict how long such difficult economic conditions will continue.
 
 As of December 31, 2010, all of our loans provided for payments of interest only with a “balloon” payment of principal payable in full at the end of the term.  The success of a borrower’s ability to repay its real estate loan obligation in a large lump-sum payment may be dependent upon the borrower’s ability to refinance the obligation or otherwise raise a substantial amount of cash.  We are of the opinion that problems in the sub-prime residential mortgage market have adversely affected the general economy and the availability of funds for commercial real estate developers.  We believe this lack of available funds has led to an increase in defaults on our loans.  Furthermore, problems experienced in U.S. credit markets since the summer of 2007 have reduced the availability of credit for many prospective borrowers.  These problems have made it more difficult for our borrowers to obtain the anticipated re-financing necessary to pay back our loans.
 
 Thus, an extended period of illiquidity in the credit markets could result in a material increase in the number of our loans that are not paid back on time.  Any failure of our borrowers to pay interest and principal on our outstanding loans when due can be expected to reduce the amount of distributions to our members.
 
 In addition, the amount of distributions will be reduced if we are unable to recover the full value of our investment in loans that have defaulted through foreclosure of the underlying real estate collateral.  We depend upon our real estate security to protect us on the loans that we make.  We depend upon the skill of independent appraisers to value the security underlying our loans.  However, notwithstanding the experience of the appraisers, they may make mistakes, or the value of the real estate may decrease due to subsequent events.  Our appraisals are generally dated within 12 months of the date of loan origination and may have been commissioned by the borrower.  Therefore, the appraisals may not reflect a decrease in the value of the real estate due to events subsequent to the date of the appraisals.  In addition, most of the appraisals for construction and acquisition and development loans were prepared on an as-if developed basis, which approximates the post-construction value of the collateralized property assuming such property is developed.  As-if developed values on raw land loans or acquisition and development loans often dramatically exceed the immediate sales value and may include anticipated zoning changes and successful development by the purchaser upon which development is dependent on availability of financing.  As most of the appraisals were prepared on an as-if developed basis, if the loan goes into default prior to completion of the project, the market value of the property may be substantially less than the appraised value.  As a result, there may be less security than anticipated at the time the loan was originally made.  If there is less security and a default occurs, we may not recover the full amount of our loan, thus reducing the amount of proceeds available to distribute.




Difficulties in the real estate markets may reduce the amounts we receive from the sale of properties that we own.
 
 Real estate markets in the states where we operate, including Oregon, Arizona, Texas and Nevada, have been adversely affected by declining values, increased rates of default on loans secured by real estate and constraints in the credit markets.  These conditions may continue for several years.  The amount of proceeds we are able to generate from the sale of real estate that we own may be adversely affected by such conditions.  While we will not be required to complete the sales of such properties in any specific time frame, a prolonged recession in real estate will likely have the effect of reducing the proceeds we generate from such sales and the amounts we have available to pay as liquidating distributions to Members.
 
 There can be no assurances concerning the prices at which our real estate held for sale will be sold.
 
 Real estate market values are constantly changing and fluctuate with changes in interest rates, the availability of suitable buyers, the perceived quality and dependability of income flows from tenancies and other factors that are generally beyond our control.  During the past three years, real estate values in our principal markets have declined significantly.  As a result, the actual prices at which we are able to sell our real estate held for sale may be less than the amounts we anticipate, which would result in a reduction in the amount we expect to distribute to our members.  The amount available for distributions may also be reduced if the expenses we incur in selling our real estate held for sale are greater than anticipated.




We may not meet the anticipated timing for the Dissolution and Liquidation.
 
 On January 26, 2010, April 8, 2010 and September 17, 2010, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million and $0.3 million, respectively, in accordance with the Plan.  To date, no subsequent distributions have been made as sufficient funds have not been available.  The amounts distributed to each Member of the Fund were calculated based upon the percentage ownership interest of such Member in the Fund.  See Note H – Members’ Equity of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
 
 We are working toward the sale of our remaining assets and the winding up of our remaining business.  We expect that the Company will make distributions as cash becomes available subject to us covering our on-going expenses and existing and future obligations.  Our manager currently is planning on establishing a reserve and we currently have approximately $0.5 million in unrestricted cash.  No assurance can be given as to the amounts to be distributed or the timing of distributions.  The Company will make a final liquidating distribution after we have completed the winding up of our business operations and made appropriate provision for any remaining obligations.
  
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There are a number of factors that could delay our anticipated timetable, including the following:





·
Delays in the sale of real estate held by us through foreclosures, which may take many years to complete due to the time required to resolve pending litigation and bankruptcy matters involving foreclosed properties and to identify suitable buyers and consummate the sale of such properties;




·
Delays in distributions resulting from defaults in the payment of interest or principal when due on our real estate loans;





·
Lawsuits or other claims asserted by or against us;





·
Unanticipated legal, regulatory or administrative requirements; and





·
Delays in settling our remaining obligations.





We own certain of our mortgage assets jointly with other parties whose consent to sale of the properties we may not be able to obtain.





Some of our mortgage assets are held jointly with other parties, many of whom are affiliates whose loan portfolios are managed by our manager.  Because of the nature of joint ownership, sale of these assets will require the Company and its co-owners to agree on the terms of each property sale before such sale can be effected.  The principal terms of sale on which we must reach agreement with the joint owners include sale price, payment terms, closing contingencies for the benefit of the buyer and post-closing obligations of the sellers to reimburse the buyer for losses incurred as a result of a breach of a representation or warranty made by the sellers with respect to these jointly held assets.  There can be no assurance that the Company and its co-owners will agree on satisfactory sales terms for any of such assets.  If the parties are unable to agree, the matter could ultimately go before a court of law, and a judicial partition could be sought.  These legal proceedings would entail additional expense and delay in completing the sale of the jointly owned mortgage assets.





Members may be liable to our creditors for the amount received from us if we are unable to meet our obligations to third parties.





Under Nevada law, if we are unable to meet our obligations to third parties, then each member who received liquidating distributions could be held liable for payment to our creditors for their pro rata share of the amounts due such creditors.  The liability of any member would be limited to the amount of such liquidating distributions previously received by such member from us.  Accordingly, in such event, a member could be required to return all such distributions received from the Company.  If a member has paid taxes on liquidating distributions previously received, a repayment of all or a portion of such amount could result in a member incurring a net tax cost if the member’s repayment of an amount previously distributed does not cause a commensurate reduction in taxes payable.  Any contingency reserve established by us may not be adequate to cover any expenses and liabilities.  As of December 31, 2010, our total liabilities were approximately $1.1 million.  We intend to establish a reserve to pay all outstanding obligations before the Company is dissolved.  The amount of the reserve may be increased or decreased by our manager based upon its evaluation of the amounts necessary to meet our obligations.





We will continue to incur claims, liabilities and expenses, which will reduce the amount available for distribution to members.





We will continue to incur claims, liabilities, and expenses as we wind down.  These expenses and liabilities will reduce the amount ultimately available for distribution to our members.





ADDITIONAL RISKS RELATED TO OUR BUSINESS





Investments in second deeds of trust and wraparound loans are subject to the rights of the first deed of trust.





As of December 31, 2010, approximately $0.8 million  or 28% of our loans were secured by second deeds of trust.  In a second deed of trust, our rights as a lender, including our rights to receive payment on foreclosure, will be subject to the rights of the first deed of trust.  Because both of these types of loans are subject to the first deed of trust’s right to payment on foreclosure, we incurred a greater risk when we invested in these types of loans and we may not be able to collect the full amount of our loan and may provide an allowance for the full amount of the loan.  When funded, such loans constituted less than 10% of our loans.  The percentage of our loans in second deeds of trust have increased primarily due to the decrease in loans secured by first deeds of trust through sales, foreclosures and modifications.  As of December 31, 2010, one of our three loans secured by second deeds of trust was considered non-performing.  This non-performing loan totaled $14.0 million, of which our portion is $0.2 million.  In addition, all three of these second position loans had an allowance for loan loss of approximately $18.2 million, of which our portion is approximately $0.6 million.





Our loans are not guaranteed by any governmental agency.





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





We have and may continue to have difficulty protecting our rights as a secured lender.





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





·
Judicial foreclosure is subject to the delays of protracted litigation.  Although we expect non-judicial foreclosure to be quicker, our collateral may deteriorate and decrease in value during any delay in foreclosing on it;





·
The borrower’s right of redemption during foreclosure proceedings can deter the sale of our collateral and can for practical purposes require us to manage the property;





·
Unforeseen environmental hazards may subject us to unexpected liability and procedural delays in exercising our rights;





·
The rights of senior or junior secured parties in the same property can create procedural hurdles for us when we foreclose on collateral;





·
Required licensing and regulatory approvals may complicate our ability to foreclose or to sell a foreclosed property where our collateral includes an operating business;





·
We may not be able to pursue deficiency judgments after we foreclose on collateral; and





·
State and federal bankruptcy laws can prevent us from pursuing any actions, regardless of the progress in any of these suits or proceedings.





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





We intend to own real property only if we foreclose on a defaulted loan and purchase the property at the foreclosure sale.  Acquiring a property at a foreclosure sale may involve significant costs.  If we foreclose on the security property, we expect to obtain the services of a real estate broker and pay the broker’s commission in connection with the sale of the property.  We may incur substantial legal fees and court costs in acquiring a property through contested foreclosure and/or bankruptcy proceedings.  In addition, significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges, must be made on any property we own regardless of whether the property is producing any income.  See Note F – Real Estate Held for Sale in the notes to the financial statement under Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.








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




MANAGEMENT AND CONFLICTS OF INTEREST RISKS





We rely on our manager to manage our day-to-day operations.





We will rely upon our manager to manage the winding down and liquidation of our business.  The funds distributable to members through this process will depend, to a large extent, upon the efforts and skills of our manager.  Our manager’s duties to our members are generally governed by the terms of our Operating Agreement, rather than by common law principles of fiduciary duty.  Moreover, our manager is not required to devote its employees’ full time to our business and may devote time to business interests competitive to our business.





Our success depends on certain key personnel, the loss of whom could adversely affect our operating results, and on our manager’s ability to attract and retain qualified personnel.





Our success depends in part upon the continued contributions of Michael V. Shustek, Chief Executive Officer and Managing Member of our manager.  Mr. Shustek has extensive experience in our line of business, extensive market contacts and familiarity with our Company.  If Mr. Shustek was to cease his employment with our manager, he might be difficult to replace and our operating results could suffer.  None of the key personnel of our manager is subject to an employment, non-competition or confidentiality agreement with our manager or us, and we do not maintain “key man” life insurance policies on any of them.  Competition for personnel is intense, and we cannot be assured that we will be successful in attracting and retaining skilled personnel.  If our manager were unable to attract and retain key personnel, the ability of our manager to make prudent decisions on our behalf may be impaired.





Any indemnification of our manager by us will decrease the amount available for distribution.





Pursuant to our Operating Agreement, we may be required to indemnify our manager or its affiliates, agents, or attorneys from any action, claim or liability arising from any act or omission made in good faith and in performance of its duties under the Operating Agreement.  The availability of such indemnification may reduce the amount of funds we have available for distribution.  We do not have an independent board of directors to review and approve any proposed indemnification of our manager pursuant to the Operating Agreement.





Vestin Mortgage serves as our manager pursuant to our Operating Agreement.  It may be difficult to terminate Vestin Mortgage and our Operating Agreement does not reflect arm’s length negotiations.





Pursuant to the terms of our Operating Agreement, Vestin Mortgage acts as our manager.  The term of the Operating Agreement is for the duration of our existence.  Vestin Mortgage may only be terminated as manager upon the affirmative vote of a majority of members entitled to vote on the matter.  Consequently, it may be difficult to replace our manager in the event that our performance does not meet expectations or for other reasons.  The Operating Agreement was negotiated by related parties and may not reflect terms as favorable as those subject to arm’s length bargaining.





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





Our manager is also the manager of VRM I and VRM II, companies with investment objectives similar to ours.  Our manager and Mr. Shustek, who indirectly owns a significant majority of our manager, anticipate that they may also sponsor other real estate programs which had investment objectives similar to ours.  As a result, our manager and Mr. Shustek may have conflicts of interest in allocating their time and resources between our business and other activities.  During times of intense activity in other programs and ventures, our manager and its key people will likely devote less time and resources to our business than they ordinarily would.  Our Operating Agreement does not specify a minimum amount of time and attention that our manager and its key people are required to devote to our company.  Thus, our manager may not spend sufficient time managing our operations, which could result in our not meeting our investment objectives.





We have incurred losses as a result of our manager’s parent defaulting on a lease obligation, thereby triggering certain obligations under an outstanding letter of credit.





Vestin Group, the parent of our manager, was previously our tenant in a building we owned in Las Vegas, Nevada.  In connection with the sale of such building, we arranged for a $985,000 letter of credit in favor of the purchaser of the building (the “Purchaser”), which could be drawn upon by the Purchaser should Vestin Group default on its lease obligations.  The Purchaser drew $285,000 from the letter of credit in 2009.  In November 2010, the Purchaser drew the remaining $700,000 from the letter of credit, for payment of certain amounts due under its lease.  Vestin Group has been engaged in litigation with the Purchaser with respect to the lease.    In February 2011, the court granted judgment to the Purchaser.  No written judgment or order has been issued by the court and Vestin Group has motioned for reconsideration.  Vestin Group has provided us with a written agreement to fully indemnify and hold us harmless in the event that the Purchaser drew upon the letter of credit.  Nonetheless, a continuation of the dispute between Vestin Group and the Purchaser could result in our suffering the full loss of the letter of credit, which may not be immediately or fully reimbursed.  Our manager is required to reimburse us for the full $985,000, before August 2014.   For a discussion of litigation between Vestin Group and the building owner, see Note M - Legal Matters Involving The Company in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





ITEM1B.
UNRESOLVED STAFF COMMENTS





None.





ITEM2.
PROPERTIES





Our manager shares office facilities in Las Vegas, Nevada through a sublease with its parent corporation, Vestin Group.  In March, 2010, Vestin Group entered into a ten-year lease agreement with a borrower for office facilities in Las Vegas, Nevada.





We previously owned an approximately 42,000 square foot office building in Las Vegas, Nevada, that was sold to an unrelated third party in November 2006.  This building was leased to our parent corporation Vestin Group and the lease agreement governing this property expires in August 2014.  For a discussion of litigation between Vestin Group and the building owner, see Note M - Legal Matters Involving The Company in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





ITEM3.
LEGAL PROCEEDINGS





Please refer to Note M - Legal Matters Involving The Manager and Note N - Legal Matters Involving The Company in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K for information regarding legal proceedings, which discussion is incorporated herein by reference.





ITEM4.
REMOVED AND RESERVED





None.




PARTII





ITEM5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES








Market Information





There is no established public trading market for the trading of units.





Holders





As of April 4, 2011, approximately 504 unit holders held 2,024,424 units in the Company.





Liquidation Distribution Policy





On January 26, 2010, April 8, 2010 and September 17, 2010, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million and $0.3 million, respectively, in accordance with the Plan.  The amount distributed to each Member of the Fund was calculated based upon the percentage ownership interest of such Member in the Fund.  See Note H – Members’ Equity of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





-4-


We intend to make Liquidating Distributions on a quarterly basis in accordance with the Plan as set forth in Annex A of the Fund’s proxy statement filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 14(a) of the Securities and Exchange Act of 1934 on May 11, 2009.  We will distribute to our members the net proceeds we receive from the payoff of our outstanding real estate loans and the net proceeds we receive from the sale of our real estate held for sale, in each case, less a reasonable Reserve established to provide for payment of the Company’s ongoing expenses and contingent liabilities.  A final Liquidating Distribution will be made after we have completed the winding up of our business operations and made appropriate provision for any remaining obligations.





We anticipate that the liquidation of our real estate loans will take more than two years and the sale of foreclosed properties may take five or more years, with the Dissolution process being substantially completed by the second half of 2014.  However, because of numerous uncertainties, the liquidation may take longer or shorter than expected.  Because the liquidation of the Fund was not imminent, as of December 31, 2010, the financial statements are presented assuming the Fund will continue as a going concern.





There are a number of factors that could delay our anticipated timetable, including the following:





•
Delays in the sale of real estate held by us through foreclosures, which may take many years to complete due to the time required to resolve pending litigation and bankruptcy matters involving foreclosed properties and to identify suitable buyers and consummate the sale of such properties;





•
Delays in distributions resulting from defaults in the payment of interest or principal when due on our real estate loans;





•
Lawsuits or other claims asserted by or against us;





•
Unanticipated legal, regulatory or administrative requirements; and





•
Delays in settling our remaining obligations.





See Note H – Members’ Equity of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





Recent Sales of Unregistered Securities





None.





Equity Compensation Plan Information





None.





Purchases of Equity Securities by the Issuer and Affiliated Purchasers




None.





ITEM6.
SELECTED FINANCIAL DATA





Balance at December 31,Vestin Fund III, LLC

2010


2009Balance Sheet Data:Investments in real estate loans (net of allowance)

$
1,658,000


$
3,353,000Cash and cash equivalents and marketable securities-related party

$
610,000


$
2,126,000Cash - restricted

$
--


$
700,000Real estate held for sale

$
820,000


$
835,000Investment in real property (net of depreciation)

$
--


$
--Total assets

$
4,341,000


$
7,266,000Total liabilities

$
1,097,000


$
1,040,000Members’ equity

$
3,244,000


$
6,226,000





2010


2009Income Statement Data:Revenues

$
106,000


$
245,000Operating expenses


635,000



2,234,000Operating loss


(529,000
)


(1,989,000
)Non-operating income (loss)


(274,000
)


21,000Loss from real estate held for sale


(222,000
)


(2,630,000
)Net loss

$
(1,025,000
)

$
(4,598,000
)Loss from operations per weighted average membership units

$
(0.26
)

$
(0.96
)Net loss per weighted average membership units

$
(0.51
)

$
(2.21
)Cash distributions per weighted average membership units

$
--


$
--Weighted average membership units


2,024,424



2,079,141





The information in this table should be read in conjunction with the accompanying audited financial statements and notes to the financial statements included elsewhere in this document.





