UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





(Mark one)





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





For the quarterly period ended September 30, 2011





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 W. SUNSET ROAD, SUITE 200, LAS VEGAS, NEVADA 89148


(Address of Principal Executive Offices) (Zip Code)





Registrant’s Telephone Number: 702.227.0965





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 (Section 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 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 [   ]

(Do not check if a smaller reporting company)
Smaller reporting company [X]





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).





Yes  [   ]    No   [X]





As of November 14, 2011, 2,024,424 membership units in the Company were outstanding.





Table of Contents


TABLEOF CONTENTS





PagePart I
FINANCIAL INFORMATIONItem 1.
Financial Statements
1Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010
1Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2011 and 2010
2Statement of Members’ Equity and Other Comprehensive Loss (unaudited) for the Nine Months Ended September 30, 2011
3Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2011 and 2010
4Notes to Financial Statements (unaudited)
6Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24Item 4.
Controls and Procedures
31Part II
OTHER INFORMATIONItem 1.
Legal Proceedings
31Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
32Item 6.
Exhibits
34SIGNATURES
35Exhibit 31.1Exhibit 31.2Exhibit 32








Table of Contents


PARTI - FINANCIAL INFORMATION





ITEM 1.
FINANCIAL STATEMENTS





VESTIN FUND III, LLCBALANCE SHEETSASSETSSeptember 30, 2011


December 31, 2010(Unaudited)AssetsCash and cash equivalents

$
191,000


$
445,000Marketable securities - related party


140,000



165,000Interest and other receivables, net of allowance for doubtful accounts of $94,000 at September 30, 2011 and  $66,000 at December 31, 2010


--



237,000Notes receivable, net of allowance of $358,000 at September 30, 2011 and December 31, 2010


--



--Real estate held for sale


770,000



820,000Investment in real estate loans, net of allowance for loan loss of $1,232,000 at September 30, 2011 and $ 1,017,000  at December 31, 2010


1,443,000



1,658,000Due from related parties


963,000



1,012,000Other assets


2,000



4,000Total assets

$
3,509,000


$
4,341,000LIABILITIES AND MEMBERS' EQUITYLiabilitiesAccounts payable and accrued liabilities

$
25,000


$
64,000Note payable


48,000



48,000Deferred income


985,000



985,000Total liabilities


1,058,000



1,097,000Commitments and contingenciesMembers' equityMembers' units - authorized 10,000,000 units, 2,024,424 units issued and outstanding at September 30, 2011 and December 31, 2010


2,480,000



3,247,000Accumulated other comprehensive loss


(29,000
)


(3,000
)Total members' equity


2,451,000



3,244,000Total liabilities and members' equity

$
3,509,000


$
4,341,000








The accompanying notes are an integral part of these statements.
 -1-
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VESTINFUND III, LLCSTATEMENTS OF OPERATIONS(UNAUDITED)


For the Three Months Ended


For the Nine Months Ended09/30/2011


09/30/2010


09/30/2011


09/30/2010RevenuesInterest income from investment in real estate loans

$
6,000


$
14,000


$
17,000


$
73,000Other income


2,000



--



2,000



25,000Total revenues


8,000



14,000



19,000



98,000Operating expensesInterest expense


1,000



--



3,000



--Provision for loan losses


215,000



--



215,000



70,000Professional fees


34,000



66,000



143,000



190,000Other


9,000



9,000



27,000



19,000Total operating expenses


259,000



75,000



388,000



279,000Loss from operations


(251,000
)


(61,000
)


(369,000
)


(181,000
)Non-operating lossInterest income from banking institutions


--



--



--



1,000Impaiment of marketable securities - related party


--



(275,000
)


--



(275,000
)Total non-operating loss, net


--



(275,000
)


--



(274,000
)Loss from real estate held for saleRevenue related to real estate held for sale


--



--



--



1,000Net loss on sale of real estate held for sale


--



(4,000
)


--



(4,000
)Write-down of real estate held for sale


(12,000
)


--



(50,000
)


(120,000
)Expenses related to real estate held for sale


(12,000
)


(24,000
)


(50,000
)


(57,000
)Total loss from real estate held for sale


(24,000
)


(28,000
)


(100,000
)


(180,000
)NET LOSS

$
(275,000
)

$
(364,000
)

$
(469,000
)

$
(635,000
)Net loss allocated to members

$
(275,000
)

