Is my investment safe?
How long has The Loan Company of San Diego been in existence?
What is the track record of The Loan Company?
The Partnership targets a return of 4% over the 11th District Cost of Funds, which typically equates to a 7% return with a two percent variance.
Historical returns will be provided to qualified investors upon request. Historical returns are not a guarantee of future returns.
Please see “History of The Loan Company.”
What are the qualifications and experience of the Principals?
The Partnership’s Principals include two General Partners: Steven B. Dillaway, as an individual, and Corporate GP, a California corporation. The individuals who make up the General Partners have extensive experience in real estate secured lending.
The Principals’ experience led them to focus on First Trust Deeds in 1988 and 1989 in anticipation of the major downturn in real estate values in the early 1990s. In addition, the Partnership was well-positioned for the Recession of 2007-2009 and the years immediately following.
See also, “Our Team.”
Are the Principals also investors?
The General Partners and their families are significant investors in the Partnership, giving them a vested interest in the Partnership’s success and longevity.
Is the Partnership audited?
The Partnership has had an annual Independent Auditors’ Report since the year ending December 31, 2002.
The Independent Auditors’ Report is available to Qualified Investors.
What is the Partnership’s banking relationship?
The Partnership’s primary banking relationship is with Pacific Premiere Bank. The bank requires independent appraisals for all properties securing loans pledged to the bank as collateral for the Line of Credit. The Partnership has a secondary relationship with First Choice Bank.
Are there any defaults, delinquencies, or deferrals of income and is there an Aging Report for receivables?
A Delinquency and Aging Report is available upon request to Qualified Investors.
Does the Partnership have a Reserve for Bad Loans?
The Partnership maintains an Allowance for Credit Losses in the approximate amount of 2.5% of Partnership receivables.
See also, “Is the Partnership audited?”
Does the Partnership have an Advisory Committee?
The Partnership Agreement provides for the appointment of an Advisory Committee. The Limited Partners Committee meets quarterly with the General Partner. Currently the Committee consists of seven members, several of whom are attorneys, each with a significant investment in the Partnership.
Do the General Partners share in Partnership losses?
The General Partners receive 10% of the Partnership’s NET income and loss. This share is non-cumulative and paid monthly as earned. The General Partners receive no guaranteed income or fees. This means that 10% of any expense or loss of the Partnership is borne by the General Partners. In addition, as the Limited Partner with the largest investment, the General Partner shares pro-rata any expense or loss with other Limited Partners.
Do the principals have conflicts of interest?
Do the principals have conflicts of interest?
The Partnership’s General Partner has gone to great lengths to eliminate conflicts of interest. This starts in the Partnership Agreement, which provides that the General Partner’s compensation is based solely on NET income and loss.
The General Partner receives no guaranteed or fixed income.
Except for office rent, no Partnership activity is contracted or outsourced to any entity in which an officer or principal–or person or entity related to an officer or principal–has an economic or personal interest.
Points paid by borrowers are paid to the Partnership.
All employee compensation is at the discretion of the General Partner with input provided on officers’ compensation by the Limited Partners Committee’s Sub-Committee for Compensation.
Additionally, all principals are Limited Partners as well.
Is my investment liquid?
What is Liquidity?
There is widespread confusion about liquidity. Part of the problem is that the term liquidity is used interchangeably with marketability, when in fact the two terms are distinctly different. Marketability is the ability of an asset to be readily bought and sold; liquidity implies that the value of the asset is preserved.
Marketability is defined by a timeline beginning with the decision to sell and ending when the asset is converted to cash. Before any asset can be converted to cash, an acceptable price must be communicated to a buyer willing to pay that price or vice versa: a willing buyer must communicate an acceptable purchase price to a willing seller. The prospective seller and buyer locate one another in the marketplace. For example, owners and buyers of stocks and bonds find one another at one of the various exchanges.
This is precisely where people get the most confused. Neither a shorter time line nor an exchange makes an asset liquid; a shorter time line or an exchange simply assist the asset’s marketability. Further, what makes an asset marketable is a function of perception: the asset’s perceived ability to generate consistent or increasing earnings (e.g., manufacturing and selling an increasing number of widgets); the asset’s perceived beauty (e.g., art or jewelry); or the asset’s perceived ability to increase in value over time (e.g., crops or land in path of development).
What makes an asset liquid is its real ability to hold value against inflation or deflation.
For forty-six years, The Loan Company has held value against inflation and deflation. Limited partnership interests are perceived as illiquid, as are many other asset classes, like a personal residence, commercial real estate, a farm, or artwork. Stock interests, by comparison, are perceived as liquid. In our opinion, when a limited partnership provides for and makes a practice of re-acquiring partners’ interests, those partnership interests are extraordinarily liquid!