ITEM7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





The following is a financial review and analysis of our financial condition and results of operations for the years ended December 31, 2010, and December 31, 2009.  This discussion should be read in conjunction with our financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, Part I, Item 2 Management’s Discussion and Analysis of Financial Conditions and Results of Operations for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010.  In light of the decision in July 2009 to liquidate the Company, our historical operating results should not be viewed as indicative of future operating results.




FORWARD-LOOKING STATEMENTS





Certain statements in this report, including, without limitation, matters discussed under this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” should be read in conjunction with the financial statements, related notes, and other detailed information included elsewhere in this report on Form 10-K.  We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Statements that are not historical fact are forward-looking statements.  Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” or other similar expressions.  Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements.  These forward-looking statements are based on our current beliefs, intentions and expectations.  These statements are not guarantees or indicative of future performance.  Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described in Part I Item 1A Risk Factors of this Annual Report on Form 10-K and in our other securities filings with the Securities and Exchange Commission





-5-


(“SEC”).  Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and involve inherent risks and uncertainties.  Our estimates of the value of collateral securing our




RESULTS OF OPERATIONS





OVERVIEW





At a special meeting of our members held on July 2, 2009, a majority of the members voted to approve the dissolution and winding up of the Fund, in accordance with the Plan of Complete Liquidation and Dissolution (the “Plan”) as set forth in Annex A of the Fund’s proxy statement filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 14(a) of the Securities and Exchange Act of 1934 on May 11, 2009.  The Plan became effective upon its approval by the members on July 2, 2009.  As a result, we have commenced an orderly liquidation and we no longer invest in new real estate loans.  Our historical operating results should not be viewed as indicative of future results as we implement the Plan.  We currently anticipate that the liquidation will be substantially completed by the second half of 2014.  However, because of numerous uncertainties, the liquidation may take longer or shorter than expected.  Because the liquidation of the Fund was not imminent, as of December 31, 2010, the financial statements are presented assuming the Fund will continue as a going concern. Pursuant to the Plan, we will make liquidating distributions to members on a quarterly basis as funds become available, subject to reasonable reserve established to provide for payment of the Company’s ongoing expenses and contrast liabilities.  Our manager has established a reserve to cover our on-going expenses and future obligations.  As of December 31, 2010, our unrestricted cash was approximately $0.5 million.





On January 26, 2010, April 8, 2010 and September 17, 2010, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million and $0.3 million, respectively, in accordance with the Plan.  To date, no subsequent distributions have been made as sufficient funds have not been available.  The amounts distributed to each Member of the Fund were calculated based upon the percentage ownership interest of such Member in the Fund.  See Note H – Members’ Equity of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





Under the terms of the Plan adopted by a majority of our members, our members no longer have the right to have their units redeemed by us and we no longer honor any outstanding redemption requests effective as of July 2, 2009.





Prior to the approval of the Plan, our primary business objective was to generate income while preserving principal by investing in loans secured by real estate.  The loan underwriting standards utilized by our manager and Vestin Originations were less strict than those used by many institutional real estate lenders.  In addition, one of our competitive advantages was our ability to approve loan applications more quickly than many institutional lenders.  As a result, in certain cases, we made real estate loans that were riskier than real estate loans made by many institutional lenders such as commercial banks.  However, in return, we sought a higher interest rate and our manager took steps to mitigate the lending risks such as imposing a lower loan-to-value ratio.  While we may have assumed more risk than many institutional real estate lenders, in return, we sought to generate higher yields from our real estate loans.





Our historical operating results were affected primarily by: (i) the amount of capital we invested in real estate loans, (ii) the level of real estate lending activity in the markets we serviced, (iii) the interest rates we were able to charge on our loans and (v) the level of non-performing assets, foreclosures and related loan losses that we experienced.





Our recent operating results have been adversely affected by increases in allowances for loan losses and increases in non-performing assets.  This negative trend accelerated sharply during the year ended December 31, 2008 and continues to affect our operations.  As of December 31, 2010, we had two loans considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due).  These loans are currently carried on our books at a value of approximately $1.3 million, net of allowance for loan losses of approximately $0.4 million.  These loans have been placed on non-accrual of interest status and are the subject of pending foreclosure proceedings.





Non-performing assets, net of allowance for loan losses, totaled approximately $2.1 million or 48% of our total assets as of December 31, 2010, as compared to approximately $2.8 million or 39% of our total assets as of December 31, 2009.  At December 31, 2010, non-performing assets consisted of approximately $0.8 million of real estate held for sale and approximately $1.3 million of non-performing loans, net of allowance for loan losses.  One of the real estate held for sale properties generated net income from guarantors totaling $1,000 during the year ended December 31, 2010.  None of the other properties held for sale generated net income during such time period.  See Note F – Real Estate Held for Sale and Note D – Investments In Real Estate Loans of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





We believe that the significant increase in the level of our non-performing assets is a direct result of the continued deterioration of the economy and credit markets.  As the economy has weakened and credit has become more difficult to obtain, many of our borrowers who develop and sell commercial real estate projects have been unable to complete their projects, obtain takeout financing or have otherwise been adversely impacted.  Our exposure to the negative developments in the credit markets and general economy has likely been increased by our business strategy, which, until the approval of the Plan entailed more lenient underwriting standards and expedited loan approval procedures.  Moreover, declining real estate values in the principal markets in which we operate has in many cases eroded the current value of the security underlying our loans.





We expect that the weakness in the credit markets and the weakness in lending will continue to have an adverse impact upon our markets for the foreseeable future.  This may result in a further increase in defaults on our loans and we might be required to record additional reserves based on decreases in market values or we may be required to restructure loans.  This increase in loan defaults has materially affected our operating results.  For additional information regarding our non-performing loans see “Non-Performing Loans” in Note D – Investments In Real Estate Loans of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





As of December 31, 2010, our loan-to-value ratio was 96.06%, net of allowances for loan losses, on a weighted average basis generally using updated appraisals.  Additional marked increases in loan defaults accompanied by additional declines in real estate values, as evidenced by updated appraisals generally prepared on an “as-is-basis,” will continue to have a material adverse effect on our financial condition and operating results.  The current loan-to-value ratio is primarily a result of declining real estate values, which have eroded the market value of our collateral.


As of December 31, 2010, we have provided a specific reserve allowance for two non-performing loans and three performing loans based on updated appraisals of the underlying collateral and our evaluation of the borrower for these loans, obtained by our manager.  For further information regarding allowance for loan losses, refer to Note D – Investments in Real Estate Loans of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





As of December 31, 2010, our loans were in the following states: Arizona, Nevada, Oregon and Texas.





SUMMARY OF FINANCIAL RESULTS





The Year Ended December 31, 2010 Compared To the Year Ended December 31, 2009





Total Revenues:  For the year ended December 31, 2010, total revenues were approximately $0.1 million compared to approximately $0.2 million during the year ended December 31, 2009, a decrease of $0.1 million or 57%.  Revenues were primarily affected by the following factors:





·
Interest income from investments in real estate loans decreased to approximately $81,000 during the year ended December 31, 2010, compared to approximately $191,000 during the same period in 2009.  This decrease is primarily due to the decrease in the balance of our investment in real estate loans and the interest earned on these loans during the year ended December 31, 2010 compared to the year ended December 31, 2009.  In addition, we foreclosed upon one non-performing loan and classified it as real estate held for sale, totaling approximately $0.5 million.  As of December 31, 2010, our investment in real estate loans was approximately $2.7 million compared to our investment in real estate loans of approximately $5.5 million as of December 31, 2009.  We anticipate this downward trend in interest income to continue as we liquidate the Company pursuant to the Plan, as we will no longer invest in new loans.  Interest income has also been adversely affected by the level of non-performing assets in our portfolio.  We expect all of these factors will continue to have an adverse effect upon our operating results during 2011.  For additional information see Note D – Investments in Real Estate Loans of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





·
During the year ended December 31, 2009, we recognized a gain related to the pay off of an investment in real estate loan of approximately $51,000.  No similar gain was recognized during the year ended December 31, 2010.





Total Operating Expenses:  For the year ended December 31, 2010, total operating expenses were approximately $0.6 million compared to approximately $2.2 million during the year ended December 31, 2009, a decrease of approximately $1.6 million or 72%.  Expenses were primarily affected by the allowance for loan losses.  During the year ended December 31, 2010, we recognized approximately $0.3 million in provision for loan loss on four investments in real estate loans.  For the year ended December 31, 2009, we recognized approximately $1.9 million in provision for loan loss on 12 investments in real estate loans.





-6-


Total Non-Operating Income (Loss):  For the year ended December 31, 2010, total non-operating loss was $274,000 compared to total non-operating income of approximately $21,000 during the year ended December 31, 2009, which was due substantially to the recognition of an other than temporary impairment of our marketable securities-related party, totaling approximately $0.2 million during the year ended December 31, 2010.  We had no similar loss during the same period in 2009.





Total Loss from Real Estate Held for Sale:For the year ended December 31, 2010, total loss from real estate held for sale was approximately $0.2 million compared to approximately $2.6 million for the year ended December 31, 2009.  The loss from real estate held for sale is mainly due to the write-down on four real estate held for sale properties of approximately $0.1 million during the year ended December 31, 2010.  During the year ended December 31, 2009, total write-downs on real estate held for sale was approximately $2.3 million on 11 real estate held for sale properties.  In addition, we recorded a net loss on sale of real estate held for sale of approximately $5,000 on one property we sold during the year ended December 31, 2010.  For additional information see Note F – Real Estate Held for Sale of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





Distributions to Members:  The following is a schedule of distributions made to members for the year ended December 31, 2010 and 2009.





For the Year

Ended December 31,2010


2009Distribution of net income available for distribution

$
--


$
--Reduction to working capital due to net loss


(1,025,000
)


--Distribution in excess of net income available for distribution


3,176,000



--Total distributions

$
2,151,000


$
--





Net Income Available for Distributions is a non-GAAP financial measure that is defined in our Operating Agreement as cash flows from operations, less certain reserves, and may exceed net income as calculated in accordance with GAAP.  We have presented net income available for distribution because management believes this financial measure is useful and important to members.  Distributions in excess of net income available for distribution will be treated as a return of capital for income tax purposes.  This non-GAAP financial measure should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity.  We compensate for these limitations by relying primarily on our GAAP results and using net income available for distribution only supplementally.





The most directly comparable GAAP measure to net income available for distribution is cash flows from operating activities.  The following table reconciles net income available for distribution to cash flows from operating activities and presents the two other major categories of our statement of cash flows:





For the Year

Ended December 31,2010


2009Distribution of net income available for distribution

$
--


$
--Distribution of working capital


--



--Increase (Reductions) to working capital


733,000



(390,000
)Realized net loss on foreclosure of loans


--



--Provision of doubtful accounts related to receivables


8,000



4,000Gain on sale of real estate held for sale


--



(26,000
)Loss on sale of real estate held for sale


5,000



241,000Change in operating assets and liabilities:Interest receivable


(6,000
)


10,000Accounts payable


11,000



(80,000
)Due to related parties


(765,000
)


(315,000
)Other assets


(4,000
)


--Net cash used by operating activities

$
(1,043,000
)

$
(556,000
)Net cash provided by investing activities

$
1,711,000


$
2,274,000Net cash used by financing activities

$
(2,103,000
)

$
(1,322,000
)





Stated Unit Value Adjustment:  In accordance with Section 7.8 of our Operating Agreement, our manager reviewed the value of our assets during the three months ended December 31, 2010.  Based on this review the value of members’ capital accounts was adjusted from $2.28 per unit to $1.60 per unit, as of January 1, 2011.  The periodic review of the estimated net unit value includes an analysis of unrealized gains that our manager reasonably believes exist at the time of the review, but that cannot be added to net asset value under GAAP.





Redemptions:  At a special meeting of our members held on July 2, 2009, a majority of the members voted to approve the dissolution and winding up of the Fund, in accordance with the Plan as set forth in Annex A of the Fund’s proxy statement filed with the SEC pursuant to Section 14(a) of the Securities and Exchange Act of 1934 on May 11, 2009.  The Plan became effective upon its approval by the members on July 2, 2009.  Our members no longer have the right to have their units redeemed by us and we no longer honor any outstanding redemption requests effective as of July 2, 2009.  As of July 2, 2009, the total redemptions made from inception were approximately $10.4 million.  For additional information regarding members redemptions, see Note H – Members’ Equity of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





The Year Ended December 31, 2009 Compared To the Year Ended December 31, 2008





Total Revenues:  For the year ended December 31, 2009, total revenues were approximately $0.2 million compared to approximately $0.9 million during the year ended December 31, 2008, a decrease of $0.7 million or 74%.  Revenues were primarily affected by the following factors:





·
Interest income from investments in real estate loans decreased to approximately $191,000 during the year ended December 31, 2009, compared to approximately $925,000 during the same period in 2008.  This decrease is primarily due to the decrease in the balance of our investment in real estate loans and the interest earned on these loans during the year ended December 31, 2009 compared to the year ended December 31, 2008.  In addition, we foreclosed upon five non-performing loans and classified them as real estate held for sale, totaling approximately $2.6 million net of allowance for loan losses approximating $1.9 million.  As of December 31, 2009, our investment in real estate loans was approximately $5.5 million compared to our investment in real estate loans of approximately $13.3 million as of December 31, 2008.  We anticipate this downward trend in interest income to continue as we liquidate the Company pursuant to the Plan, as we will no longer invest in new loans.  Interest income has also been adversely affected by the level of non-performing assets in our portfolio.  We expect all of these factors will continue to have an adverse effect upon our operating results during 2010.  For additional information see Note D – Investments in Real Estate Loans of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





·
During the year ended December 31, 2009, we recognized a gain related to the pay off of an investment in real estate loan of approximately $51,000.  No similar gain was recognized during the year ended December 31, 2008.





Total Operating Expenses:  For the year ended December 31, 2009, total operating expenses were approximately $2.2 million compared to approximately $6.4 million during the year ended December 31, 2008, a decrease of approximately $4.2 million or 65%.  Expenses were primarily affected by the allowance for loan losses.  During the year ended December 31, 2009, we recognized approximately $1.9 million in provision for loan loss on 12 investments in real estate loans.  For the year ended December 31, 2008, we recognized approximately $5.9 million in provision for loan loss on 16 investments in real estate loans.





Total Non-Operating Income (Loss):  For the year ended December 31, 2009, total non-operating income was $21,000 compared to total non-operating loss of approximately $1.1 million during the year ended December 31, 2008, which was due substantially to the recognition of an other than temporary impairment of our marketable securities-related party, totaling approximately $1.2 million during the year ended December 31, 2008.  We had no similar loss during the same period in 2009.





Total Loss from Real Estate Held for Sale:For the year ended December 31, 2009, total loss from real estate held for sale was approximately $2.6 million compared to approximately $3.5 million for the year ended December 31, 2008.  The loss from real estate held for sale is mainly due to the write-down on 11 real estate held for sale properties of approximately $2.3 million during the year ended December 31, 2009.  During the year ended December 31, 2008, total write-downs on real estate held for sale was approximately $3.3 million on eight real estate held for sale properties.  In addition, we recorded a net loss on sale of real estate held for sale of approximately $0.2 million on five properties we sold during the year ended December 31, 2009.  For additional information see Note F – Real Estate Held for Sale of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.






-7-


Distributions to Members:  The following is a schedule of distributions made to members for the year ended December 31, 2009 and 2008.





For the Year

Ended December 31,2009


2008Distribution of net income available for distribution

$
--


$
--Reduction to working capital due to net loss


--



(1,869,000
)Distribution in excess of net income available for distribution


--



2,558,000Total distributions

$
--


$
689,000





Net Income Available for Distributions is a non-GAAP financial measure that is defined in our Operating Agreement as cash flows from operations, less certain reserves, and may exceed net income as calculated in accordance with GAAP.  We have presented net income available for distribution because management believes this financial measure is useful and important to members.  Distributions in excess of net income available for distribution will be treated as a return of capital for income tax purposes.  This non-GAAP financial measure should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity.  We compensate for these limitations by relying primarily on our GAAP results and using net income available for distribution only supplementally.





The most directly comparable GAAP measure to net income available for distribution is cash flows from operating activities.  The following table reconciles net income available for distribution to cash flows from operating activities and presents the two other major categories of our statement of cash flows:





For the Year

Ended December 31,2009


2008Distribution of net income available for distribution

$
--


$
--Distribution of working capital


--



689,000Reductions to working capital


(390,000
)


(2,558,000
)Realized net loss on foreclosure of loans


--



2,280,000Provision of doubtful accounts related to receivables


4,000



28,000Gain on sale of real estate held for sale


(26,000
)


30,000Loss on sale of real estate held for sale


241,000



38,000Change in operating assets and liabilities:Interest receivable


10,000



152,000Accounts payable


(80,000
)


10,000Due to related parties


(315,000
)


66,000Other assets


--



3,000Net cash provided (used) by operating activities

$
(556,000
)

$
738,000Net cash provided by investing activities

$
2,274,000


$
1,487,000Net cash used by financing activities

$
(1,322,000
)

$
(3,461,000
)





Stated Unit Value Adjustment:  In accordance with Section 7.8 of our Operating Agreement, our manager reviewed the value of our assets during the three months ended December 31, 2009.  Based on this review the value of members’ capital accounts was adjusted from $4.04 per unit to $3.56 per unit, as of January 1, 2010.  The periodic review of the estimated net unit value includes an analysis of unrealized gains that our manager reasonably believes exist at the time of the review, but that cannot be added to net asset value under GAAP.