$
(364,000
)

$
(469,000
)

$
(635,000
)Net loss allocated to members per weighted average membership unit

$
(0.14
)

$
(0.18
)

$
(0.23
)

$
(0.31
)Weighted average membership units


2,024,424



2,024,424



2,024,424



2,024,424


The accompanying notes are an integral part of these statements.
 -2-
 Table of Contents





VESTINFUND III, LLCSTATEMENT OF MEMBERS' EQUITY AND OTHER COMPREHENSIVE LOSSFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011(UNAUDITED)Units


AmountMembers' equity at December 31, 2010


2,024,424


$
3,244,000Comprehensive loss:Net loss






(469,000
)Unrealized loss on marketable securities – related party






(26,000
)Total comprehensive loss






(495,000
)Liquidating distributions






(298,000
)Members' equity at September 30, 2011 (unaudited)


2,024,424


$
2,451,000








The accompanying notes are an integral part of these statements.
 -3-
 Table of Contents





VESTINFUND III, LLCSTATEMENTS OF CASH FLOWS(UNAUDITED)For the Nine

Months Ended09/30/11


09/30/10Cash flows from operating activities:Net loss

$
(469,000
)

$
(635,000
)Adjustments to reconcile net loss to net cash used in operating activities:Provision for doubtful accounts related to receivable included in other expense


--



(3,000
)Provision for loan loss


215,000



70,000Write-downs on real estate held for sale


50,000



120,000Loss on real estate held for sale


--



4,000Impairment of marketable securities – related party


--



275,000Change in operating assets and liabilities:Interest receivable


236,000



5,000Accounts payable and accrued liabilities


(41,000
)


(1,000
)Due to/from related parties


49,000



(20,000
)Other assets


4,000



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


44,000



(188,000
)Cash flows from investing activities:Proceeds from loan payoff


--



299,000Sale of investments in real estate loans to:VRM II


--



200,000Proceeds related to real estate held for sale


--



313,000Net cash provided by investing activities


--



812,000Cash flows from financing activities:Liquidating distributions, net of reinvestments


(298,000
)


(1,840,000
)Liquidating distributions – related party


--



(311,000
)Net cash used in financing activities


(298,000
)


(2,151,000
)NET CHANGE IN CASH


(254,000
)


(1,527,000
)Cash, beginning of period


445,000



1,880,000Cash, end of period

$
191,000


$
353,000





Supplemental disclosures of cash flows information:Interest paid

$
3,000


$
--Non-cash investing and financing activities:Adjustment to interest receivable and related allowance associated with sale of investment  in real estate loan

$
--


$
(226,000
)Account receivable related to sale of loan collateral, held in escrow account

$
--


$
236,000Write off of interest receivable and related allowance

$
--


$
10,000Recognition of unrealized loss on marketable securities – related party

$
--


$
275,000Unrealized gain (loss) on marketable securities - related party

$
(26,000
)

$
77,000





The accompanying notes are an integral part of these statements.
 -4-
 Table of Contents


VESTINFUND III, LLC





NOTES TO FINANCIAL STATEMENTS





SEPTEMBER 30, 2011





(UNAUDITED)





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 September 30, 2011, 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, September 17, 2010 and May 25, 2011, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million $0.3 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.





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 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 Vestin Originations, which the significant majority is beneficially owned by Michael V. Shustek, and Advant Mortgage, LLC (“Advant”), beneficially owned by Michel V. Shustek, both licensed Nevada mortgage brokers.


-5-
 Table of Contents








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.  Because of numerous uncertainties, the liquidation may take longer or shorter than expected.  Because the liquidation of the Fund was not imminent, as of September 30, 2011, the financial statements are presented assuming the Fund will continue as a going concern.





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.  Strategix Solutions also provides accounting and financial reporting services  to 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.





On January 21, 2011, Eric Bullinger was appointed as CFO to our manager by their Board of Directors, pursuant to the terms of our agreement with Strategix Solutions, who was responsible for designating, subject to the approval of their Board of Directors, a new CFO for the manager.  From May 21, 2010 until January 21, 2011, our current CEO of our manager, Michael Shustek, was acting as their interim CFO.





NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis of Presentation





The financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”).  Management has included all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented.  Interim results are not necessarily indicative of results for a full year.  The information included in this Form 10-Q should be read in conjunction with information included in the 2010 annual report filed on Form 10-K.