Can I withdraw some or all of my income?
Yes, Partners’ income is paid on a quarterly basis unless a Partner has elected to accrue his or her share of income.
Can I withdraw some or all of my capital investment?
Yes, the Partnership Agreement requires the General Partner to publish terms and conditions for withdrawal of capital. Similar to a bank CD, Partners withdrawing capital within three years of the capital’s contribution will forfeit a six percent withdrawal fee on the capital withdrawn. After three years, Partners may withdraw capital at quarter-end with forty-five days written notice to the Partnership without a withdrawal fee.
The Partnership Agreement also requires the General Partner to protect the integrity and liquidity requirements of the Partnership. There can never be a guarantee, therefore, that the Partnership will be able to partially or fully pay a Partner who requests a withdrawal of capital.
In the unusual circumstances of the 2007-2009 Recession, the General Partner temporarily suspended capital (not income) withdrawals for the quarter ending March 31, 2009. In subsequent quarters through the quarter ending December 31, 2010, Partners withdrew capital subject to a six percent withdrawal fee. All Partner’s requests were fully satisfied. The General Partner removed this temporary withdrawal fee beginning the first quarter of 2011.
What can I do if the Partnership is unable to return my investment?
As with any asset a person owns–like stocks, bonds, or real estate–a Limited Partner is free to sell all or part of his account at any time to an existing Partner or a third party on terms and conditions acceptable to the parties involved.
In anticipation that a Limited Partner may desire to sell all or part of his or her account, the Partnership Agreement provides at Article 2.08 for a Right of First Refusal, first to the Partnership and then to Limited Partners with a ten (10) day notice requirement. Article 2.07 provides that Admission of Substituted Limited Partner requires the consent of the General Partner and Article 7.01(k) provides that a fee may be charged.
In March 2010, the Partnership adopted a simplified method of transferring interests between Partners or third parties, referred to as the generic Notice of Right of First Refusal. So long as the terms of the generic Notice are satisfied, no additional Notice is required.
What if I have an emergency?
Quite simply, an investment in The Loan Company should not be earmarked as a source to meet emergencies. Nor is The Loan Company a bank for depositing cash. An investment in The Loan Company is a long-term investment for fixed income.
You must be an Accredited Investor to invest in The Loan Company. Before investing in The Loan Company, carefully consider whether The Loan Company meets your long-term goals.
What are the precautions for inflation?
Are the Partnership’s loans Variable Rate Loans (also known as Adjustable Rate Mortgages)?
Yes, approximately 90% of the Partnership’s loans are adjusted semi-annually to the 11th District Cost of Funds Index (COFI).
Simply put, the COFI is the average interest rate paid by savings institutions for their various sources of funds. The 11th District comprises the western United States. This index is generally considered a slower moving index and over a period of time tracks inflation and other economic trends.
Other than Adjustable Rate Mortgages (ARM), how does the Partnership mitigate against the effects of economic changes such as inflation or recession?
The Partnership’s loan portfolio is constantly being refreshed. The overwhelming majority of the Partnership’s loans have been written with a balloon date of five years or less. Accordingly, on average, 20% of the portfolio will be paid-off or rewritten every year reflecting the then prevailing economic conditions.
New capital and accrued earnings are loaned out reflecting the then prevailing economic conditions.
All of the Partnership ARM loans have a floor below which the interest rate will not be adjusted.
What are the precautions for a recession?
Does the Partnership have a Loan Policy?
Yes, the Partnership has a written Loan Policy that establishes standards for the loan underwriters in underwriting and for the Limited Partners Committee in review.
Does the Partnership make subprime loans?
No, the Partnership requires borrowers to have equity in the property securing the loan.
Does the Partnership make junior trust deed loans?
The Partnership rarely makes loans secured by junior trust deeds. Recognizing that in some circumstances junior trust deeds may be beneficial to both the Partnership and the borrower, the Partnership has an internal standard allowing junior trust deeds so long as the total of all junior trust deeds does not exceed 15% of Partnership capital.
What property types secure Partnership loans?
The Partnership’s loans are all real estate secured. On the whole, the Partnership lends only on properties improved with Commercial, Mixed Use, Multi-Family Apartments, investor-owned Single-Family Residences, and Construction. The Partnership can make loans secured by owner-occupied Single-Family Residences or Unimproved Land but rarely has.
What position or priority level are the Partnership’s loans?
The Partnership has an internal standard requiring that over 85% of the Partnership’s loans are First Trust Deeds.
What is the typical Loan-to-Value Ratio on outstanding loans?
LTV Ratios on new loans are generally between 65-75% of the current market value of the property securing the loan. Often loans at or near the 75% LTV Ratio will be cross-collateralized with additional security.