Redemptions:  At a special meeting of our members held on July 2, 2009, a majority of the members voted to approve the dissolution and winding up of the Fund, in accordance with the Plan as set forth in Annex A of the Fund’s proxy statement filed with the SEC pursuant to Section 14(a) of the Securities and Exchange Act of 1934 on May 11, 2009.  The Plan became effective upon its approval by the members on July 2, 2009.  Our members no longer have the right to have their units redeemed by us and we no longer honor any outstanding redemption requests effective as of July 2, 2009.  As of December 31, 2009, the total redemptions made from inception were approximately $10.4 million.  For additional information regarding members redemptions, see Note H – Members’ Equity of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





CAPITAL AND LIQUIDITY





Liquidity is a measure of a company’s ability to meet potential cash requirements, including ongoing commitments to fund lending activities and general operating purposes.  As a result of the decision to liquidate the Company, we no longer invest in new loans.  Hence, subject to retaining sufficient funds to meet our obligations and conduct wind down operations, all available funds will be paid out to our members.  We do not anticipate the need for hiring any employees, acquiring fixed assets such as office equipment or furniture, or incurring material office expenses during the next twelve months because our manager will manage our affairs.





During the year ended December 31, 2010, net cash flows used in operating activities approximated $1.0 million.  Operating cash flows were adversely impacted by the decrease in interest income of approximately $0.1 million, related to the decrease in our investments in real estate loans during the year ended December 31, 2010, compared to the same period in 2009.  In addition, we incurred approximately $0.2 million in write-downs on real estate held for sale and approximately $0.3 million in provisions for loan losses during the year ended December 31, 2010.  These write-downs and allowances represent the decreases in the fair value of these properties, which are expected to affect the amount of proceeds we will receive from future sales of these assets.  Cash flows related to investing activities consisted of cash provided by loan payoffs, loan sales and sales of real estate held for sale of approximately $1.7 million.  In addition, our restricted cash was reduced by $700,000, which we used to reimburse a bank for a letter of credit that it had drawn upon.  Cash flows used for financing activities consisted of cash used for members’ redemptions of approximately $2.1 million.





At December 31, 2010, we had approximately $0.5 million in unrestricted cash, $0.2 million in marketable securities – related party and approximately $4.3 million in total assets.  We intend to meet short-term working capital needs through a contingency reserve, pursuant to the Plan.  We believe we have sufficient working capital to meet our operating needs during the next 12 months.





During the second quarter ended June 30, 2010, the Trustee in a Bankruptcy case, involving one of our non-performing commercial loans in California, sold the assets of the Borrower to an unrelated third party for an aggregate amount of $4.1 million.  The proceeds, net of all court costs, closing costs, trustee’s fees, real estate taxes and security guard services, totaled approximately $3.4 million.  An unaffiliated lender was successful in claiming an interest in the proceeds of the bankruptcy sale, purportedly based on loans of approximately $0.9 million, secured by some of the equipment located at the property.  A motion to determine the allocation of the sale proceeds was filed with the Bankruptcy Court.  In the interim, a settlement was reached with the unaffiliated lender wherein we, VRM I and VRM II will receive approximately $2.7 million, of which our portion equals $0.2 million.





On January 26, 2010, April 8, 2010 and September 17, 2010, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million and $0.3 million, respectively, in accordance with the Plan.  The amounts distributed to each Member of the Fund were calculated based upon the percentage ownership interest of such Member in the Fund.  See Note H – Members’ Equity of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





Investments in Real Estate Loans Secured by Real Estate Portfolio





As of December 31, 2010, we had investments in five real estate loans with a balance of approximately $2.7 million as compared to investments in 10 real estate loans, as of December 31, 2009, with a balance of approximately $5.5 million.  In accordance with the Plan, we will no longer invest in new loans.





As of December 31, 2010, we had two loans considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due).  These loans are currently carried on our books at a value of approximately $1.3 million, net of allowance for loan losses of approximately $0.4 million, which does not include the allowances of approximately $0.6 million relating to the decrease in the property value for performing loans as of December 31, 2010.  These loans have been placed on non-accrual of interest status and may be the subject of pending foreclosure proceedings.  Our manager has evaluated these loans and, based on current estimates, believes that the value of the underlying collateral is sufficient to protect us from loss of principal.  However, such estimates may change, or the value of the underlying collateral may deteriorate, in which case further losses may be incurred.




-8-


Our manager periodically reviews and makes a determination as to whether the allowance for loan losses is adequate to cover any potential losses.  Additions to the allowance for loan losses are made by charges to the provision for loan loss.  Recoveries of previously charged off amounts are credited to the allowance for loan losses or included as income when the asset is disposed.  As of December 31, 2010, we have provided a specific reserve related to two non-performing loans and three performing loans, based on updated appraisals and evaluation of the borrower obtained by our manager, totaling approximately $1.0 million.  Our manager evaluated these loans and concluded that the remaining underlying collateral was sufficient to protect us against further losses of principal or interest.  Our manager will continue to evaluate these loans in order to determine if any other allowance for loan losses should be recorded.  As of April 4, 2011, we believe we may continue to experience declining book values in investments in real estate loans and real estate held for sale.




During the year ended December 31, 2010, we foreclosed upon one property, totaling approximately $0.5 million, net of allowance for loan loss, and classified it as real estate held for sale.  For additional information on our investments in real estate loans, refer to Note D – Investments In Real Estate Loans and Note F – Real Estate Held for Sale of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





Asset Quality and Loan Reserves





Losses may occur from investing in real estate loans.  The amounts of losses will vary as the loan portfolio is affected by changing economic conditions and the financial condition of borrowers.





The conclusion that a real estate loan is uncollectible or that collectability is doubtful is a matter of judgment.  On a quarterly basis, our manager evaluates our real estate loan portfolio for impairment.  The fact that a loan is temporarily past due does not necessarily mean that the loan is non-performing.  Rather, all relevant circumstances are considered by our manager to determine impairment and the need for specific reserves.  Such evaluation, which includes a review of all loans on which full collectability may not be reasonably assured, considers among other matters:





·
Prevailing economic conditions;





·
Historical experience;





·
The nature and volume of the loan portfolio;





·
The borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay;





·
Evaluation of industry trends; and




·
Estimated net realizable value of any underlying collateral in relation to the real estate loan amount.





Non-performing assets included loans in non-accrual status, net of allowance for loan losses, and real estate held for sale totaling approximately $1.3 million and $0.8 million, respectively, as of December 31, 2010, compared to approximately $2.0 million and $0.8 million, respectively, as of December 31, 2009.  It is possible that no earnings will be recognized from these assets until they are disposed of, or that no earnings will be recognized at all, and the time it will take to dispose of these assets cannot be predicted.  Our manager believes that these non-performing assets have increased in significant part as a result of conditions in the real estate and credit markets.  We believe that the continued weakness in real estate markets may result in additional losses on our real estate held for sale.





As a commercial real estate lender who was willing to invest in riskier loans, rates of delinquencies, foreclosures and losses on our loans could be higher than those generally experienced in the commercial mortgage lending industry during this period of economic slowdown and recession.  Problems in the sub-prime residential mortgage market have adversely affected the general economy and the availability of funds for commercial real estate developers.  We believe this lack of available funds has led to an increase in defaults on our loans.  Furthermore, problems experienced in U.S. credit markets since the summer of 2007 have reduced the availability of credit for many prospective borrowers.  These problems have made it more difficult for our borrowers to obtain the anticipated re-financing necessary in many cases to pay back our loans.  Thus, we have had to work with some of our borrowers to either modify, restructure and/or extend their loans in order to keep or restore the loans to performing status.





Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses.  Additions to the allowance for loan losses are made by charges to the provision for loan loss.  Recoveries of previously charged off amounts are credited to the allowance for loan losses.  For additional information regarding the roll-forward of the allowance for loan losses for the year ended December 31, 2010, refer to Note D – Investments In Real Estate Loans of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





Real Estate Held for Sale





At December 31, 2010, we held four properties with a total carrying value of approximately $0.8 million, which were acquired through foreclosure and recorded as investments in real estate held for sale.  Our investments in real estate held for sale are accounted for at the lower of cost or fair value less costs to sell with fair value based on appraisals and knowledge of local market conditions.  It is not our intent to invest in or to own real estate as a long-term investment.  We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.  For additional information on our investments in real estate held for sale, refer to Note F – Real Estate Held for Sale of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





OFF-BALANCE SHEET ARRANGEMENTS





As of December 31, 2010, we do not have any interests in off-balance sheet special purpose entities nor do we have any interests in non-exchange traded commodity contracts.





CONTRACTUAL OBLIGATIONS





The following summarizes our contractual obligations at December 31, 2010:





Contractual Obligation

Total


Less Than 1 Year


1-3 Years


3-5 Years


More Than

5 YearsNote payable

$
48,000


$
--


$
48,000



--



--Total

$
48,000


$
--


$
48,000


$
--


$
--





See Note J – Notes Payable of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





RELATED PARTY TRANSACTIONS





Prior to July 2, 2009, we may have acquired or sold investments in real estate loans from/to our manager or other related parties.  Pursuant to the terms of our Operating Agreement, such acquisitions and sales were made without any mark up or mark down.  No gain or loss was recorded on these transactions, as it was not our intent to make a profit on the purchase or sale of such investments.  The purpose was generally to diversify our portfolio by syndicating loans, thereby providing us with additional capital to make additional loans.  From time to time, we may continue to sell performing investments in real estate loans to our manager or other related parties, without any mark up or mark down.  No gain or loss will be recorded on these transactions.  For further information regarding related party transactions, refer to Note G – Related Party Transactions of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





CRITICAL ACCOUNTING ESTIMATES





Revenue Recognition





Interest income on loans is accrued by the effective interest method.  We do not accrue interest income from loans once they are determined to be non-performing.  A loan is considered non-performing when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due.




-9-


The following table presents a sensitivity analysis, averaging the balance of our loan portfolio at the end of the last six quarters, to show the impact on our financial condition at December 31, 2010, from fluctuations in weighted average interest rate charged on loans as a percentage of the loan portfolio:




Changed Assumption

Increase (Decrease) in Interest IncomeWeighted average interest rate assumption increased by 1.0% or 100 basis points

$
47,000Weighted average interest rate assumption increased by 5.0% or 500 basis points

$
235,000Weighted average interest rate assumption increased by 10.0% or 1,000 basis points

$
470,000Weighted average interest rate assumption decreased by 1.0% or 100 basis points

$
(47,000
)Weighted average interest rate assumption decreased by 5.0% or 500 basis points

$
(235,000
)Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points

$
(470,000
)





The purpose of this analysis is to provide an indication of the impact that the weighted average interest rate fluctuations would have on our financial results.  It is not intended to imply our expectation of future revenues or to estimate earnings.  We believe that the assumptions used above are appropriate to illustrate the possible material impact on the financial statements.





Allowance for Loan Losses





We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment in our investment in real estate loans portfolio.  Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan.  Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans.  Actual losses on loans are recorded as a charge-off or a reduction to the allowance for loan losses.  Subsequent recoveries of amounts previously charged off are added back to the allowance or included as income.





The following table presents a sensitivity analysis to show the impact on our financial condition at December 31, 2010, from increases and decreases to our allowance for loan losses as a percentage of the loan portfolio:




Changed Assumption

Increase (Decrease) in Allowance for Loan LossesAllowance for loan losses assumption increased by 1.0% of loan portfolio

$
27,000Allowance for loan losses assumption increased by 5.0% of loan portfolio

$
134,000Allowance for loan losses assumption increased by 10.0% of loan portfolio

$
268,000Allowance for loan losses assumption decreased by 1.0% of loan portfolio

$
(27,000
)Allowance for loan losses assumption decreased by 5.0% of loan portfolio

$
(134,000
)Allowance for loan losses assumption decreased by 10.0% of loan portfolio

$
(268,000
)





Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property.  As a commercial real estate lender, which had invested in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the mortgage lending industry.  We  and our manager generally approved loans more quickly than other real estate lenders and, due to our expedited underwriting process, there is a risk that the credit inquiries we performed did not reveal all material facts pertaining to a borrower and the security.





We may discover additional facts and circumstances as we continue our efforts in the collection and foreclosure processes.  This additional information often causes management to reassess its estimates.  In recent years, we have revised estimates of our allowance for loan losses.  Circumstances that may cause significant changes in our estimated allowance include, but are not limited to:





·
Declines in real estate market conditions that can cause a decrease in expected market value;





·
Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;





·
Lack of progress on real estate developments after we advance funds.  We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances.  After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances;





·
Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed upon property; and





·
Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.





RECENT ACCOUNTING PRONOUNCEMENTS





In January 2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-06 regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements.  This ASU requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers.  Further, this ASU requires additional disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements.  This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  We are currently evaluating the impact of this ASU, however, we do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.





On December 21, 2010, the FASB issued ASU 2010-29, which impacts any public entity that enters into business combinations that are material on an individual or aggregate basis. The guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenues and earnings of the combined entity as though the business combination(s) that occurred during the year had occurred at the beginning of the prior annual period when preparing the pro forma financial information for both the current and prior reporting periods. The guidance also requires that pro forma disclosures be accompanied by a narrative description regarding the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in reported pro forma revenues and earnings. This guidance is effective for business combinations consummated in periods beginning after December 15, 2010.  We do not believe the adoption of this guidance will have a material impact on our Consolidated Financial Statements.





ITEM7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We are exposed to market risk, primarily from changes in interest rates.  We do not deal in any foreign currencies and do not own any options, futures or other derivative instruments.  As of December 31, 2010, we do not have a significant amount of debt.





Most of our assets consist of investments in real estate loans.  At December 31, 2010, our aggregate investment in real estate loans was approximately $1.7 million, net of allowance of approximately $1.0 million, with a weighted average effective interest rate of 10.14%.  The weighted average interest rate of 10.14% is based on the contractual terms of the loans for the entire portfolio including non-performing loans.  The weighted average interest rate on performing loans only, as of December 31, 2010, was 6.16%.  Most of the real estate loans had an initial term of 12 months.  The weighted average term of outstanding loans, including extensions, at December 31, 2010, was 13 months.  All of the outstanding real estate loans at December 31, 2010, were fixed rate loans.  All of the real estate loans are held for investment purposes; none are held for sale.  We intend to hold such real estate loans to maturity.  As of December 31, 2010, none of our loans had a prepayment penalty, although four of our loans, totaling approximately $2.3 million, had an exit fee.  Out of the four loans with an exit fee, two loans, totaling approximately $1.7 million, were considered non-performing as of December 31, 2010.





Market fluctuations in interest rates generally do not affect the carrying value of our investment in real estate loans.  However, significant and sustained changes in interest rates could affect our operating results.  If interest rates decline significantly, some of the borrowers could prepay their loans with the proceeds of a refinancing at lower interest rates.  This would reduce our earnings and funds available for dividend distribution to stockholders.  On the other hand, a significant increase in interest rates could result in a slowdown in real estate development activity that would reduce the demand for commercial real estate loans.  We are not in a position to quantify the potential impact on our operating results from a material change in interest rates.





-10-


The following table contains information about the investment of real estate loans in our portfolio as of December 31, 2010.  The presentation aggregates the investment in real estate loans by their maturity dates for maturities occurring in each of the years 2011 through 2015 and thereafter and separately aggregates the information for all maturities arising after 2014.  The carrying values of these assets approximate their fair value as of December 31, 2010.  See Note K – Fair Value of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





Interest Earning Assets

Aggregated by Maturity at December 31, 2010Interest Earning Assets

2011


2012


2013


2014


2015


Thereafter


Total(a)Investments In Real Estate Loans

$
2,675,000


$
--


$
--


$
--


$
--


$
--


$
2,675,000Weighted Average Interest Rates


10.14
%


--
%


--
%


--
%


--
%


--
%


10.14
%





(a)
Amounts include the balance of non-performing loans and loans that have been extended subsequent to December 31, 2010.





At December 31, 2010, we also had approximately $0.6 million invested in cash and marketable securities – related party (VRM II).  We believe that these financial assets do not give rise to significant interest rate risk due to their short-term nature.






















































































































































-11-
 Table of Contents











ITEM8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA








INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION





PageREPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
13FINANCIAL STATEMENTSBalance Sheets
14Statements of Operations
15Statements of Members’ Equity and Other Comprehensive Income (Loss)
16Statements of Cash Flows
17Notes to the Financial Statements
19SUPPLEMENTARY INFORMATION
29Investments in Real Estate Loans:Real Estate Loan Roll Forward
29Real Estate Loans by Type of Property
29Real Estate Loans by Lien Position
29Real Estate Loans that Exceed Three Percent of the Portfolio
30









































































































































-12-










REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM










To the Members of


Vestin Fund III, LLC





We have audited the accompanying balance sheet of Vestin Fund III, LLC (the “Company”) as of December 31, 2010 and the related statements of operations, members’ equity and other comprehensive income (loss), and cash flows for the year ended December 31, 2010. Our audit of the basic financial statements also included the financial statement schedules listed in the Index at Item 15.  Vestin Fund III, LLC’s management is responsible for these financial statements and schedules. Our responsibility is to express an opinion on these financial statements and schedules based on our audit.




We conducted our audit 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.





In our opinion, the 2010 financial statements referred to above present fairly, in all material respects, the financial position of Vestin Fund III, LLC as of December 31, 2010, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects, the information set forth therein.