Management Estimates





The preparation of financial statements in conformity with 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.





-6-
 Table of Contents





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 was to expire August 31, 2014.  Revenue will be recognized at the expiration of the lease referred to above.  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.  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 is 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 complies 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.





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 Table of Contents





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 subsequently to loan origination or upon the sale of foreclosed related loan advances;





·
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.





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 Table of Contents





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 September 30, 2011.  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.





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 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 of 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.





-9-
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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 public reporting company, we are required to make our fair value disclosures for interim reporting periods.





Net Income (Loss) Allocated to Members Per Weighted Average Membership Unit





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





Segments





We operate as one business segment.





Reclassifications





Certain amounts in the September 30, 2010 consolidated financial statements have been reclassified to conform to the September 30, 2011 presentation.





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.





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NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK





Financial instruments consist of cash, interest and other receivables, notes receivable, accounts payable and accrued liabilities, due to/from related parties, and notes payable.  The carrying value of these instruments approximates their fair values due to their short-term nature.  Marketable securities – related party and investment in real estate loans are further described in Note J – Fair Value.





Financial instruments with concentration of credit and market risk include cash, interest and other receivables, marketable securities - related party, notes receivable, accounts payable and accrued liabilities, due to/from related parties, 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 September 30, 2011 and December 31, 2010, we had no amounts in excess of the federally insured limits.





As of September 30, 2011 and December 31, 2010, approximately 28% and 57% of our loans were in Nevada and Oregon, 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 September 30, 2011 and December 31, 2010, the loan to our largest borrower represented 56.8% 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, modifications, and liquidating distributions.  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 approximately $1.5 million.  As of September 30, 2011, 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 September 30, 2011, 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 four unsecured notes receivable totaling approximately $0.4 million, had a common guarantor.





No other loans in our portfolio have common guarantors at September 30, 2011.





NOTE D — INVESTMENTS IN REAL ESTATE LOANS





As of September 30, 2011 and December 31, 2010, all of our loans provided for interest only payments with a “balloon” payment of principal payable and any accrued interest payable in full at the end of the term.





In addition, we have previously 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 September 30, 2011 and December 31, 2010, we had no investments in real estate loans that had interest reserves.





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Loan Portfolio





Historically we had five available real estate loan products consisting of commercial, construction, acquisition and development, land and residential.  As of September 30, 2011, our remaining loans were commercial or construction loans.  The effective interest rates on all product categories range from 3% to 15% which includes performing loans that are being fully or partially accrued and will be payable at maturity.





Investments in real estate loans as of September 30, 2011, 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
%


89.60
%Construction


1



404,000



8.00
%


15.10
%


91.33
%Total


5


$
2,675,000



10.14
%


100.00
%


89.88
%





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
%





*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 September 30, 2011 and December 31, 2010 was 6.16%.  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 September 30, 2011 and December 31, 2010:





Loan Type

Number of Loans


September 30, 2011

Balance *


Portfolio

Percentage


Number of Loans


December 31, 2010 Balance *


Portfolio

PercentageFirst deeds of trust


2


$
1,924,000



71.93
%


2


$
1,924,000



71.93
%Second deeds of trust


3



751,000



28.07
%


3



751,000



28.07
%Total


5


$
2,675,000



100.00
%


5


$
2,675,000



100.00
%





*Please see Balance Sheet Reconciliation below.





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The following is a schedule of contractual maturities of investments in real estate loans as of September 30, 2011:





Non-performing and past due loans

$
1,720,000October 2011 – December 2011


604,000January 2012 – March 2012


--April 2012 – June 2012


--July 2012 – September 2012


351,000Total

$
2,675,000





The following is a schedule by geographic location of investments in real estate loans as of September 30, 2011 and December 31, 2010:





September 30, 2011

Balance *


Portfolio Percentage


December 31, 2010

Balance *


Portfolio PercentageArizona

$
200,000



7.48
%

$
200,000



7.48
%Nevada


755,000



28.22
%


755,000



28.22
%Oregon


1,520,000



56.82
%


1,520,000



56.82
%Texas


200,000



7.48
%


200,000



7.48
%Total

$
2,675,000



100.00
%

$
2,675,000



100.00
%





*Please see Balance Sheet Reconciliation below.