What is the typical Income-to-Debt Service Coverage Ratio?
Debt Service Coverage Ratios on new loans are generally not less than 1:1. Loans at or near the 1:1 ratio often will be cross-collateralized and other sources of servicing the debt will be in place.
What are the precautions for a depression?
What is the worst-case scenario?
The Partnership’s precautions for a depression include those put in place in the event of a recession. The Partnership’s business plan was totally revised after the huge one-day decline of the Stock Market in October 1987. The General Partner asked himself, “How would I want my assets deployed if there were to be another depression?” The answer was to be holding well underwritten First Trust Deeds. Over the next three years, with the consent of the Limited Partners Committee, the portfolio was converted to primarily First Trust Deeds. The Partnership rode through the significant decline in property values in the early 1990s without any principal losses to the Partners and maintained average annual yields exceeding 8%.
Partners incurred no losses to principal in the 2007-2009 Recession and Partners making no additions or withdrawals of capital realized returns of 8.10%, 6.57%, and 6.44% for 2008, 2009 and 2010, respectively. Actual loan losses incurred during this period were charged against the Allowance for Credit Losses that had been established in prior years for just such an occurrence.
In a worst-case scenario, the Partnership would acquire the properties securing its loans, subject only to real property taxes, and this can be adjusted down by application to the County Assessor. The Partnership has deliberately positioned itself in First Trust Deeds with LTV Ratios of approximately 65-75% and Debt Service Ratios of not less than 1:1. This gives us room to experience a drop in property values and net operating income before we are affected.
If we were required to foreclose and become the property owner, we would be well positioned to manage the property and would receive rental income in place of interest income. Rental incomes across the market place would be severely depressed, but owning the properties outright would maximize our options. Our overall rental income may be less than our previous interest income; however, the prices of other goods and services (for example the cost of bread) should also be equally depressed. It could be anticipated that as Limited Partners we would be more financially sound during and after a depression than before.
In a severe recession or depression scenario, the General Partner is empowered to restrict the withdrawal of capital to protect the integrity and liquidity requirements of the Partnership.
What are the Partnership’s Line of Credit terms?
The LOC is renewable annually; however, so long as the Partnership is not in default, the LOC cannot be called. If the bank declines to renew the LOC, the remaining balance will be amortized over a twenty-year period, all due in three years. This means the bank cannot put us in an illiquid position.
See also, “Does the Partnership Use Leverage?”
Does the partnership use leverage?
Does the Partnership use leverage to increase profits?
The Partnership does not borrow to arbitrage. Arbitrage is the practice of taking advantage of a price differential between two or more markets. In our case, that would mean borrowing for the purpose of making loans at a higher interest rate to take advantage of the rate differential.
The Partnership does, however, utilize a Line of Credit for the purpose of cash management, which in turn increases our yield. The Partnership LOC is like a savings account in reverse: it is a reserve account used to fund loans, pay expenses, and pay income and capital withdrawals.
The Partnership cash flow is significant but unpredictable. Our monthly income from payments is predictable, but loan pay-offs and new investor capital are not. Cash is an unproductive asset. Therefore, by being slightly leveraged at all times, the Partnership profits from the old axiom “a penny saved is a penny earned”. The Partnership targets borrowing approximately 10% of its capital with zero in cash.
See also, “What are the Partnership’s Line of Credit terms?”
Does the partnership have successor management plans?
What plans are in place for Steve Dillaway’s retirement?
This has been the single most frequently asked question. Founder Steve Dillaway retired from operations effective 1/1/2014; he retired as President of Corporate GP effective 1/1/2016. He remains one of three directors of Corporate GP and is the Limited Partner with the largest investment. The Partnership has been deliberate in establishing a successor plan prior to Steve’s retirement.
In January 2001, pursuant to the Limited Partners’ approved restructuring of the General Partner’s interest, the GP’s share of net profits remained the same, but was divided between Steve Dillaway, an individual, and Corporate GP, a California corporation. Establishment of Corporate GP eliminated the need to dissolve the Partnership or find a new GP in the event of the death, disability, or retirement of Steve Dillaway.
In 2006, the Partnership Agreement was amended to provide that in the event of Steve Dillaway’s death, disability or retirement, his GP interest would be converted to a Preferred Limited Partner interest. Also in 2006, the Limited Partners Committee was expanded to not less than three or more than seven members.
Ivan Lavinsky has been a Limited Partner since 2013. He became President in March 2019. Ivan also has served on the Limited Partners’Committee and on the Sub-Committee for Compensation, both advisory positions.
President Ivan Lavinsky, Chief Financial Officer Angela Kasten, and Controller Elizebeth Poe exercised their stock options on January 1, 2020.The exercise of their options required cash payments, which adds stability and continuity to the Partnership succession plan.