/s/ JLK Partners, LLP





Irvine, California


April 4, 2011













REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











To the Members of Vestin Fund III, LLC:











We have audited the accompanying balance sheets of Vestin Fund III, LLC (“the Company”) as of December 31, 2009 and 2008, and related statements of operations, members’ equity and other comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2009.  Our audits also included the financial statement schedules listed in the Index at Item 15.  These financial statements and schedules are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and schedules 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.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vestin Fund III, LLC as of December 31, 2009 and 2008, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects, the information set forth therein.








/s/ Frazer Frost, LLP (Successor entity of Moore Stephens Wurth Frazer and Torbet, LLP.  See Form 8-K filed on January 7, 2010.)





Brea, California


March 19, 2010





























-13-




FINANCIALSTATEMENTS





VESTIN FUND III, LLCBALANCE SHEETSASSETSDecember 31, 2010


December 31, 2009AssetsCash and cash equivalents

$
445,000


$
1,880,000Cash - restricted


--



700,000Marketable securities - related party


165,000



246,000Interest and other receivables, net of allowance for doubtful accounts of $66,000 at December 31, 2010 and $69,000 at December 31, 2009


237,000



4,000Notes receivable, net of allowance of $358,000 at December 31, 2010 and $156,000 at December 31, 2009


--



--Real estate held for sale


820,000



835,000Investment in real estate loans, net of allowance for loan loss of $1,017,000 at December 31, 2010 and $2,194,000 at December 31, 2009


1,658,000



3,353,000Due from related parties


1,012,000



248,000Other assets


4,000



--Total assets

$
4,341,000


$
7,266,000LIABILITIES AND MEMBERS' EQUITYLiabilitiesAccounts payable and accrued liabilities

$
64,000


$
55,000Note payable


48,000



--Deferred income


985,000



985,000Total liabilities


1,097,000



1,040,000Commitments and contingenciesMembers' equityMembers' units - 10,000,000 authorized units, 2,024,424 units issued and outstanding at December 31, 2010, and 2,024,424 units issued and outstanding at December 31, 2009


3,247,000



6,424,000Accumulated other comprehensive loss


(3,000
)


(198,000
)Total members' equity


3,244,000



6,226,000Total liabilities and members' equity

$
4,341,000


$
7,266,000








The accompanying notes are an integral part of these financial statements.
 -14-
 Table of Contents





VESTIN FUND III, LLCSTATEMENTSOF OPERATIONSFor the Year Ended12/31/2010


12/31/2009RevenuesInterest income from investment in real estate loans

$
81,000


$
191,000Gain related to pay off of real estate loan, including recovery of allowance for loan loss


--



51,000Other


25,000



3,000Total revenues


106,000



245,000Operating expensesInterest expense


--



3,000Provision for loan loss


309,000



1,902,000Professional fees


258,000



240,000Professional fees - related party


18,000



29,000Provision for doubtful accounts related to receivable


(3,000
)


4,000Other


53,000



56,000Total operating expenses


635,000



2,234,000Loss from operations


(529,000
)


(1,989,000
)Non-operating income (loss)Interest income from banking institutions


1,000



21,000Impairment of marketable securities - related party


(275,000
)


--Total non-operating income (loss), net


(274,000
)


21,000Income (loss) from real estate held for saleIncome related to real estate held for sale


1,000



6,000Net loss on sale of real estate held for sale


(5,000
)


(215,000
)Write-down of real estate held for sale


(149,000
)


(2,255,000
)Expenses related to real estate held for sale


(69,000
)


(166,000
)Total loss from real estate held for sale


(222,000
)


(2,630,000
)NET LOSS

$
(1,025,000
)

$
(4,598,000
)Net loss allocated to members

$
(1,025,000
)

$
(4,598,000
)Net loss allocated to members per weighted average membership unit

$
(0.51
)

$
(2.21
)Weighted average membership units


2,024,424



2,079,141





The accompanying notes are an integral part of these financial statements.
 -15-
 Table of Contents





VESTIN FUND III, LLCSTATEMENTSOF MEMBERS' EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)Units


AmountMembers' equity at December 31, 2008


2,248,825


$
12,260,000Comprehensive loss:Net loss






(4,598,000
)Unrealized loss on marketable securities






(114,000
)Total comprehensive loss






(4,712,000
)Members' redemptions


(224,401
)


(1,322,000
)Members' equity at December 31, 2009


2,024,424


$
6,226,000Comprehensive loss:Net loss






(1,025,000
)Recognition of unrealized loss on marketable securities






275,000Unrealied loss on marketable securities






(81,000)Total comprehensive loss






(831,000
)Distributions






(2,151,000
)Members' equity at December 31, 2010


2,024,424


$
3,244,000


The accompanying notes are an integral part of these financial statements.
 -16-
 Table of Contents


VESTIN FUND III, LLC




STATEMENTSOF CASH FLOWS





12/31/10


12/31/09Cash flows from operating activities:Net loss

$
(1,025,000
)

$
(4,598,000
)Adjustments to reconcile net loss to net cash used in operating activities:Provision for doubtful accounts related to receivable


8,000



4,000Provision for loan loss


309,000



1,902,000Gain related to pay off of real estate loan, including recovery of allowance for loan loss


5,000



51,000Write-downs on real estate held for sale


149,000



2,255,000Gain on sale of real estate held for sale


--



(26,000
)Loss on real estate held for sale


--



241,000Impairment of marketable securities - related party


275,000



--Change in operating assets and liabilities:Interest receivable


(6,000
)


10,000Accounts payable and accrued liabilities


11,000



(80,000
)Due to related parties


(765,000
)


(315,000
)Other assets


(4,000
)


--Net cash used in operating activities


(1,043,000
)


(556,000
)Cash flows from investing activities:Proceeds related to real estate held for sale


312,000



--Purchase of investments in real estate loans from VRM II


--



(500,000
)Proceeds from loan payoff


699,000



459,000Sale of investments in real estate loans to:Third parties


--



557,000Proceeds related to real estate held for sale


--



1,473,000Changes in restricted cash


700,000



285,000Net cash provided by investing activities


1,711,000



2,274,000Cash flows from financing activities:Proceeds from note payable


48,000



45,000Payments on notes payable


--



(45,000
)Members' redemptions


--



(1,322,000
)Members' distributions, net of reinvestments


(2,151,000
)


--Net cash used in financing activities


(2,103,000
)


(1,322,000
)NET CHANGE IN CASH


(1,435,000
)


396,000Cash, beginning of period


1,880,000



1,484,000Cash, end of period

$
445,000


$
1,880,000





The accompanying notes are an integral part of these financial statements.
 -17-
 Table of Contents


VESTIN FUND III, LLC




STATEMENTSOF CASH FLOWS (CONTINUED)





12/31/10


12/31/09Supplemental disclosures of cash flows information:Interest paid during the period

$
--


$
3,000Non-cash investing and financing activities:Adjustment to allowance for loan losses related to sale and payment of investment in real estate loan

$
1,284,000


$
3,197,000Adjustment to interest receivable and related allowance associated with sale and payment of investment in real estate loan

$
224,000


$
15,000Impairment on restructured loan reclassified to allowance for loan loss

$
--


$
30,000Adjustment to note receivable and related allowance

$
202,000


$
--Loan rewritten with same or similar collateral

$
--


$
451,000Allowance for notes receivable related to final payment of investments in real estate loans

$
--


$
156,000Real estate held for sale acquired through foreclosure

$
451,000


$
2,495,000Unrealized loss on marketable securities - related party

$
3,000


$
114,000











The accompanying notes are an integral part of these financial statements.
 -18-
 Table of Contents





VESTIN FUND III, LLC





NOTESTO FINANCIAL STATEMENTS





DECEMBER 31, 2010





NOTE A — ORGANIZATION





Vestin Fund III, LLC was organized in April 2003 as a Nevada limited liability company for the purpose of investing in commercial real estate loans (hereafter referred to as “real estate loans”) and income-producing real property.  In this report, we refer to Vestin Fund III, LLC as “the Company,” “our Company,” the “Fund,” “we,” “us,” or “our”.





We commenced operations in February 2004.  Prior to March 2007, we invested in revenue-generating commercial real estate and loans secured by real estate through deeds of trust or mortgages (hereafter referred to collectively as “deeds of trust” and as defined in our Operating Agreement as “Mortgage Assets”).  On March 5, 2007, a majority of our members approved the Third Amended and Restated Operating Agreement, which limited the Company’s investment objectives to investments in real estate loans.





At a special meeting of our members held on July 2, 2009, a majority of the members voted to approve the dissolution and winding up of the Fund, in accordance with the Plan of Complete Liquidation and Dissolution (the “Plan”) as set forth in Annex A of the Fund’s proxy statement filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 14(a) of the Securities and Exchange Act of 1934 on May 11, 2009.  The Plan became effective upon its approval by the members on July 2, 2009.  As a result, we have commenced an orderly liquidation and we no longer invest in new real estate loans.  We anticipate that the liquidation will be substantially completed by the second half of 2014.  However, because of numerous uncertainties, the liquidation may take longer or shorter than expected.  Because the liquidation of the Fund was not imminent, as of December 31, 2010, the financial statements are presented assuming the Fund will continue as a going concern.  Pursuant to the Plan, we will make liquidating distributions to members on a quarterly basis as funds become available, subject to any reserve established by our manager.  Our members no longer have the right to have their units redeemed by us and we no longer honor any outstanding redemption requests effective as of July 2, 2009.





On January 26, 2010, April 8, 2010 and September 17, 2010, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million and $0.3 million, respectively, in accordance with the Plan.  The amounts distributed to each Member of the Fund were calculated based upon the percentage ownership interest of such Member in the Fund.  See Note H – Members’ Equity of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.





We are not a mutual fund or an investment company within the meaning of the Investment Company Act of 1940, nor are we subject to any regulation thereunder.





Vestin Group, Inc. (“Vestin Group”), a Delaware corporation, owns a significant majority of Vestin Mortgage, a Nevada limited liability company, who is our manager. On January 7, 2011, Vestin Mortgage converted from a corporation to a limited liability company.  Michael Shustek, the CEO and managing member of our manager and CEO, President and a director of us, wholly owns Vestin Group, which is engaged in asset management, real estate lending and other financial services through its subsidiaries.  Our manager, prior to June 30, 2006, also operated as a licensed Nevada mortgage broker and was generally engaged in the business of brokerage, placement and servicing of commercial loans secured by real property.  On July 1, 2006, a mortgage broker license was issued to an affiliated company, Vestin Originations, Inc. (“Vestin Originations”), which Vestin Group owns a significant majority of,  that continued the business of brokerage, placement and servicing of real estate loans.  Effective February 14, 2011, the business of brokerage and placement of real estate loans will be performed by affiliated or non-affiliated mortgage brokers, which includes Advant Mortgage, LLC (“Advant”), a licensed Nevada mortgage broker, the significant majority of which is beneficially owned by Michael V. Shustek.





Pursuant to our Operating Agreement and the Plan of Complete Liquidation and Dissolution approved by a majority of our members on July 2, 2009, our manager will continue to manage our operations during the liquidation process.  Consequently, the orderly liquidation of our assets and our operating results are dependent upon our manager’s ability and performance in managing our liquidation.





Vestin Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the successor by merger to Vestin Fund I, LLC, (“Fund I”) and Vestin Realty Mortgage II, Inc. (“VRM II”), as the successor by merger to Vestin Fund II, LLC, (“Fund II).  These entities have been formed to invest in real estate loans.





During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services to us, VRM I and VRM II.  The CFO of our manager and other members of our accounting staff are employees of Strategix Solutions.  Strategix Solutions is managed by LL Bradford and Company, LLC ("LL Bradford"), a certified public accounting firm that has provided non-audit accounting services to us.  The principal manager of LL Bradford was a former officer of our manager from April 1999 through January 1, 2005.  Strategix Solutions is owned by certain partners of LL Bradford, none of whom are currently or were previously officers of our manager.  As used herein, “management” means our manager, its executive officers and the individuals at Strategix Solutions who perform accounting and financial reporting services on our behalf.





NOTE B — 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 (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.





Cash and Cash Equivalents





Cash and cash equivalents include interest-bearing and non-interest-bearing bank deposits, money market accounts, short-term certificates of deposit with original maturities of three months or less, and short-term instruments with a liquidation provision of one month or less.




Restricted Cash




We had restricted cash, which related to a cash deposit held as collateral by a banking institution for an irrevocable stand by letter of credit to support rent payments on the property we sold during November 2006.  The requirement for the deposit expires at the end of the lease on August 31, 2014;  however this collateral was relinquished pursuant to litigation between Vestin Group and the building owner.  For a discussion of this litigation between Vestin Group and the building owner, see Note N - Legal Matters Involving The Company.
  Revenue Recognition





Interest is recognized as revenue on performing loans when earned according to the terms of the loans, using the effective interest method.  We do not accrue interest income on loans once they are determined to be non-performing.  A loan is non-performing when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due.  Cash receipts will be allocated to interest income, except when such payments are specifically designated by the terms of the loan as principal reduction.  Interest is recognized on impaired loans on the cash basis method.





Deferred Revenue Recognition





Deferred revenue supports the amount of sales proceeds withheld on a sale of our building during November 2006, which we were required to establish an irrevocable stand by letter of credit which expires August 31, 2014.  Revenue will be recognized at the expiration of the lease referred to above or when restricted cash is received.  For discussion of litigation between Vestin Group and the building owner, see Note M – Legal Matters Involving The Company.





Investments in Real Estate Loans





Prior to July 2, 2009, we may have, from time to time, acquired or sold investments in real estate loans from or to our manager or other related parties pursuant to the terms of our Operating Agreement without a premium.








-19-
 Table of Contents





The primary purpose was to either free up capital to provide liquidity for various reasons, such as loan diversification, or place excess capital in investments to maximize the use of our capital.  Selling or buying loans allowed us to diversify our loan portfolio within these parameters.  Due to the short-term nature of the loans we made and the similarity of interest rates in loans we normally would invest in, the fair value of a loan typically approximated its carrying value.  Accordingly, discounts or premiums typically did not apply upon sales of loans and therefore, generally no gain or loss is recorded on these transactions, regardless of whether to a related or unrelated party.





Investments in real estate loans are secured by deeds of trust or mortgages.  Generally, our real estate loans require interest only payments with a balloon payment of the principal at maturity.  We have both the intent and ability to hold real estate loans until maturity and therefore, real estate loans are classified and accounted for as held for investment and are carried at amortized cost.  Loans sold to or purchased from affiliates are accounted for at the principal balance and no gain or loss is recognized by us or any affiliate.  Loan-to-value ratios are initially based on appraisals obtained at the time of loan origination and are updated, when new appraisals are received or when management’s assessment of the value has changed, to reflect subsequent changes in value estimates.  Such appraisals are generally dated within 12 months of the date of loan origination and may be commissioned by the borrower.





The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The Company’s impaired loans include troubled debt restructuring, and performing and non-performing loans in which full payment of principal or interest is not expected.  The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of its collateral.





Loans that have been modified from their original terms are evaluated to determine if the loan meets the definition of a Troubled Debt Restructuring (“TDR”).  When the Company modifies the terms of an existing loan that is considered a TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement.  If the modification calls for deferred interest, it is recorded as interest income as cash is collected.





Allowance for Loan Losses





We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment.  Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan.  Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans.  Actual losses on loans are recorded as a charge-off or a reduction to the allowance for loan losses.  Generally, subsequent recoveries of amounts previously charged off are added back to the allowance and included as income.





Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property.  As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the real estate lending industry.  We and our manager generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.





Additional facts and circumstances may be discovered as we continue our efforts in the collection and foreclosure processes.  This additional information often causes management to reassess its estimates.  In recent years, we have revised estimates of our allowance for loan losses.  Circumstances that have and may continue to cause significant changes in our estimated allowance include, but are not limited to:





·
Declines in real estate market conditions, which can cause a decrease in expected market value;




·
Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;





·
Lack of progress on real estate developments after we advance funds.  We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances.  After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances;





·
Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed property; and





·
Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.





Real Estate Held for Sale





Real estate held for sale includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property's estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions.  While pursuing foreclosure actions, we seek to identify potential purchasers of such property.  It is not our intent to invest in or to own real estate as a long-term investment.  We generally seek to sell properties acquired through foreclosure as quickly as circumstances permit.  The carrying values of real estate held for sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.





Management classifies real estate held for sale when the following criteria are met:





·
Management commits to a plan to sell the properties;





·
The property is available for immediate sale in its present condition subject only to terms that are usual and customary;





·
An active program to locate a buyer and other actions required to complete a sale have been initiated;





·
The sale of the property is probable;





·
The property is being actively marketed for sale at a reasonable price; and





·
Withdrawal or significant modification of the sale is not likely.





Classification of Operating Results from Real Estate Held for Sale





Generally, operating results and cash flows from long-lived assets held for sale are to be classified as discontinued operations as a separately stated component of net income.  Our operations related to real estate held for sale are separately identified in the accompanying statements of operations.





Investment in Marketable Securities – Related Party





Investment in marketable securities – related party consists of stock in VRM II.  The securities are stated at fair value as determined by the closing market price as of December 31, 2010.  All securities are classified as available-for-sale.





We are required to evaluate our available-for-sale investment for other-than-temporary impairment charges.  We will determine when an investment is considered impaired (i.e., decline in fair value below its amortized cost), and evaluate whether the impairment is other than temporary (i.e., investment value will not be recovered over its remaining life).  If the impairment is considered other than temporary, we will recognize an impairment loss equal to the difference between the investment’s cost and its fair value.