Balance Sheet Reconciliation





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





September 30, 2011

Balance


December 31, 2010 BalanceBalance per loan portfolio

$
2,675,000


$
2,675,000Less:Allowance for loan losses (a)


(1,232,000
)


(1,017,000
)Balance per balance sheet

$
1,443,000


$
1,658,000





(a)
Please refer to Specific Reserve Allowance below.





Non-Performing Loans





As of September 30, 2011, 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 $1.1 million, net of allowance for loan losses of approximately $0.7 million, which does not include the allowances of approximately $0.6 million relating to performing loans as of September 30, 2011.  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.





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At September 30, 2011, the following loan types were non-performing:





Loan Type

Number Of Non-Performing Loans


Balance at

September 30, 2011


Allowance for Loan Losses


Net Balance at

September 30, 2011Commercial


2


$
1,720,000


$
(671,000
)

$
1,049,000Total


2


$
1,720,000


$
(671,000
)

$
1,049,000





At December 31, 2010, the following loan types were non-performing





Loan Type

Number Of Non-Performing Loans


Balance at

December 31, 2010


Allowance for Loan Losses


Net Balance at

December 31, 2010Commercial


2


$
1,720,000


$
(456,000
)

$
1,264,000Total


2


$
1,720,000


$
(456,000
)

$
1,264,000





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 September 30, 2011, 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 September 30, 2011 and December 31, 2010:


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As of September 30, 2011Balance


Allowance for loan losses


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

$
--


$
--


$
--Non-performing loans – related allowance


1,720,000



(671,000
)


1,049,000Subtotal non-performing loans


1,720,000



(671,000
)


1,049,000Performing 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


$
(1,232,000
)

$
1,443,000





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 Allowancesbelow.





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.  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


As of September 30, 2011, 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/or our evaluation of the borrower.  The following table is a roll-forward of the allowance for loan losses for the nine months ended September 30, 2011, and 2010 by loan type.





Loan Type

Balance at

12/31/10


Specific Reserve Allocation


Sales


Loan Pay Downs


Transfers to REO


Balance at

09/30/11Commercial

$
840,000


$
215,000


$
--


$
--


$
--


$
1,055,000Construction


177,000



--



--



--



--



177,000Total

$
1,017,000


$
215,000


$
--


$
--


$
--


$
1,232,000





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Loan Type

Balance at

12/31/09


Specific Reserve Allocation *


Sales


Loan Pay Downs


Transfers to REO


Balance at

09/30/10Commercial

$
1,941,000


$
70,000


$
(1,164,000
)

$
--


$
--


$
847,000Construction


253,000



--



--



--



--



253,000Total

$
2,194,000


$
70,000


$
(1,164,000
)

$
--


$
--


$
1,100,000





Troubled Debt Restructuring





As of September 30, 2011 and December 31, 2010, we had three loans totaling approximately $1.0 million that met the definition of a Troubled Debt Restructuring or TDR.  When the Company modifies the terms of an existing loan that is considered 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.  During the previous 12 months there has been one loan that became a TDR loan and it remains performing.  The following is a breakdown of our TDR loans that were considered performing and non-performing loans as of September 30, 2011 and December 31, 2010:





As of September 30, 2011Total


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



404,000



1



404,000



--



--Total


3


$
955,000



3


$
954,000



--


$
--





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



--



--Total


3


$
956,000



3


$
956,000






$
--





·
Commercial –As of September 30, 2011 and December 31, 2010 we had four commercial loans, two of which, at each date, were modified pursuant to TDR.  As of September 30, 2011 and December 31, 2010, 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.  As of November 14, 2011, these two loans continue to perform as required by the loan modifications.





·
Construction – As of September 30, 2010 and December 31, 2010, we had one construction loan that was modified pursuant to TDR.





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Extensions





As of September 30, 2011, our manager had granted extensions on three loans that share a common guarantor, 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.





NOTE E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY





As of September 30, 2011 and December 31, 2010, we owned 114,117 shares of VRM II’s common stock, representing approximately 0.90% of their total outstanding common stock.





During the nine months ended September 30, 2011, the trading price for VRM II’s common stock ranged from $1.10 to $1.65 per share.  We will continue to evaluate our investment in marketable securities on a quarterly basis with respect to unrealized gain or losses.





NOTE F — REAL ESTATE HELD FOR SALE





At September 30, 2011, we held four properties with a total carrying value of approximately $0.8 million, which were acquired through foreclosure and recorded as investments in REO.  On May 31, 2011, we recorded a write down on a property based on an appraisal dated May 23, 2011.  The total write down was approximately $46,000, of which our portion was approximately $15,000.  On June 30, 2011, we recorded a write down on a property based on an appraisal dated July 13, 2011.  The total write down was approximately $0.7 million, of which our portion was approximately $23,000.  On September 30, 2011, we recorded a write down of approximately $0.4 million, of which our portion was $12,000 million on a property based on a pending sale of the property which is scheduled to close on November 14, 2011.





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 three and nine months ended September 30, 2011 and 2010.





As of September 30, 2011 and 2010, our manager owned 54,863 of our units.  During the nine months ended September 30, 2011, we made liquidating distributions to our manager totaling $8,000, in accordance with the Plan.  During the three and nine months ended September 30, 2010, we made liquidating distributions to our manager totaling $8,000 and $58,000, respectively, in accordance with the Plan.





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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, as a hearing has yet to be set regarding offsets to the Purchaser’s damages.  Vestin Group and Mike Shustek have 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.  However, Mr. Shustek has assigned all future liquidating distributions for the 292,681 units he holds directly and indirectly to the company to commence paying such obligation.  For a discussion of litigation between us, Vestin Group and the building owner, see Note M -Legal Matters Involving The Company .





As of September 30, 2011 and December 31, 2010, we had receivables from our manager totaling approximately $1.0 million, primarily related to the withdrawal of the letter of credit referred to above.





Transactions with Other Related Parties





As of September 30, 2011 and December 31, 2010, we owned 114,117 common shares of VRM II, representing approximately 0.90% of their total outstanding common stock.





As of September 30, 2011, we owed VRM II approximately $15,000.  As of December 31, 2010, we had receivables from VRM II of approximately $37,000.





As of September 30, 2011, we had no amounts due to VRM I.  As of December 31, 2010, we owed VRM I approximately $2,000.





As of September 30, 2011 and 2010, inVestin Nevada Inc., a company wholly owned by our manager’s CEO, (“inVestin”), owned 34,856 of our membership units representing approximately 1.72% of our total membership units.  During the nine months ended September 30, 2011, we made liquidating distributions to inVestin totaling $5,000, in accordance with the Plan.  During the three and nine months ended September 30, 2010, we made liquidating distributions to inVestin totaling $5,000 and $37,000, respectively, in accordance with the Plan.





As of September 30, 2011 and 2010, 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 nine months ended September 30, 2011, we made liquidating distributions to Shustek Investments totaling $30,000, in accordance with the Plan.  During the nine ended September 30, 2010, we made liquidating distributions to Shustek Investments totaling $30,000 and $213,000, respectively, in accordance with the Plan.





As of September 30, 2011 and 2010, Mr. Shustek’s spouse owned 2,963 of our membership units, representing less than 1.0% of our total membership units.  During the nine months ended June 30, 2011, we made liquidating distributions to Mr. Shustek’s spouse totaling less than $1,000, in accordance with the Plan.  During the three and nine months ended September 30, 2010, we made liquidating distributions to Mr. Shustek’s spouse totaling $1,000 and $3,000, respectively, in accordance with the Plan.





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.





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 Table of Contents





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, however the amount of the reserve may fluctuate based on cash expenditure requirements.  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 September 30, 2011.  Based on this review, the value of members’ capital accounts was adjusted from $1.37 per unit to $1.21 per unit, as of September 30, 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, September 17, 2010 and May 25, 2011, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million, $0.3 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.





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 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.  Interest expense for the nine months ended September 30, 2011 amounted to $4,000.





NOTE J — FAIR VALUE





As of September 30, 2011, 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.


-19-
 Table of Contents





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 September 30, 2011 and December 31, 2010, 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 09/30/2011


Carrying Value on Balance Sheet at 09/30/2011AssetsInvestment in marketable securities - related party

$
140,000


$
--


$
--


$
140,000


$
140,000Investment in real estate loans

$
--


$
--


$
1,444,000


$
1,444,000


$
1,443,000





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 12/31/2010


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





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, 2011 to September 30, 2011.  There were no liabilities measured at fair value on a recurring basis using significant unobservable inputs as of September 30, 2011, and 2010.