-20-
 Table of Contents




According to the SEC Staff Accounting Bulletin, Topic 5: Miscellaneous Accounting, M - Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities, there are numerous factors to be considered in such an evaluation and their relative significance will vary from case to case.  The following are a few examples of the factors that individually or in combination, indicate that a decline is other than temporary and that a write-down of the carrying value is required:





·
The length of the time and the extent to which the market value has been less than cost;





·
The financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; or





·
The intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.





Fair Value Disclosures





Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. “the exit price”) in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows.  The established hierarchy for inputs used, in measuring fair value, maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources.  Unobservable inputs are inputs that reflect a company’s judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances.  The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:





·
Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access.  Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.





·
Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.





·
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement, which utilize the Company’s estimates and assumptions.





If the volume and level of activity for an asset or liability have significantly decreased, we will still evaluate our fair value estimate as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.  In addition, since we are a publicly traded company, we are required to make our fair value disclosures for interim reporting periods.





Net Income Allocated to Members Per Weighted Average Membership Unit





Net income allocated to members per weighted average membership unit is computed by dividing net income calculated in accordance with GAAP by the weighted average number of membership units outstanding for the period.





Segments





We operate as one business segment.





Income Taxes





Limited liability companies (“LLCs”) are not liable for federal or state income taxes and, therefore, no provision for income taxes is made in the accompanying financial statements.  Rather, a proportionate share of the LLC’s income, deductions, credits and tax preference items are reported to the individual members for inclusion in their tax returns.





NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK





Financial instruments with concentration of credit and market risk include cash, marketable securities related party, accounts and notes receivable, notes payable, and loans secured by deeds of trust.





We maintain cash deposit accounts and certificates of deposit which, at times, may exceed federally-insured limits.  To date, we have not experienced any losses.  As of December 31, 2010 and December 31, 2009, we had approximately $0.2 million and $2.3 million, respectively, in excess of the federally-insured limits.





As of December 31, 2010, 28%, 56%, and 0% of our loans were in Nevada, Oregon and California, respectively, compared to 40%, 27% and 25% at December 31, 2009, respectively.  As a result of this geographical concentration of our real estate loans, the downturn in the local real estate markets in these states has had a material adverse effect on us.





At December 31, 2010 and December 31, 2009, the loan to our largest borrower represented 56.8% and 27.4%, respectively, of our total investment in real estate loans.  When funded in December 2007, this loan constituted approximately 7.0% of our total investment in real estate loans.  The percentage of this loan increased due to the decrease in other loans through payments, sales, foreclosures and modifications.  This commercial property real estate loan is located in Oregon with a first lien position and has an outstanding balance of approximately $6.0 million, of which our portion is $1.5 million.  As of December 31, 2010, this loan was considered non-performing.  Any additional defaults in our loan portfolio will have a material adverse effect on us.





A borrower’s ability to repay its real estate loan obligation in a large lump-sum payment may be dependent upon the borrower’s ability to refinance the obligation or otherwise raise a substantial amount of cash.  With the weakened economy, credit continues to be difficult to obtain and as such, many of our borrowers who develop and sell commercial real estate projects have been unable to complete their projects, obtain takeout financing or have been otherwise adversely impacted.  In addition, an increase in interest rates over the loan rate applicable at origination of the loan may have an adverse effect on our borrower’s ability to refinance.





Common Guarantors





As of December 31, 2010, one loan totaling approximately $7.2 million, of which our portion is $0.4 million, representing approximately 15.1% of our portfolio’s total value, along with two unsecured notes receivable totaling approximately $0.2 million, had a common guarantor.  The two unsecured notes receivable were previously loans totaling approximately $0.3 million that were converted to unsecured notes receivable pursuant to a loan modification agreement executed on November 30, 2010.  For additional information regarding the above loan modification agreement, see Note I – Notes Receivable.









No other loans in our portfolio have common guarantors at December 31, 2010.




For additional information regarding the above non-performing loans, see “Non-Performing Loans” in Note D – Investments In Real Estate Loans.
 
 NOTE D — INVESTMENTS IN REAL ESTATE LOANS
 
 As of December 31, 2010 and December 31, 2009, all of our loans provided for payments of interest only with a “balloon” payment of principal payable in full at the end of the term.
 
 In addition, we invested in real estate loans that require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time.  At December 31, 2010, and December 31, 2009 we had no investments in real estate loans that had interest reserves.










-21-
 Table of Contents




Loan Portfolio





As of December 31, 2010, we had five available real estate loan products consisting of commercial, construction, acquisition and development, land and residential.  The effective interest rates on all product categories range from 3% to 15%.  Revenue by product will fluctuate based upon relative balances during the period.





During the second quarter ended June 30, 2010, the Trustee in a Bankruptcy case, involving one of our non-performing commercial loans in California, sold the assets of the Borrower to an unrelated third party for an aggregate amount of $4.1 million.  The proceeds, net of all court costs, closing costs, trustee’s fees, real estate taxes and security guard services, totaled approximately $3.4 million.  An unaffiliated lender was successful in claiming an interest in the proceeds of the bankruptcy sale, purportedly based on loans of approximately $0.9 million, secured by some of the equipment located at the property.  A motion to determine the allocation of the sale proceeds was filed with the Bankruptcy Court.  In the interim, a settlement was reached with the unaffiliated lender wherein we, VRM I and VRM II will receive approximately $2.7 million, of which our portion equals approximately $0.2 million.




Investments in real estate loans as of December 31, 2010, were as follows:





Loan Type

Number of Loans


Balance *


Weighted Average Interest Rate


Portfolio Percentage


Current Weighted Average Loan-To-Value, Net of Allowance for Loan LossesCommercial


4


$
2,271,000



10.52
%


84.90
%


94.74
%Construction


1



404,000



8.00
%


15.10
%


104.37
%Total


5


$
2,675,000



10.14
%


100.00
%


96.06
%





Investments in real estate loans as of December 31, 2009, were as follows:


Loan Type

Number of Loans


Balance *


Weighted Average Interest Rate


Portfolio Percentage


Current Weighted Average Loan-To-Value, Net of Allowance for Loan LossesCommercial


7


$
4,288,000



11.28
%


77.30
%


78.10
%Construction


2



808,000



3.00
%


14.57
%


100.00
%Land


1



451,000



8.00
%


8.13
%


78.54
%Total


10


$
5,547,000



9.81
%


100.00
%


81.78
%





*
Please see Balance Sheet Reconciliation below.





The “Weighted Average Interest Rate” as shown above is based on the contractual terms of the loans for the entire portfolio including non-performing loans.  The weighted average interest rate on performing loans only, as of December 31, 2010 and December 31, 2009, was 6.16% and 7.87%, respectively.  Please see “Non-Performing Loans” and “Asset Quality and Loan Reserves” below for further information regarding performing and non-performing loans.





Loan-to-value ratios are generally based on the most recent appraisals and may not reflect subsequent changes in value and include allowances for loan losses.  Recognition of allowance for loan losses will result in a maximum loan-to-value ratio of 100% per loan.





The following is a schedule of priority of real estate loans as of December 31, 2010 and December 31, 2009:





Loan Type

Number of Loans


December 31, 2010 Balance *


Portfolio

Percentage


Number of Loans


December 31, 2009 Balance *


Portfolio

PercentageFirst deeds of trust


2


$
1,924,000



71.93
%


6


$
4,678,000



84.33
%Second deeds of trust


3



751,000



28.07
%


4



869,000



15.67
%Total


5


$
2,675,000



100.00
%


10


$
5,547,000



100.00
%





*
Please see Balance Sheet Reconciliation below.








The following is a schedule of contractual maturities of investments in real estate loans as of December 31, 2010:





Non-performing and past due loans (a)

$
1,720,000January 2011 – March 2011 (b)


404,000April 2011 – June 2011


--July 2011 – September 2011


351,000October 2011 – December 2011


200,000Total

$
2,675,000





(a)
Amounts include the balance of non-performing loans.


(b)
These loans have been or are in the process of being extended subsequent to April 4, 2011.





The following is a schedule by geographic location of investments in real estate loans as of December 31, 2010 and December 31, 2009:




December 31, 2010

Balance *


Portfolio Percentage


December 31, 2009

Balance *


Portfolio PercentageArizona

$
200,000



7.48
%

$
200,000



3.60
%California


--



--
%


1,400,000



25.25
%Nevada


755,000



28.22
%


2,227,000



40.15
%Oregon


1,520,000



56.82
%


1,520,000



27.40
%Texas


200,000



7.48
%


200,000



3.60
%Total

$
2,675,000



100.00
%

$
5,547,000



100.00
%


*
Please see Balance Sheet Reconciliation below.




-22-


Balance Sheet Reconciliation





The following table reconciles the balance of the loan portfolio to the amount shown on the accompanying Balance Sheets.





December 31, 2010 Balance


December 31, 2009 BalanceBalance per loan portfolio

$
2,675,000


$
5,547,000Less:Allowance for loan losses (a)


(1,017,000
)


(2,194,000
)Balance per balance sheet

$
1,658,000


$
3,353,000





(a)
Please refer to Specific Reserve Allowance below.





Non-Performing Loans





As of December 31, 2010, we had two loans considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due).  These loans are currently carried on our books at a value of approximately $1.3 million, net of allowance for loan losses of approximately $0.4 million, which does not include the allowances of approximately $0.6 million relating to performing loans as of December 31, 2010.  Except as otherwise provided below, these loans have been placed on non-accrual of interest status and may be the subject of pending foreclosure proceedings.  At December 31, 2010, the following loans were non-performing:





Loan Type

Number Of Non-Performing Loans


Balance at

December 31, 2010


Number Of Non-Performing Loans


Balance at

December 31, 2009Commercial


2


$
1,720,000


$
3


$
3,120,000Land


--



--



1



451,000Total


2


$
1,720,000


$
4


$
3,571,000





·
Commercial – As of December 31, 2010, two of our four commercial loans were considered non-performing.  The outstanding balance on the two non-performing loans was $20.0 million, of which our portion is approximately $1.7 million.  As of December 31, 2010, these loans have been non-performing for 22 and 31 months.  Our manager has commenced foreclosure proceedings on the two loans, and has proceeded with legal action to enforce the personal guarantees if necessary.  As of December 31, 2010, based on our manager’s evaluations and updated appraisals, our manager has provided a specific allowance to these commercial loans of approximately $15.0 million, of which our portion is approximately $0.5 million.





Asset Quality and Loan Reserves





Losses may occur from investing in real estate loans.  The amount of losses will vary as the loan portfolio is affected by changing economic conditions and the financial condition of borrowers.





The conclusion that a real estate loan is uncollectible or that collectability is doubtful is a matter of judgment.  On a quarterly basis, our manager evaluates our real estate loan portfolio for impairment.  The fact that a loan is temporarily past due does not necessarily mean that the loan is non-performing.  Rather, all relevant circumstances are considered by our manager to determine impairment and the need for specific reserves.  Such evaluation, which includes a review of all loans on which full collectability may not be reasonably assured, considers among other matters:




·
Prevailing economic conditions;





·
Historical experience;





·
The nature and volume of the loan portfolio;





·
The borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay;





·
Evaluation of industry trends; and





·
Estimated net realizable value of any underlying collateral in relation to the loan amount.





Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses.  Additions to the allowance for loan losses are made by charges to the provision for loan loss.  As of December 31, 2010, we have provided a specific reserve allowance for all non-performing loans and all performing loans based on updated appraisals of the underlying collateral and/or our evaluation of the borrower.  The following is a breakdown of allowance for loan losses related to performing and non-performing loans as of December 31, 2010 and December 31, 2009:





As of December 31, 2010Balance


Allowance for loan losses *


Balance, net of allowanceNon-performing loans – no related allowance

$
--


$
--


$
--Non-performing loans – related allowance


1,720,000



(456,000
)


1,264,000Subtotal non-performing loans


1,720,000



(456,000
)


1,264,000Performing loans – no related allowance


--



--



--Performing loans – related allowance


955,000



(561,000
)


394,000Subtotal performing loans


955,000



(561,000
)


394,000Total

$
2,675,000


$
(1,017,000
)

$
1,658,000





*           Please refer to Specific Reserve Allowancesabove.





As of December 31, 2009Balance


Allowance for loan losses


Balance, net of allowanceNon-performing loans – no related allowance

$
451,000


$
--


$
451,000Non-performing loans – related allowance


3,120,000



(1,551,000
)


1,569,000Subtotal non-performing loans


3,571,000



(1,551,000
)


2,020,000Performing loans – no related allowance


499,000



--



499,000Performing loans – related allowance


1,477,000



(643,000
)


834,000Subtotal performing loans


1,976,000



(643,000
)


1,333,000Total

$
5,547,000


$
(2,194,000
)

$
3,353,000





-23-
 Table of Contents




Our manager evaluated our loans and, based on current estimates with respect to the value of the underlying collateral, believes that such collateral is sufficient to protect us against further losses of principal or interest.  However, such estimates could change or the value of the underlying real estate could decline.  Our manager will continue to evaluate our loans in order to determine if any other allowance for loan losses should be recorded.


Specific Reserve Allowances





The following table is a roll-forward of the allowance for loan losses for the years ended December 31, 2010, and 2009 by loan type.





Loan Type

Balance at

12/31/08


Specific Reserve Allocation *


Sales


Loan Pay Downs


Transfers to REO


Balance at

12/31/09Commercial

$
3,284,000


$
1,531,000


$
(1,791,000
)

$
(93,000
)

$
(990,000
)

$
1,941,000Construction


222,000



359,000



--



(328,000
)


--



253,000Land


1,940,000



42,000



(985,000
)


--



(997,000
)


--Total

$
5,446,000


$
1,932,000


$
(2,776,000
)

$
(421,000
)

$
(1,987,000
)

$
2,194,000





* The difference between the specific reserve allocation of $1,932,000 shown above and the $1,902,000 on the statement of operations is $30,000.  As of December 31, 2008, a commercial loan, mentioned above, included an impairment reserve, applied to the loan balance, of $30,000.  During March 2009, the impairment reserve for this loan was reclassified to its existing allowance for loan loss.





·
Commercial – As of December 31, 2009, six of our seven commercial loans had a specific reserve allowance totaling approximately $31.9 million, of which our portion is approximately $1.9 million.  The outstanding balance on these six loans was approximately $63.9 million, of which our portion was $3.8 million.





·
Construction – As of December 31, 2009, our two construction loans did not have a specific reserve allowance.  The outstanding balance on these two loans was approximately $14.4 million, of which our portion is $0.8 million.





·
Land – As of December 31, 2009, our land loan did not have a specific reserve allowance.  The outstanding balance on this loan was approximately $3.2 million, of which our portion is $0.5 million.





Loan Type

Balance at

12/31/09


Specific Reserve Allocation


Sales


Loan Pay Downs


Transfers to REO


Balance at

12/31/10Commercial


1,941,000



181,000



--



(1,282,000
)


--


$
840,000Construction


253,000



128,000



--



(204,000
)


--



177,000Total

$
2,194,000


$
309,000


$
--


$
(1,486,000
)

$
--


$
1,017,000




·
Commercial – As of December 31, 2010, all of our commercial loans had a specific reserve allowance totaling approximately $19.3 million, of which our portion is approximately $0.8 million.  The outstanding balance on these loans was approximately $34.2 million, of which our portion was $2.3 million.





·
Construction – As of December 31, 2010, our one construction loan had a specific reserve allowance totaling approximately $2.6 million, of which our portion is approximately $0.2 million.  The outstanding balance on this loan was approximately $7.2 million, of which our portion is approximately $0.4 million.





Troubled Debt Restructuring





As of December 31, 2010 and December 31, 2009, we had three and four loans, respectively, totaling approximately $1.0 million and $1.1 million, respectively, that met the definition of a Troubled Debt Restructuring or TDR.  When the Company modifies the terms of an existing loan that is considered a TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement.  If the modification calls for deferred interest, it is recorded as interest income as cash is collected.  Impairment on these loans is generally determined by the lesser of the value of the underlying collateral or the present value of expected future cash flows.  The following is a breakdown of our TDR loans that were considered performing and non-performing loans as of December 31, 2010 and December 31, 2009:








As of December 31, 2010Total


Performing


Non-PerformingLoan Type

Number of Loans


Fund Balance


Number of Loans


Fund Balance


Number of Loans


Fund BalanceCommercial


2


$
551,000



2


$
551,000



--


$
--Construction


1



405,000



1



405,000



--



--Land


--



--



--



--



--



--Total


3


$
956,000



3


$
956,000



--


$
--








As of December 31, 2009Total


Performing


Non-PerformingLoan Type

Number of Loans


Fund Balance


Number of Loans


Fund Balance


Number of Loans


Fund BalanceCommercial


2


$
318,000



2


$
318,000



--


$
--Construction


2



808,000



2



808,000



--



--Land


--



--



--



--



--



--Total


4


$
1,126,000



4


$
1,126,000






$
--





·
Commercial –As of December 31, 2010 and December 31, 2009 we had four and seven commercial loans, respectively, two, at each date, were modified pursuant to TDR.  As of December 31, 2010 and December 31, 2009, two of these loans were secured by second deeds of trust and were considered performing prior to their restructuring, whereby they had their interest rates reduced.  One loan’s interest rate was reduced from 15% payable monthly to 8% accrued and payable at maturity, which was extended from April 30, 2010 to December 31, 2011.  As a result of this reduction in interest rate, we recorded an impairment of $33,000, as an allowance for loan loss, based on the reduction of the present value of future cash flows.  During September 2010, the other loan had its maturity date extended to September 16, 2011 and had its interest rate reduced from 10.5% to 3.0%.  This loan was considered performing prior to its restructuring.  As of April 4, 2011, these two loans continue to perform as required by the loan modifications.