Investment in real estate loansBalance on January 1, 2011

$
1,658,000Change in temporary valuation adjustment included in net lossIncrease in allowance for loan losses


(215,000
)Balance on September 30, 2011, net of temporary valuation adjustment

$
1,443,000





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Investment in real estate loansBalance on January 1, 2010

$
3,291,000Change in temporary valuation adjustment included in net lossIncrease in allowance for loan losses


(70,000
)Sales, pay downs and reduction of assetsCollections of principal and sales of investment in real estate loans


(1,899,000
)Reduction of allowance for loan losses related to sales and payments ofInvestment in real estate loans


1,164,000Temporary change in estimated fair value based on future cash flows


22,000Balance on September 30, 2010, net of temporary valuation adjustment

$
2,508,000





NOTE K — RECENT ACCOUNTING PRONOUNCEMENTS





In May 2011, FASB issued ASU 2011-04 “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments in this update to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. For public entities, the new guideline is effective for interim and annual periods beginning after December 15, 2011 and should be applied prospectively. The Company does not expect that the guidance effective in future periods will have a material impact on its consolidated financial statements.





Presentation of Comprehensive Income: In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. ASU 2011-05 is effective for our fiscal year beginning January 1, 2012 and must be applied retrospectively. Other than the change in presentation, we have determined these changes will not have an impact on the Consolidated Financial Statements.





NOTE L— LEGAL MATTERS INVOLVING THE MANAGER





The Manager and the Company were defendants 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 Manager and 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.  The Manager is still involved in this civil action. The Company is attempting to recover legal fees associated with this matter.  Any fees not recovered will be reimbursed by the Manager.





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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.  Should the recovery meet or exceed $9 million, all parties have agreed that no further litigation between the state of Hawaii and Vestin will be reinstituted related to the trust’s statutory minimum balances.  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.





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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 M — 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.  The Company is attempting to recover legal fees associated with this matter.  Any fees not recovered will be reimbursed by the Manager.





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 N — SUBSEQUENT EVENTS





None





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ITEM2.
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 three and nine months ended September 30, 2011 and 2010.  This discussion should be read in conjunction with our financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this report on Form 10-Q and our report filed on Form 10-K, Part II, Item 7 for the year ended December 31, 2010.





FORWARD-LOOKING STATEMENTS





Certain statements in this report, including, without limitation, matters discussed under this Item 2, “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-Q.  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 this Quarterly Report on Form 10-Q and in our other securities filings with the Securities and Exchange Commission (“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 loans may change, or the value of the underlying property could decline subsequent to the date of our evaluation.  As a result, such estimates are not guarantees of the future value of the collateral.  The forward-looking statements contained in this report are made only as of the date hereof.  We undertake no obligation to update or revise information contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.





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 September 30, 2011, 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 September 30, 2011, our unrestricted cash was approximately $0.2 million.





On January 26, 2010, April 8, 2010, September 17, 2010 and May 25, 2011, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million, $0.3 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 I, Item I Financial Statements of this Quarterly Report on Form 10-Q.


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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 (iv) the level of non-performing assets, foreclosures and related loan losses that we experienced.





Our 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.  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 I, Item I Financial Statements of this Quarterly Report on Form 10-Q.





We believe that the significant level of our non-performing assets is a direct result of the deterioration of the economy and credit markets.  As the economy weakened and credit became 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 been otherwise adversely impacted.  These depressed conditions persist in 2011 as the weak economic recovery and the threat of a double dip recession has prevented a recovery of real estate values in our principal markets.  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, real estate values in the principal markets in which we operate declined dramatically, which 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 I, Item I Financial Statements of this Quarterly Report on Form 10-Q.





As of September 30, 2011, our loan-to-value ratio was 89.88%, net of allowances for loan losses, on a weighted average basis, generally using updated appraisals.  Additional significant 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 has been affected by declining real estate values, which have eroded the market value of our collateral.





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SUMMARY OF FINANCIAL RESULTS





Comparison of Operating Results for the three months ended September 30, 2011, to the three months ended September 30, 2010.





Total Revenues:  For the three months ended September 30, 2011, total revenues were $8,000 compared to $14,000 during the three months ended September 30, 2010, a decrease of $6,000 or 43%.  This decrease in interest income is mainly due to the decrease in our portfolio of performing real estate loans, which declined from five loans totaling approximately $1.5 million as of September 30, 2010, to three loans totaling approximately $1.0 million as of September 30, 2011.