·
Construction – As of December 31, 2010 and December 31, 2009, we had one and two construction loans, respectively that were modified pursuant to TDR.  During July 2009, our manager negotiated with a guarantor of four of our performing loans.  As part of the negotiations, two of the loans were paid off for approximately the loan amount net of allowance for loan losses plus accrued interest and two 60-month promissory notes were executed by the borrower and guaranteed by the main principal, totaling approximately $2.7 million, of which our portion was approximately $0.2 million.  In addition, our manager modified the remaining loan whereby interest payments are payable monthly at 3.0%, beginning July 2009, and accrue at 5.0% payable at the maturity of the loan.  Interest on this loan will be recorded as interest income when cash is collected.  As of April 4, 2011, the two remaining loans continue to perform as required by the loan modification.











-24-
 Table of Contents






As of December 31, 2010, our manager had granted extensions on three loans, totaling approximately $21.4 million, of which our portion was approximately $1.0 million, pursuant to the terms of the original loan agreements, which permit extensions by mutual consent.  Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing.  Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan.  In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal.


As of November 30, 2010, we had five loans totaling approximately $19.0 million, of which our portion is approximately $1.1 million, before allowances totaling approximately $4.2 million, of which our portion is approximately $0.2 million, and were guaranteed by common guarantors. Pursuant to agreements entered into on March 16, 2009 and July 2, 2009, which modified these loans, three of these loans continued to be secured by real property and two became unsecured due to the permanent financing being obtained for less than the outstanding balance on the loans. On November 30, 2010, we entered into additional agreements to modify the terms related to these five loans in order to further enhance our investment. Pursuant to these additional agreements, we obtained an additional guarantor, interest in operating profits and any aggregate sales proceeds of $10.4 million less operating profits previously received related to these properties. The new guarantor is the managing member of the borrowing entities who is also the principal manager of L.L. Bradford and was a former officer of our manager from April 1999 through January 2005.  In the event the total proceeds from the operating profits and sales proceeds do not equal $10.4 million, each borrower will execute a promissory note to pay us the deficiency, which shall be guaranteed by the guarantors, including the new guarantor. In addition, we agreed to release our deeds of trust on two of the three loans secured by real estate totaling $9.0 million, of which our portion is $0.5 million.  As a result of releasing our deeds of trust we classified these loans as unsecured notes receivable for the same amount and recognized a full allowance on this balance.  On December 30, 2010, we received a payment totaling approximately $3.6 million from the receipt of permanent financing on one of the properties, of which our portion is approximately $0.2 million, which was applied towards the balances due.





NOTE E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY





As of December 31, 2010, we owned 114,117 shares of VRM II’s common stock, representing approximately 0.87% of their total outstanding common stock.





At September 30, 2010, our manager evaluated the near-term prospects of VRM II in relation to the severity and duration of the unrealized loss.  Based on that evaluation and current market conditions, we have determined there was an other-than-temporary impairment on our investment in VRM II as of September 30, 2010.  We reversed our unrealized other comprehensive losses and realized a loss on our investment to its fair value of $1.48 per share as of September 30, 2010, totaling approximately $0.3 million and recognizing an impairment of approximately $0.3 million.





As of December 31, 2010, our manager evaluated the near-term prospects of VRM II in relation to the severity and duration of the unrealized loss since October 1, 2010.  Based on that evaluation and our ability and intent to hold this investment for a reasonable period of time sufficient for a forecasted recovery of fair value, we do not consider our investment in VRM II to be other-than-temporarily impaired at December 31, 2010.  During the year ended December 31, 2010, the trading price for VRM II’s common stock ranged from $1.21 to $2.55 per share.  We will continue to evaluate our investment in marketable securities on a quarterly basis.





NOTE F — REAL ESTATE HELD FOR SALE





At December 31, 2010, we held four properties with a total carrying value of approximately $0.8 million, which were acquired through foreclosure and recorded as investments in real estate held for sale (“REO”).  One of these properties generated net income from guarantors during the year ended December 31, 2010, totaling $1,000.  Expenses incurred during the year ended December 31, 2010, related to our REO totaled approximately $0.2 million.  These expenses included approximately $0.1 million in write-downs on REO.  Our REO are accounted for at the lower of cost or fair value less costs to sell with fair value based on appraisals and knowledge of local market conditions.  It is not our intent to invest in or own real estate as a long-term investment.  We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.  Set forth below is a roll-forward of REO during the year ended December 31, 2010:




Description

Balance at

12/31/09


Acquisitions Through Foreclosure


Write Downs


Cash Reductions


Seller Financed / New Loan


Net Cash Proceeds on Sales


Net Loss on Sale of Real Estate


Balance at

12/31/10Land

$
716,000


$
451,000


$
(149,000
)

$
--


$
--


$
(198,000
)

$
--


$
820,000Residential Building


119,000



--



--



--



--



(114,000
)


(5,000
)


--Total

$
835,000


$
451,000


$
(149,000
)

$
--


$
--


$
(312,000
)

$
(5,000
)

$
820,000





Land





As of December 31, 2010, we held four REO properties, classified as Land, totaling approximately $0.8 million.  These properties were acquired between May 2008 and October 2010 and consist of commercial and residential land.  During the year ended December 31, 2010, our manager continually evaluated the carrying value of these properties and based on its estimates and updated appraisals these properties were written down approximately $0.1 million.  Our manager is currently working with prospective buyers to sell these properties; however, no assurance can be given that these sales will take place.





·
Commercial Land – On April 27, 2010, we, VRM I and VRM II sold our commercial land REO property located in Texas to an unrelated third party for approximately $0.6 million, of which our portion was approximately $0.1 million.  No gain or loss was associated with this transaction.  During the year ended December 31, 2010, our manager continually evaluated the carrying value of our commercial land REO and based on its estimates and updated appraisals on these properties, both were written down approximately $87,000.  As of December 31, 2010, we held two properties, classified as commercial land REO, located in Nevada totaling approximately $0.5 million.





·
Residential Land – On January 15, 2010, one property located in Nevada was sold to an unrelated third party for their approximate book value of a combined $1.3 million, of which our portion was approximately $0.1 million.  No gain or loss was associated with these transactions.  During the year ended December 31, 2010, our manager continually evaluated the carrying value of our residential land REO and based on its estimates and updated appraisals two of these properties were written down a total of approximately $62,000.  As of December 31, 2010, we held two properties, classified as residential land REO, located in Arizona and California totaling approximately $0.3 million.





Residential Building





As of December 31, 2010, we had no REO properties classified as Residential Buildings.  During the year ended December 31, 2010, our manager continually evaluated the carrying value of our Residential Building REO properties, and based on its estimates and updated appraisals, no write-downs were deemed necessary.





·
Single Family Residential Properties –During April and May 2010, we, VRM I and VRM II sold the two remaining units on our REO property located in California to an unrelated third party for a total of $325,000, of which our portion was $6,000.  These transactions resulted in approximately no gain or loss for us.  As of December 31, 2010, we had no single-family residential properties.





·
Residential Apartment/Condo – On April 23, 2010, we, VRM I and VRM II sold the remaining unit on one REO property located in Nevada to an unrelated third party for its approximate book value of $81,000, of which our portion was $3,000.  There was approximately no gain or loss associated with this transaction.  On August 25, 2010, we, VRM I and VRM II sold a REO property located in Nevada to an unrelated third party for approximately $1.3 million, of which our portion was $0.1 million.  This transaction resulted in a net loss for us of $4,000.  As of December 31, 2010, we had no residential apartment/condo properties.


NOTE G — RELATED PARTY TRANSACTIONS





Prior to July 2, 2009, we may have acquired or sold investments in real estate loans from/to our manager or other related parties.  Pursuant to the terms of our Operating Agreement, such acquisitions and sales were made without any mark up or mark down.  No gain or loss was recorded on these transactions, as it was not our intent to make a profit on the purchase or sale of such investments.  The purpose was generally to diversify our portfolio by syndicating loans, thereby providing us with additional capital to make additional loans.  From time to time, we may continue to sell performing investments in real estate loans to our manager or other related parties, without any mark up or mark down.  No gain or loss will be recorded on these transactions.





Transactions with the Manager





Our manager is entitled to receive from us a management (acquisition and advisory) fee up to 2.5% of the gross offering proceeds and up to 3% of our rental income.  No management fees were recorded during the years ended December 31, 2010 and 2009.




-25-











During the years ended December 31, 2010 and 2009, our manager received administrative fees of $0.5 million and $0.5 million, respectively, related to the sale of VRM I, VRM II, and our REO properties.  Our pro-rata share of these fees totaled $7,000 and $32,000, respectively.  See Note F – Real Estate Held for Sale.
 
 As of December 31, 2010 and December 31, 2009, our manager owned 54,863 of our units.  During the year ended December 31, 2010, we made liquidating distributions to our manager totaling $58,000, in accordance with the Plan.  There were no similar distributions during the year ended December 31, 2009.





In connection with the sale of an office building located in Las Vegas, Nevada, we arranged for a $985,000 letter of credit in favor of the purchaser of the building (the “Purchaser”), which could be drawn upon by the Purchaser should Vestin Group default on its lease obligations and is supported by our restricted cash.  Vestin Group is currently engaged in litigation with the Purchaser and has not paid certain amounts allegedly due under its lease.  In 2009, $285,000 of the letter of credit was drawn by the Purchaser.   In November 2010, the Purchaser drew the final $700,000 from the letter of credit.  In February 2011 the court granted judgment to the Purchaser.  No written judgment or order has been issued by the court and Vestin Group has motioned for reconsideration.  Vestin Group has provided us with a written agreement to fully indemnify and hold us harmless for any such withdrawals, including the full amount of the $985,000 drawn to date under the letter of credit.  Vestin Group’s obligation is to make us whole no later than August 2014.  For a discussion of litigation between us, Vestin Group and the building owner, see Note N - Legal Matters Involving The Company.





As of December 31, 2010 and December 31, 2009, we had receivables from our manager totaling approximately $1.0 million and $0.3 million, primarily related to the withdrawal of the letter of credit referred to above.





Transactions with Other Related Parties





As of December 31, 2010 and December 31, 2009, we owned 114,117 common shares of VRM II, representing approximately 0.87% and 0.84% respectfully, of their total outstanding common stock.





As of December 31, 2010, we had receivables from VRM II of approximately $37,000.  As of December 31, 2009, we owed VRM II $33,000.





As of December 31, 2010, we owed VRM I $2,000.  As of December 31, 2009, we owed VRM I $1,000.





As of December 31, 2010 and December 31, 2009, inVestin Nevada Inc., a company wholly owned by our manager’s CEO, (“inVestin”), owned 34,856 of our membership units representing approximately 1.72%, respectively, of our total membership units.  During the year ended December 31, 2010, we made liquidating distributions to inVestin totaling $37,000, in accordance with the Plan.  There were no similar distributions during the year ended December 31, 2009.




As of December 31, 2010 and December 31, 2009, Shustek Investments, a company wholly owned by our manager’s CEO, owned 200,000 of our membership units representing approximately 9.88% of our total membership units.  During the year ended December 31, 2010, we made liquidating distributions to Shustek Investments totaling $213,000, in accordance with the Plan.  There were no similar distributions during the year  ended December 31, 2009.





As of December 31, 2010 and December 31, 2009, Mr. Shustek’s spouse owned 2,963 of our membership units representing less than 1.0% of our total membership units.  During the year ended December 31, 2010, we made liquidating distributions to Mr. Shustek’s spouse totaling $3,000, in accordance with the Plan.  There were no similar distributions during the year ended December 31, 2009.





During the year December 31, 2010, we incurred $18,000, for legal fees to the law firm of Levine, Garfinkel & Katz in which the Secretary of Vestin Group has an equity ownership interest in the law firm.  During the year ended December 31, 2009, we incurred $29,000, for legal fees to the law firm of Levine, Garfinkel & Katz.





During the year ended December 31, 2010, SCORP, Inc. dba Diligent Consulting and Analysis, an entity wholly owned by Daniel B. Stubbs, the former Senior Vice President of Vestin Group, received a consulting fee of approximately $59,000.  Our pro-rata share of these fees totaled approximately $3,000.





NOTE H — MEMBERS’ EQUITY





Allocations and Distributions





In accordance with our Operating Agreement, profits, gains and losses are to be credited to and charged against each member’s capital account in proportion to their respective capital accounts as of the close of business on the last day of each calendar month.





Distributions were paid monthly to members; however, on August 27, 2008, we suspended payment of distributions as a result of our current losses.





Contingency Reserve





In accordance with the Plan, we established a contingency reserve of $300,000 for the payment of ongoing expenses, any contingent liabilities or to account for loan or other investment losses.  Our manager will have the discretion to increase or decrease the amount of the reserve, but will ensure that the reserve is adequate to pay our outstanding obligations.  The amount of the contingency reserve is based upon estimates and opinions of our manager or through consultation with an outside expert, if our manager determines that it is advisable to retain such expert.  In determining the size of the reserve, our manager reviewed among other things, the value of our non-performing assets and the likelihood of repayment, our estimated contingent liabilities and our estimated expenses, including without limitation, estimated professional, legal and accounting fees, rent, payroll and other taxes, miscellaneous office expenses, facilities costs and expenses accrued in our financial statements.





Value of Members’ Capital Accounts





In accordance with Section 7.8 of our Operating Agreement, our manager reviewed the value of our assets during the three months ended December 31, 2010.  Based on this review the value of members’ capital accounts was adjusted from $2.28 per unit to $1.60 per unit, as of January 1, 2011.  The change in valuation is primarily for tax and capital account purposes and does not reflect the change in the value of the units calculated in accordance with GAAP.  Accordingly, unit prices calculated under GAAP may be different than the adjusted price per unit.





Liquidating Distributions





On January 26, 2010, April 8, 2010 and September 17, 2010, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million and $0.3 million, respectively, in accordance with the Plan.  To date, no subsequent distributions have been made as sufficient funds have not been available.  The amounts distributed to each Member of the Fund were calculated based upon the percentage ownership interest of such Member in the Fund.


Redemption Limitation
 
 In accordance with the Plan, our members no longer have the right to have their units redeemed by us and we no longer honor any outstanding redemption requests effective as of July 2, 2009.
 
 NOTE I — NOTES RECEIVABLE
 
 During July 2009, we, VRM I, and VRM II entered into a promissory note, totaling approximately $1.4 million, of which our portion is $82,000, with the borrowers of a construction loan, as part of the repayment terms of the loan.  In addition, we received a principal pay off on the loan of approximately $0.3 million, which reflected our book value of the loan, net of allowance for loan loss of approximately $0.2 million.  The promissory note accrues interest over a 60-month period with an interest rate of 7%, with the first monthly payment due on the 37th month.  The remaining note balance and accrued interest will be due at maturity.  Payments will be recognized as income when received.  The balance of $82,000 was fully reserved as of December 31, 2010.
 
 During July 2009, we, VRM I, and VRM II entered into a promissory note, totaling approximately $1.3 million, of which our portion is $74,000, with the borrowers of a construction loan, as part of the repayment of the loan.  In addition, we received a principal pay off on the loan of approximately $0.2 million, which reflected our book value of the loan, net of allowance for loan loss of approximately $0.2 million.  The promissory note accrues interest over a 60-month period with an interest rate of 7%, with the first monthly payment due on the 37th month.  The remaining note balance and accrued interest will be due at maturity.  Payments will be recognized as income when received.  The balance of $74,000 was fully reserved as of December 31, 2010.




NOTE J — NOTES PAYABLE
 
 On December 3, 2010, we, VRM I and VRM II mortgaged a mixed-use land held for sale property for $1.6 million, of which our portion was approximately $48,000.  The note has an interest rate of 9%, payable monthly and a maturity date of December 2, 2011.


-26-
 Table of Contents




NOTE K — FAIR VALUE
 As of December 31, 2010, financial assets and liabilities, utilizing Level 1 inputs included investment in marketable securities - related party.  We had no assets or liabilities utilizing Level 2 inputs, and assets and liabilities utilizing Level 3 inputs included investments in real estate loans.


To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  Accordingly, our degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, an asset or liability will be classified in its entirety based on the lowest level of input that is significant to the measurement of fair value.





Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure.  Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date.  We use prices and inputs that are current as of the measurement date, including during periods of market dislocation, such as the recent illiquidity in the auction rate securities market.  In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments.  This condition may cause our financial instruments to be reclassified from Level 1 to Level 2 or Level 3 and/or vice versa.


Our valuation techniques will be consistent with at least one of the three possible approaches: the market approach, income approach and/or cost approach.  Our Level 1 inputs are based on the market approach and consist primarily of quoted prices for identical items on active securities exchanges.  Our Level 2 inputs are primarily based on the market approach of quoted prices in active markets or current transactions in inactive markets for the same or similar collateral that do not require significant adjustment based on unobservable inputs.  Our Level 3 inputs are primarily based on the income and cost approaches, specifically, discounted cash flow analyses, which utilize significant inputs based on our estimates and assumptions.





The following tables present the valuation of our financial assets as of December 31, 2010 and December 31, 2009, measured at fair value on a recurring basis by input levels:





Fair Value Measurements at Reporting Date UsingQuoted Prices in Active Markets For Identical Assets (Level 1)


Significant Other Observable Inputs (Level 2)


Significant Unobservable Inputs (Level 3)


Balance at 12/31/2010


Carrying Value on Balance Sheet at 12/31/2010AssetsInvestment in marketable securities - related party

$
165,000


$
--


$
--


$
165,000


$
165,000Investment in real estate loans

$
--


$
--


$
1,660,000


$
1,660,000


$
1,658,000





Fair Value Measurements at Reporting Date UsingQuoted Prices in Active Markets For Identical Assets (Level 1)


Significant Other Observable Inputs (Level 2)


Significant Unobservable Inputs (Level 3)


Balance at 12/31/2009


Carrying Value on Balance Sheet at 12/31/2009AssetsInvestment in marketable securities - related party

$
246,000


$
--


$
--


$
246,000


$
246,000Investment in real estate loans

$
--


$
--


$
3,291,000


$
3,291,000


$
3,353,000





The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2010 to December 31, 2010 and from January 1, 2009 to December 31, 2009.  There were no liabilities measured at fair value on a recurring basis using significant unobservable inputs as of December 31, 2010 and December 31, 2009.