Total Operating Expenses:  For the three months ended September 30, 2011, total operating expenses were approximately $0.3 million compared to approximately $75,000 during the three months ended September 30, 2010, an increase of approximately $0.2 million or 245%.  Expenses were primarily affected by an increase in provision for loan losses of approximately $0.2 million, which were offset by a decrease in professional fees of $32,000.  The professional fees have decreased due to a decrease in pending litigation for the three months ended September 30, 2011 compared to the same period in 2010.  For additional information see  Note L – Legal Matters Involving the Manager and Note M – Legal Matters Involving the Company in the notes to the financial statement under Part I, Item I FinancialStatements of this Quarterly Report on Form 10-Q, for information regarding our legal proceedings, which are incorporated herein by reference.





Total Loss from Real Estate Held for Sale:  For the three months ended September 30, 2011 and 2010, the losses from real estate held for sale were comparable.  For additional information see Note F–Real Estate Held For Sale of the Notes to the Financial Statements included in Part I, Item I Financial Statements of this Quarterly Report on Form 10-Q.





Comparison of Operating Results for the nine months ended September 30, 2011, to the nine months ended September 30, 2010.





Total Revenues:  For the nine months ended September 30, 2011, total revenues were $19,000 compared to approximately $0.1 million during the nine months ended September 30, 2010, a decrease of $79,000 or 81%.  This decrease in interest income is primarily due to the decrease in our portfolio of performing real estate loans, which declined from five loans totaling approximately $1.5 million as of September 30, 2010, to three loans totaling approximately $1.0 million as of September 30, 2011.  Additionally, during the nine months ended September 30, 2010, we recognized approximately $24,000 in other income due to a receipt of a loan payment on a loan that was the subject of a 100% reserve.  No similar transaction occurred during the nine months ended September 30, 2011.





Total Operating Expenses:  For the nine months ended September 30, 2011, total operating expenses were approximately $0.4 million compared to approximately $0.3 million during the nine months ended September 30, 2010, an increase of  approximately $0.1 million or 39%.  Expenses were primarily affected by an increase in provision for loan losses of approximately $0.2 million, which were offset by a decrease in professional fees of $47,000.  The professional fees have decreased due to a decrease in pending litigation for the nine months ended September 30, 2011 compared to the same period in 2010.  For additional information see  Note L – Legal Matters Involving the Manager and Note M – Legal Matters Involving the Company in the notes to the financial statement under Part I, Item I FinancialStatements of this Quarterly Report on Form 10-Q, for information regarding our legal proceedings, which are incorporated herein by reference.





Total Loss from Real Estate Held for Sale:  For the nine months ended September 30, 2011, total losses from REO were approximately $0.1 million compared to approximately $0.2 during the nine months ended September 30, 2010, a decrease of approximately $0.1 million or 50%.  The decrease is mainly due to a decrease in write downs on real estate held for sale during the nine months ended September 30, 2011, compared to write downs on real estate held for sale during the nine months ended September 30, 2010.  For additional information see Note F–Real Estate Held For Sale of the Notes to the Financial Statements included in Part I, Item I Financial Statements of this Quarterly Report on Form 10-Q.


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Liquidating Distributions to Members in accordance to the Plan:  On January 26, 2010, April 8, 2010, September 17, 2010 and May 25, 2011, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million, $0.3 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.





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 September 30, 2011.  Based on this review, the value of members’ capital accounts was adjusted from $1.37 per unit to $1.21 per unit, as of September 30, 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 I, Item I Financial Statements of this Quarterly Report on Form 10-Q.





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 nine months ended September 30, 2011, net cash flows provided by operating activities totaled $44,000.  The receipt of funds from an outstanding Accounts Receivable balance affected operating cash flows.  There were no cash flows related to investing activities, and net cash flows used by financing activities totaled approximately $0.3 million during the nine months ended September 30, 2011.





At September 30, 2011, we had approximately $0.2 million in unrestricted cash, $0.1 million in marketable securities – related party and approximately $3.5 million in total assets.  We believe we have sufficient working capital to meet our operating needs during the next 12 months.





Investments in Real Estate Loans Secured by Real Estate Portfolio





As of September 30, 2011 and December 31, 2010, we had investments in five real estate loans with a balance of approximately $2.7 million.  In accordance with the Plan, we will no longer invest in new loans.





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 I, Item 1Financial Statementsof this Quarterly Report on Form 10-Q.





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Asset Quality and Loan Reserves





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 periods of economic slowdown and recession.  The recent recession adversely affected the general economy and the availability of funds for commercial real estate developers.  We believe this lack of available funds led to an increase in defaults on our loans. Furthermore, problems experienced in the U.S. credit markets from the summer of 2007 through present have reduced the availability of credit for many prospective borrowers.  These problems persist in the markets we are serving, making it more difficult for our borrowers to obtain the anticipated re-financing necessary in many cases to pay back our loans.  Thus, an extended period of illiquidity in the credit markets has resulted in a material increase in the number of our loans that are not paid back on time, and 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.





OFF-BALANCE SHEET ARRANGEMENTS





As of September 30, 2011, 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 September 30, 2011:





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 I – Notes Payable of the Notes to the Financial Statements included in Part I, Item I Financial Statements and Supplementary Data of this Quarterly Report on Form 10-Q.





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 I, Item I Financial Statements of this Quarterly Report on Form 10-Q.





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.


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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 September 30, 2011, 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

$
30,000Weighted average interest rate assumption increased by 5.0% or 500 basis points

$
150,000Weighted average interest rate assumption increased by 10.0% or 1,000 basis points

$
300,000Weighted average interest rate assumption decreased by 1.0% or 100 basis points

$
(30,000
)Weighted average interest rate assumption decreased by 5.0% or 500 basis points

$
(150,000
)Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points

$
(300,000
)





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 September 30, 2011, 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, our manager, and Vestin Originations 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:


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·
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 May 2011, FASB issued ASU 2011-04 “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments in this update to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. For public entities, the new guideline is effective for interim and annual periods beginning after December 15, 2011 and should be applied prospectively. The Company does not expect that the guidance effective in future periods will have a material impact on its consolidated financial statements.





Presentation of Comprehensive Income: In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. ASU 2011-05 is effective for our fiscal year beginning January 1, 2012 and must be applied retrospectively. Other than the change in presentation, we have determined these changes will not have an impact on the Consolidated Financial Statements.





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ITEM4.
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-Q, our manager carried out an evaluation, under the supervision and with the participation of our manager’s CEO and CFO, as of September 30, 2011, 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 September 30, 2011, 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.





We did not design and implement adequate controls related to the accounting of foreclosure transactions





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.





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 third fiscal quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  During the third quarter of 2011, management was able to amend the Form 10-Q for VRM I and VRM II which included a restatements of previously issued consolidated financial statements for the quarter ended September 30, 2010. Additionally, management has established additional internal controls to further evaluate foreclosure transactions to assist in determining whether the accounting for the transaction should be reported on a consolidated basis. Management will continue to evaluate these additional internal controls to determine whether the material weakness discussed above has been remediated.




PARTII – OTHER INFORMATION





ITEM1.
LEGAL PROCEEDINGS





Please refer to Note L – Legal Matters Involving the Manager and Note M – Legal Matters Involving the Company in the notes to the financial statement under Part I, Item I Financial Statements of this Quarterly Report on Form 10-Q, for information regarding our legal proceedings, which are incorporated herein by reference.





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ITEM2.
UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS





Market Information





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





Holders





As of November 10, 2011, approximately 509 unit holders held 2,024,424 units in the Company.





Liquidation Distribution Policy





On January 26, 2010, April 8, 2010, September 17, 2010 and May 25, 2011, we made liquidating distributions to all Fund Members, in the aggregate amount of approximately $1.0 million, $0.9 million, $0.3 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 I, Item I Financial Statements of this Quarterly Report on Form 10-Q.





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 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 September 30, 2011, 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.





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Recent Sales of Unregistered Securities
 
 None.
 
 Equity Compensation Plan Information
 
 None.


Purchases of Equity Securities by the Issuer and Affiliated Purchasers





None.





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ITEM6.
EXHIBITS





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)








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SIGNATURES





Pursuant to the requirements 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:  November 14, 2011








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Exhibit31.1





CERTIFICATIONS





I, Michael V. Shustek, certify that:





1. I have reviewed this Form 10-Q 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 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: November 14,  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-Q 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 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: November 14, 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-Q for the nine months ended September 30, 2011, 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:  November 14, 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




Date:  November 14, 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.


* 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.