Investment in real estate loans2010

2009Balance on January 1
$
3,291,000

$
7,863,000Change in temporary valuation adjustment included in net lossIncrease in allowance for loan losses

(309,000)


(1,932,000
)Change in impairment on restructured loans

--


30,000Gain on sale of investment in real estate loan

--


51,000Purchase and additions of assetsTransfer of real estate loans to real estate held for sale

(451,000)


(4,483,000
)Transfer of allowance on real estate loans to real estate held for sale

--


1,598,000New mortgage loans and mortgage loans bought




1,340,000Sales, pay downs and reduction of assetsCollections of principal and sales of investment in real estate loans

(2,421,000)


(4,263,000
)Reduction of allowance for loan losses related to sales an d payments of investment in real estate loans

1,486,000


3,146,000Temporary change in estimated fair value based on future cash flows

62,000


(59,000)Transfer to Level 1




--Transfer to Level 2




--Balance on December 31, net of temporary valuation adjustment
$
1,658,000

$
3,291,000





NOTE L — RECENT ACCOUNTING PRONOUNCEMENTS





In January 2010, the FASB issued ASU No. 2010-06 regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements.  This ASU requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers.  Further, this ASU requires additional disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements.  This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  We are currently evaluating the impact of this ASU, however, we do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.




On December 21, 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-29, which impacts any public entity that enters into business combinations that are material on an individual or aggregate basis. The guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenues and earnings of the combined entity as though the business combination(s) that occurred during the year had occurred at the beginning of the prior annual period when preparing the pro forma financial information for both the current and prior reporting periods. The guidance also requires that pro forma disclosures be accompanied by a narrative description regarding the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in reported pro forma revenues and earnings. This guidance is effective for business combinations consummated in periods beginning after December 15, 2010.  We do not believe the adoption of this guidance will have a material impact on our Consolidated Financial Statements.





NOTE M— LEGAL MATTERS INVOLVING THE MANAGER





The United States Securities and Exchange Commission (the “Commission”), conducted an investigation of certain matters related to us, our manager, Vestin Capital, VRM I, and VRM II.  We fully cooperated during the course of the investigation.  On September 27, 2006, the investigation was resolved through the entry of an Administrative Order by the Commission (the “Order”).  Our manager, Vestin Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin Capital (collectively, the “Respondents”), consented to the entry of the Order without admitting or denying the findings therein.






-27-





In the Order, the Commission found that the Respondents violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 through the use of certain slide presentations in connection with the sale of our units and units in Fund II, the predecessor to VRM II.  The Respondents consented to the entry of a cease and desist order, the payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s suspension from association with any broker or dealer for a period of six months, which expired in March 2007.  In addition, the Respondents agreed to implement certain undertakings with respect to future sales of securities.  We are not a party to the Order.
 On November 21, 2005, Desert Land filed a complaint in the state District Court of Nevada against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. which complaint is substantially similar to a complaint previously filed by Desert Land in the United States District Court, which complaint was dismissed by the United States Court of Appeals for the Ninth Circuit, which dismissal was upheld when the United States Supreme Court denied Desert Land’s Writ of Certiorari.  The action was based upon allegations that Del Mar Mortgage, Inc. and/or Vestin Mortgage charged unlawful fees on various loans arranged by them in 1999, prior to the formation of Fund II.  On March 6, 2006, Desert Land amended the state court complaint to name VRM I.  Desert Land alleged that one or more of the defendants had transferred assets to other entities without receiving reasonable value therefore; plaintiffs alleged that defendants had made such transfers with the actual intent to hinder, delay or defraud Desert Land; that such transfers made the transferor insolvent and that sometime between February 27 and April 1, 2003, Vestin Group transferred $1.6 million to VRM I for that purpose.





The state court complaint further alleged that Desert Land was entitled to void such transfers and that pursuant to NRS 112.20, Desert Land was entitled to an injunction to enjoin defendants from further disposition of assets. Additionally, Del Mar Mortgage, Inc. has indemnified Vestin Group and Vestin Mortgage for any losses and expenses in connection with the action, and Mr. Shustek has guaranteed the indemnification.  In December 2008, this lawsuit was settled.  The settlement had no effect on us.





In April 2006, the lenders of the loans made to RightStar, Inc. (“RightStar”) filed suit against the State of Hawaii listing 26 causes of action, including allegations that the State of Hawaii has illegally blocked the lender’s right to foreclose and take title to its collateral by inappropriately attaching conditions to the granting of licenses needed to operate the business, the pre-need trust funds and the perpetual care trust funds and that the State of Hawaii has attempted to force the lenders to accept liability for any statutory trust fund deficits while no such lender liability exists under the laws of the State of Hawaii.  The State of Hawaii responded by filing allegations against Vestin Mortgage and VRM II alleging that these Vestin entities improperly influenced the former RightStar trustees to transfer trust funds to VRM II.





On May 9, 2007, VRM I, VRM II, Vestin Mortgage, the State of Hawaii and Comerica Incorporated (“Comerica”) announced that an arrangement had been reached to auction the RightStar assets.  The auction was not successful.  On June 12, 2007, the court approved the resolution agreement, which provides that the proceeds of the foreclosure sale would be allocated in part to VRM I, VRM II and Vestin Mortgage and in part to fund the trust’s statutory minimum balances.  VRM I, VRM II, Vestin Mortgage, the State of Hawaii and Comerica have pledged to cooperate to recover additional amounts owed to the trusts and the creditors from others.  The Vestin entities and the State of Hawaii signed a new agreement that would permit the foreclosure to proceed.  On October 12, 2009, the State Court approved the agreement permitting the foreclosure to proceed.  On January 25, 2010, the Circuit Court of the First Circuit for the State of Hawaii confirmed the right of VRM I, VRM II and Vestin Mortgage, to acquire through foreclosure the RightStar assets.  On June 29, 2010, the First Circuit for the State of Hawaii issued its final order allowing the foreclosure.  On July 13, 2010, VRM I, VRM II and Vestin Mortgage completed the foreclosure of these properties and classified them as REO.





VRM I, VRM II and Vestin Mortgage (“Defendants”) were defendants in a breach of contract class action filed in San Diego Superior Court by certain plaintiffs who alleged, among other things, that they were wrongfully denied roll-up rights in connection with the merger of Fund I into VRM I and Fund II into VRM II.  The court certified a class of all former Fund I unit holders and Fund II unit holders who voted against the mergers of Fund I into VRM I and Fund II into VRM II.  The trial began in December 2009 and concluded in January 2010.  On February 11, 2010, the Defendants were notified of a Tentative Statement of Decision, in their favor issued by the Superior Court for the State of California in San Diego following a trial.  In the Tentative Statement, the Court found that there was no roll-up and therefore no breach of contract.  The Court entered final judgment for the Defendants on March 18, 2010.  Defendants and Plaintiffs agreed to a post-judgment settlement by which Plaintiffs agreed not to appeal the judgment in consideration of a waiver by the Defendants of any claim to recover actual court costs from the Plaintiffs.  The Court granted final approval of this settlement of post-judgment rights on July 9, 2010.





VRM I, Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) were defendants in a civil action filed by approximately 25 separate plaintiffs (“Plaintiffs”) in District Court for Clark County, Nevada (the “Nevada Lawsuit”).  The Plaintiffs alleged, among other things, that Defendants: breached certain alleged contractual obligations owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented or omitted material facts regarding the conversion of Fund I into VRM I.  The action sought monetary and punitive damages.  The court dismissed the claim for punitive damages.  On September 8, 2010, the parties agreed to settle the case.  The Settlement Agreement provides for the settlement and complete release of all claims against the Defendants.  The settlement was made without admission of liability by Defendants.





VRM II, Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) were defendants in a civil action filed by 88 sets of plaintiffs representing approximately 138 individuals (“Plaintiffs”), in District Court for Clark County, Nevada (the “Nevada Lawsuit”).  The Plaintiffs alleged, among other things, that Defendants: breached certain alleged contractual obligations owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented or omitted material facts regarding the conversion of Fund II into VRM II.  The action sought monetary and punitive damages.  The court dismissed the claim for punitive damages.  On September 8, 2010, the parties agreed to settle the case.  The Settlement Agreement provides for the settlement and complete release of all claims against the Defendants.  The settlement was made without admission of liability by Defendants.





In addition to the matters described above, our manager is involved in a number of other legal proceedings concerning matters arising in connection with the conduct of its business activities.  Our manager believes it has meritorious defenses to each of these actions and intends to defend them vigorously.  Our manager believes that it is not a party to any other pending legal or arbitration proceedings that would have a material adverse effect on our manager’s financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on the manager’s net income in any particular period.





NOTE N — LEGAL MATTERS INVOLVING THE COMPANY





The Company was a defendant in a civil action filed by Birkeland Family, LLC III and Birkeland Family, LLC V (“Plaintiffs”) in District Court for Clark County, Nevada.  The Plaintiffs alleged as causes of action against the Company:  Breach of Contract and Breach of the Implied Covenant of Good Faith and Fair Dealing regarding the sale of the office building commonly described as 8379 W. Sunset Road, Las Vegas, Nevada.  The action sought monetary, punitive and exemplary damages.  On January 18, 2011, summary judgment was granted in favor of the Company, with the Court finding that the Company was not part of the lease and, therefore, could not be held liable for damages.





From time to time, we may become involved in litigation in the ordinary course of business.  We do not believe that any pending legal proceedings are likely to have a material adverse effect on our financial condition or results of operations or cash flows.  It is not possible to predict the outcome of any such proceedings.





NOTE O — SUBSEQUENT EVENTS





The following subsequent events have been evaluated through the date of this filing with the SEC.





On January 21, 2011, the Board of Directors appointed Eric Bullinger as our Chief Financial Officer.  Mr. Bullinger, 40, will also serve as the Chief Financial Officer of Vestin Realty Mortgage I, Inc. and the equivalent of the Chief Financial Officer of Vestin Fund III, LLC. Vestin Realty Mortgage I, Vestin Realty Mortgage II and Vestin Fund III are referred to collectively hereafter as the “Vestin Entities”. Mr. Bullinger’s services are furnished to us pursuant to an accounting services agreement entered into by our manager and Strategix Solutions. Strategix Solutions is managed by LL Bradford, a certified public accounting firm, and provides accounting and financial reporting services on our behalf. Mr. Bullinger has worked for LL Bradford for approximately 11 years. Mr. Bullinger has overseen various audit engagements of public companies, as well as non-public companies. Mr. Bullinger is  compensated solely by Strategix Solutions.  Mr. Bullinger’s responsibilities at Strategix Solutions include matters unrelated to the Vestin Entities.  Strategix Solutions has an agreement with the Vestin Entities whereby Strategix Solutions receives certain compensation for the performance of accounting services for the Vestin Entities.  Such accounting services include services in addition to the services to be provided by Mr. Bullinger.




























-28-
 Table of Contents








SUPPLEMENTARYINFORMATION





Schedule IVESTIN FUND III, LLCREAL ESTATE LOANS ON REAL ESTATEREALESTATE LOAN ROLL FORWARDBalance, December 31, 2008

$
13,312,000Additions during the periodNew real estate loans and additions


481,000Real estate loans bought


500,000Deductions during the periodCollections of principal and reductions


510,000Foreclosed loans (Real estate held for sale)


4,482,000Real estate loans sold


3,754,000Net Change in 2009


(7,765,000
)Balance, December 31, 2009

$
5,547,000Additions during the periodNew real estate loans and additions


--Real estate loans bought


--Deductions during the periodCollections of principal and reductions


2,421,000Foreclosed loans (Real estate held for sale)


451,000Real estate loans sold


--Net Change in 2010


(2,872,000
)Balance, December 31, 2010

$
2,675,000














Schedule IIVESTIN FUND III, LLCREAL ESTATE LOANS ON REAL ESTATE *REALESTATE LOANS BY TYPE OF PROPERTYAs of December 31, 2010:Type of Property

Interest Rate


Face Amount of Loan


Carrying Amount of Loan


Maturity Date


Amount Subject to DelinquencyCommercial


3%-15
%

$
2,271,000


$
1,430,000


12/08-12/11


$
1,720,000Construction


8
%

$
404,000


$
228,000



01/11


$
--Total





$
2,675,000


$
1,658,000






$
1,720,000As of December 31, 2009:Type of Property

Interest Rate


Face Amount of Loan


Carrying Amount of Loan


Maturity Date


Amount Subject to DelinquencyCommercial


3%-15
%

$
4,288,000


$
2,347,000


10/08-12/11


$
3,120,000Construction


3
%

$
808,000


$
555,000



01/11


$
-Land


8
%

$
451,000


$
451,000



05/10


$
451,000Total





$
5,547,000


$
3,353,000






$
3,571,000








Schedule IIIVESTIN FUND III, LLCREALESTATE LOANS ON REAL ESTATE *REAL ESTATE LOANS BY LIEN POSITIONAs of December 31, 2010:Lien Position

Face Amount of Loan


Interest Rate


Carrying Amount of Loan

Maturity Date

Amount Subject to Delinquency1st

$
1,924,000



8%-12
%

$
1,491,000

12/08-01/11

$
1,520,0002nd

$
751,000



3%-15
%

$
167,000

04/09-12/11

$
200,000Total

$
2,675,000






$
1,658,000



$
1,720,000As of December 31, 2009:Lien Position

Face Amount of Loan


Interest Rate


Carrying Amount of Loan

Maturity Date

Amount Subject to Delinquency1st

$
4,678,000



3%-15
%

$
3,074,000

10/08-01/11

$
3,371,0002nd

$
869,000



3%-15
%

$
279,000

04/09-12/11

$
200,000Total

$
5,547,000






$
3,353,000



$
3,571,000








-29-
 Table of Contents





Schedule IVVESTIN FUND III, LLCREAL ESTATE LOANS ON REAL ESTATEREALESTATE LOANS THAT EXCEED THREE PERCENT OF THE PORTFOLIOAs of December 31, 2010:Description of Loan

Interest Rate

Final Maturity Date
Periodic Payment Terms
Lien Position

Face Amount of Loan


Carrying Amount of Loan


Amount Subject to DelinquencyCommercial


12.00
%
12/05/08
Fixed Interest only, Balloon Payment $1,520,000
1st

$
1,520,000


$
1,263,000


$
1,520,000Commercial


3.00
%
09/16/11
Fixed Interest only, Balloon Payment $351,000
2nd

$
351,000


$
--


$
--Commercial


8.00
%
12/31/11
Fixed Interest only, Balloon Payment $200,000
2nd

$
200,000


$
167,000


$
--Commercial


15.00
%
04/30/09
Fixed Interest only, Balloon Payment $200,000
2nd

$
200,000


$
--


$
200,000Construction


8.00
%
01/31/11
Fixed Interest only, Balloon Payment $404,000
1st

$
404,000


$
228,000


$
--Total








$
2,675,000


$
1,658,000


$
1,720,000








Schedule IVVESTIN FUND III, LLCREAL ESTATE LOANS ON REAL ESTATEREAL ESTATE LOANS THAT EXCEED THREE PERCENT OF THE PORTFOLIOAs of December 31, 2009:Description of Loan

Interest Rate

Final Maturity Date
Periodic Payment Terms
Lien Position

Face Amount of Loan


Carrying Amount of Loan


Amount Subject to DelinquencyCommercial


12.00
%
12/05/08
Fixed Interest only, Balloon Payment $1,520,000
1st

$
1,520,000


$
1,520,000


$
1,520,000Commercial


10.00
%
10/29/08
Fixed Interest only, Balloon Payment $1,400,000
1st

$
1,400,000


$
306,000


$
1,400,000Commercial


8.00
%
12/31/11
Fixed Interest only, Balloon Payment $200,000
2nd

$
200,000


$
167,000


$
--Commercial


15.00
%
04/30/09
Fixed Interest only, Balloon Payment $200,000
2nd

$
200,000


$
115,000


$
200,000Commercial


15.00
%
03/15/10
Fixed Interest only, Balloon Payment $499,000
1st

$
499,000


$
499,000


$
--Construction


3.00
%
01/31/11
Fixed Interest only, Balloon Payment $404,000
1st

$
404,000


$
274,000


$
--Construction


3.00
%
01/31/11
Fixed Interest only, Balloon Payment $404,000
1st

$
404,000


$
296,000


$
--Land


8.00
%
05/20/10
Fixed Interest only, Balloon Payment $451,000
1st

$
451,000


$
451,000


$
451,000Total








$
5,078,000


$
3,628,000


$
3,571,000





ITEM9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





None.





ITEM9A.
CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures





We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our manager, including our manager’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required financial disclosure.  In connection with the preparation of this Report on Form 10-K, our manager carried out an evaluation, under the supervision and with the participation of our manager’s CEO and CFO, as of December 31, 2010, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Exchange Act.  Based upon our manager’s evaluation, our manager’s CEO and CFO concluded that, as of December 31, 2010, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our manager's CEO and CFO, as appropriate to allow timely decisions regarding required disclosure due to the material weakness in our internal control over financial reporting as described below.


Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within our company have been or will be detected.  Even effective internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation.  Furthermore, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.  Our manager, including our manager’s CEO and CFO, does not expect that our controls and procedures will prevent all errors.





The certifications of our manager’s CEO and CFO required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.





Management’s Report on Internal Control over Financial Reporting





Management is responsible for establishing and maintaining adequate internal control over financial reporting for our Company, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States.  Internal control over financial reporting includes those policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of our Company are being made only in accordance with authorizations of management and the director of our manager; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our Company's assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.





-30-


Management has conducted an assessment, including testing, of the effectiveness of our internal control over financial reporting as of December 31, 2010.  In making its assessment of internal control over financial reporting, management used the criteria inInternal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  Based on this assessment, management, with the participation of the Chief Executive and Chief Financial Officers of the Manager, believes that, as of December 31, 2010, we did not maintain effective internal control over financial reporting due to the material weakness described below.


A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. We identified the following material weakness in our assessment of the effectiveness of internal control over financial reporting:
 
 We did not design and implement adequate controls related to the accounting of foreclosure transactions, specifically in this instance, applying consolidation guidance to determine whether and how to consolidate another entity as it relates to investments held by VRM I and VRM II. This material weakness has resulted in the required restatement of previously issued financial statements for the quarter ended September 30, 2010.
 
 Plan of Remediation
 
 To remediate the aforementioned material weakness, we are implementing additional controls to help ensure that all accounting pronouncements are sufficiently researched and that our conclusions relative to the effect of such pronouncements on us are communicated to management and our auditors.


Changes in Internal Control Over Financial Reporting





As required by Rule 13a-15(d) under the Exchange Act, our management, including our manager’s CEO and  CFO, has evaluated our internal control over financial reporting to determine whether any changes occurred during the fourth fiscal quarter of 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Based on that evaluation, other than what was described above, there has been no such change during the fourth fiscal quarter of 2010.






ITEM9B.
OTHER INFORMATION





None.





PARTIII





ITEM10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





We do not have a Board of Directors or any corporate officers.  We are managed by Vestin Mortgage, a privately held company which is majority owned by Vestin Group, Inc.  The powers, responsibilities and obligations of our manager are set forth in our Operating Agreement.  The CEO and CFO of Vestin Group function as the equivalent of our CEO and CFO.





Vestin Group, Inc. was previously a publicly held company and maintained an audit committee consisting of independent directors.  The Vestin Group audit committee previously functioned as the equivalent of our audit committee.  Since May 2005, Vestin Group has been a privately held company and since March 2006, it no longer has any independent directors.  Michael Shustek, the principal executive officer of our manager, is the sole director of Vestin Group, Inc.  Accordingly, we do not have an audit committee or any body that functions as the equivalent of an audit committee.  Our units are not listed on any exchange and we are not required to have an audit committee which consists of independent directors and meets the other requirements of Section 10A(m) of the Securities Exchange Act of 1934 and the rules promulgated thereunder.





Our manager is responsible for overseeing management of the Company’s risks.





The following table sets forth the names, ages as of April 4, 2011 and positions of the individuals who serve as directors, executive officers and certain significant employees of Vestin Mortgage (our manager) or our affiliates:





Name

Age

TitleMichael V. Shustek


52

President, Chief Executive Officer and ChairmanEric Bullinger (1)


40

Chief Financial OfficerMichael J. Whiteaker


61

Vice President of Regulatory Affairs






(1)
During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services to us, VRM I and VRM II.  The CFO of our manager is an employee of Strategix Solutions.  Strategix Solutions is managed by LL Bradford and Company, LLC ("LL Bradford"), a certified public accounting firm that has provided non-audit accounting services to us.  The principal manager of LL Bradford was an officer of our manager from April 1999 through January 1, 2005.  Strategix Solutions is owned by certain partners of LL Bradford, none of whom are currently or were previously officers of our manager.  As of December 31, 2010, Strategix Solutions dedicates to us a total of three employees.






Directors, Executive Officers and certain significant employees of Vestin Mortgage (our manager), Vestin Group, Vestin Originations or our affiliates





Michael V. Shustek has been a director of our manager and Chairman of the board of directors, Chief Executive Officer and a director of Vestin Group since April 1999.  In addition, Mr. Shustek has been a Director and the CEO of VRM I and VRM II since January 2006.  In February 2004, Mr. Shustek became the President of Vestin Group.  Mr. Shustek also serves on the loan committee of our manager and its affiliates.  In 2003, Mr. Shustek became the Chief Executive Officer of our manager.  In 1995, Mr. Shustek founded Del Mar Mortgage, and has been involved in various aspects of the real estate industry in Nevada since 1990.  In 1993, he founded Foreclosures of Nevada, Inc., a company specializing in non-judicial foreclosures.  In 1993, Mr. Shustek also started Shustek Investments, a company that originally specialized in property valuations for third-party lenders or investors.





In 1997, Mr. Shustek was involved in the initial founding of Nevada First Bank, with the largest initial capital base of any new state charter in Nevada’s history.  Mr. Shustek has co-authored two books, entitled “Trust Deed Investments,” on the topic of private mortgage lending, and “If I Can Do It, So Can You.”  Mr. Shustek is a guest lecturer at the University of Nevada, Las Vegas, where he also has taught a course in Real Estate Law and Ethics.  Mr. Shustek received a Bachelor of Science degree in Finance at the University of Nevada, Las Vegas.  As our founder and our manager’s CEO, Mr. Shustek is highly knowledgeable with regard to our business operations and loan portfolio.  See Note M Legal Matters Involving The Manager in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K for information regarding legal matters involving our manager and Mr. Shustek.





Eric Bullinger has acted as the equivalent of our Chief Financial Officer (CFO) since January 21, 2011.  In addition, Mr. Bullinger was appointed as the Chief Financial Officer of Vestin Realty Mortgage I, Inc. (“VRM I”) and Vestin Realty Mortgage II, Inc. (“VRM II”). Mr. Bullinger’s services are furnished to us pursuant to an accounting services agreement entered into by our manager and Strategix Solutions. Strategix Solutions is managed by LL Bradford, a certified public accounting firm, and provides accounting and financial reporting services on our behalf. Mr. Bullinger is a Certified Public Accountant and has worked for LL Bradford for approximately 11 years. Mr. Bullinger has overseen various audit engagements of public and private companies.  He received a Bachelor of Business Administration degree in Accounting from the University of Wyoming.





Michael J. Whiteaker has been Vice President of Regulatory Affairs since May 1999.  Mr. Whiteaker is experienced in the banking and finance regulatory fields, having served with the State of Nevada, Financial Institution Division from 1982 to 1999 as its Supervisory Examiner, responsible for the financial and regulatory compliance audits of all financial institutions in Nevada.  Mr. Whiteaker has worked extensively on matters pertaining to both state and federal statutes, examination procedures, policy determination and credit administration for commercial and real estate loans.  From 1973 to 1982, Mr. Whiteaker was Assistant Vice President of Nevada National Bank, responsible for a variety of matters including loan review.  Mr. Whiteaker has previously served on the Nevada Association of Mortgage Brokers, Legislative Committee and is a past member of the State of Nevada, Mortgage Advisory Council.  He currently is a director of the Private Lenders Group, an organization devoted to creating and maintaining the highest professional standards possible among licensed Nevada Mortgage brokers.





Code of Ethics





As we do not have any executive officers we have not adopted a Code of Ethics.  However, our manager has adopted a Code of Ethics.





-31-
 Table of Contents





ITEM11.
EXECUTIVE COMPENSATION





We do not compensate any executive officers.  We are required to pay our manager a management (acquisition and advisory) fee and certain other fees in accordance with the terms of our Operating Agreement.  For the years ended December 31, 2010 and 2009, no such fees were paid.  In addition, we may pay our manager or its affiliates for services rendered in selling properties acquired through foreclosure.  We also pay a fee to Strategix Solutions which is based upon the wages of the employees providing the services.  We have evaluated the risks entailed in these fee arrangements and we do not believe that such risks are reasonably likely to have a material adverse effect upon the Company.





ITEM12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





Shown below is certain information as of April 4, 2011, with respect to beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of number of membership units by the only persons or entities known to us to be a beneficial owner of more than 5% of the outstanding membership units.  Unless otherwise noted, the percentage ownership is calculated based on 2,024,424 membership units as of  April 4, 2011.





Name and Address of

Beneficial Owner

Amount and Nature of

Beneficial Ownership

Percent of ClassMichael V. Shustek

8880 West Sunset Rd Ste 200

Las Vegas, NV 89118

Sole voting and investment power of 289,718 units & shared voting and investment power of 2,963 units held by his spouse

14.46%





The following table sets forth the total number and percentage of our membership units beneficially owned as of  April 4, 2011 by:





·
each of our manager’s directors;





·
our manager’s chief executive officer and other executive officers; and





·
all of our manager’s executive officers and directors as a group.





Unless otherwise noted, the percentage ownership is calculated based on 2,024,424 units of our total outstanding membership units as of  April 4, 2011.





Common Shares Beneficially OwnedBeneficial Owner
Address

Number


PercentMichael V. Shustek (1)
8880 West Sunset Rd Ste 200

Las Vegas, NV  89118


292,681



14.46
%All directors and executive officers of our manager as a group



292,681



14.46
%





(1)
Includes 54,863 units held by our manager and 200,000 units held by Shustek Investments, 34,856 units held by inVestin and 2,963 units held by his spouse.  Mr. Shustek is the Chairman, President and Chief Executive Officer of our manager and indirectly owns a significant majority of the membership units of our manager through Vestin Group, Inc. a company wholly owned by Mr. Shustek.  Mr. Shustek is the sole owner, Chairman, President and Chief Executive Officer of Shustek Investments, Inc.  Mr. Shustek is the sole owner, Chairman, President and Chief Executive Officer of inVestin Nevada, Inc.  Mr. Shustek has sole voting and investment power in all these units, except for the units held by his spouse.





ITEM13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





Prior to July 2, 2009, we may have acquired or sold investments in real estate loans from/to our manager or other related parties.  Pursuant to the terms of our Operating Agreement, such acquisitions and sales were made without any mark up or mark down.  No gain or loss was recorded on these transactions, as it was not our intent to make a profit on the purchase or sale of such investments.  The purpose was generally to diversify our portfolio by syndicating loans, thereby providing us with additional capital to make additional loans.  From time to time, we may continue to sell performing investments in real estate loans to our manager or other related parties, without any mark up or mark down.  No gain or loss will be recorded on these transactions.





Please refer to Note G – Related Party Transactions in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K, for information regarding our related party transactions, which are incorporated herein by reference.





ITEM14.
PRINCIPAL ACCOUNTING FEES AND SERVICES








During the year ended December 31, 2009, Frazer Frost provided various audit, audit related and non-audit services to us as follows:





December 31, 2009Audit Fees

$
106,000Audit Related Fees

$
--Tax Fees

$
--All Other Fees

$
--





During the year ended December 31, 2010, JLK Partners, LLP (“JLK”) provided various audit, audit related and non-audit services to us as follows:





December 31, 2010Audit Fees

$
67,000Audit Related Fees

$
--Tax Fees

$
--





Mr. Shustek, the sole director of our manager, has considered whether provision of the services described regarding audit related fees, tax fees and all other fees above were compatible with maintaining the independent accountant’s independence and has determined that such services did not adversely affect the independence of Frazer Frost and JLK.





Our manager has direct responsibility to review and approve the engagement of the independent auditors to perform audit services or any permissible non-audit services.  All audit and non-audit services to be provided by the independent auditors must be approved in advance by our manager.  Our manager may not engage the independent auditors to perform specific non-audit services proscribed by law or regulation.  All services performed by independent auditors under engagements entered into on or after January 21, 2005, were approved by our manager pursuant to their pre-approval policy, and none was approved pursuant to the de minimisexception to the rules and regulations of the Securities Exchange Act of 1934, Section 10A(i)(1)(B), on pre-approval.





















-32-


PARTIV





ITEM15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES





The following are filed as part of this Report:





(a) 1.  Financial Statements




The list of the financial statements contained herein are contained in Part II, Item 8 Financial Statements and Supplementary Data on this Annual Report on Form 10-K, which is hereby incorporated by reference.


(a) 2.  Financial Statement Schedules





The list of the financial statements schedules contained herein are contained in Part II, Item 8 Financial Statements and Supplementary Data on this Annual Report on Form 10-K, which is hereby incorporated by reference.





(a) 3.  Exhibits




















































































































































-33-
 Table of Contents


EXHIBIT INDEX











Exhibit No.

Description of Exhibits2.1(1)

Plan of Complete Liquidation and Dissolution3.1(2)

Articles of Organization3.2(3)

Certificate of Amendment to Articles of Organization3.3(4)

Amended and Restated Operating Agreement (included as Exhibit A to the prospectus)4.4(5)

Distribution Reinvestment Plan10.9(6)

Office lease agreement dated March 31, 2003 by and between Luke Properties, LLC and Vestin Group, Inc.10.10(7)

Indemnification agreement dated March 25, 2009 by and between Vestin Group, Inc. and Vestin Fund III, LLC10.11 (8)

Agreement between Strategix Solutions, LLC and Vestin Fund III, LLC for accounting services.10.12 (9)

Plan of Complete Liquidation and Dissolution31.1

Section 302 Certification of Michael V. Shustek31.2

Section 302 Certification of Eric Bullinger32

Certification Pursuant to 18 U.S.C. Sec. 1350





(1)

Incorporated herein by reference to our Schedule 14A Definitive Proxy Statement filed on May 11, 2009 (File No. 000-51301)(2)

Incorporated herein by reference to our Pre-Effective Amendment No. 3 to Form S-11 Registration Statement filed on September 2, 2003 (File No. 333-105017)(3)

Incorporated herein by reference to our Form 10-Q filed on August 16, 2004 (File No. 333-105017)(4)

Incorporated herein by reference to our Schedule 14A Definitive Proxy Statement filed on January 29, 2007 (File No. 000-51301)(5)

Incorporated herein by reference to Exhibit 4.4 of our Post-Effective Amendment No. 5 to Form S-11 Registration Statement filed on April 28, 2006 (File No. 333-105017)(6)

Incorporated herein by reference to our Form 10-KSB filed on March 30, 2005 (File No. 333-105017)(7)

Incorporated herein by reference to the Annual Report on Form 10-K for the year ended December 31, 2008 filed on March 27, 2009 (File No. 000-51301)(8)

Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on May 14, 2009 (File No. 000-51301)(9)

Incorporated herein by reference to the Proxy Statement dated May 11, 2009 (File No. 000-51301)



























































































































-34-
 Table of Contents





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 thereunto duly authorized.





Vestin Fund III, LLCBy:

Vestin Mortgage, LLC., its sole ManagerBy:

/s/ Michael V. ShustekMichael V. ShustekChief Executive Officer and Sole Director of the Manager(Principal Executive Officer of Manager)By:

/s/ Eric BullingerEric BullingerChief Financial Officer of the Manager(Principal Financial and Accounting Officer of the Manager)





Date:   April 4, 2011












































































































































-35-
 Table of Contents





Exhibit31.1





CERTIFICATIONS





I, Michael V. Shustek, certify that:





1. I have reviewed this Form 10-K of Vestin Fund III, LLC;





2. Based on my knowledge, this 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 report;





3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;





4. The registrant's other certifying officer(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and 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 report is being prepared;





(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;





(c)
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





(d)
Disclosed in this report any change in the registrant's internal 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 officer(s) 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.





Date:  April 4, 2011








/s/ Michael V. Shustek


Michael V. Shustek


Chief Executive Officer and Director of the Manager*


Vestin Mortgage, LLC, sole Manager of Vestin Fund III, LLC


* Michael V. Shustek functions as the equivalent of the Chief Executive Officer of the Registrant.


Table of Contents


Exhibit31.2





CERTIFICATIONS





I, Eric Bullinger, certify that:





1. I have reviewed this Form 10-K of Vestin Fund III, LLC;





2. Based on my knowledge, this 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 report;





3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;





4. The registrant's other certifying officer(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and 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 report is being prepared;





(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;





(c)
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





(d)
Disclosed in this report any change in the registrant's internal 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 officer(s) 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.





Date:  April 4, 2011





/s/ Eric Bullinger


Eric Bullinger


Chief Financial Officer of the Manager*


Vestin Mortgage, LLC, sole Manager of Vestin Fund III, LLC


*Eric Bullinger functions as the equivalent of Chief Financial Officer for Vestin Fund III LLC pursuant to an accounting services agreement entered into between Vestin Fund III LLC and his employer, Strategix Solutions, LLC.


Table of Contents





Exhibit32





CERTIFICATION PURSUANT TO


18 U.S.C.  SECTION 1350








Michael V. Shustek, as Chief Executive Officer and Director of Vestin Mortgage, LLC., the sole manager of Vestin Fund III, LLC (the “Registrant”), and Eric Bullinger, as Chief Financial Officer of Vestin Mortgage, LLC., hereby certify, pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:







(1)
The Registrant’s Report on Form 10-K for the year ended December 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and









(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.










Date:  April 4, 2011








/s/ Michael V. ShustekMichael V. ShustekChief Executive Officer and Director*of Vestin Mortgage, LLC, sole Manager of the Registrant











Date:  April 4, 2011








/s/Eric BullingerEric BullingerChief Financial Officer**of Vestin Mortgage, LLC., sole Manager of the Registrant











* Michael V. Shustek functions as the equivalent of the Chief Executive Officer of the Registrant for purposes of 18 U.S.C. Section 1350.





**Eric Bullinger functions as the equivalent of Chief Financial Officer of the Registrant for purposes of 18 U.S.C. Section 1350, pursuant to an accounting services agreement entered into between Vestin Fund III LLC and his employer, Strategix Solutions, LLC