NOTES PAYABLE SECURED BY REAL ESTATE INVESTMENT

12 Months Ended

Dec. 31, 2011

NOTES PAYABLE SECURED BY REAL ESTATE INVESTMENT

5. NOTES PAYABLE SECURED BY REAL ESTATE INVESTMENT

Desert Moon Estates Note Payable

As discussed in Note 4 and in connection with the closing of Desert Moon Estates, SPT AZ Land Holdings, LLC executed a $2,000,000 promissory note and deed of trust in favor of AZPro Developments, Inc. The note is secured by a Deed of Trust with Assignment of Rents which encumbers the Desert Moon Estates Property. SPT AZ Land Holdings, LLC may prepay in whole or in part the principal amount outstanding under this note, together with accrued and unpaid interest thereon computed to the date of prepayment and any sums owing to AZPro Developments, Inc., without penalty or premium.

Interest on the Promissory Note accrued on the principal outstanding from the date of the promissory note at a rate of six percent (6.00%) per annum. Payments of interest only were due quarterly in arrears on November 1, 2009, February 1, 2010 and May 1, 2010. On the original maturity date of this note, July 31, 2010, the entire outstanding principal balance and all unpaid interest on this note was due and payable in full.

On March 11, 2010, our affiliate SPT AZ Land Holdings, LLC, executed an extension on the existing $2,000,000 secured promissory note with AZPro Development Inc. An extension of the maturity date to July 31, 2011 was granted to SPT AZ Land Holdings, LLC by AZPro Development Inc. in exchange for a principal pay down of $500,000 on or before the original maturity date of July 31, 2010 and a two percent increase in the original interest rate beginning on the original maturity date of July 31, 2010. In addition to the principal pay down of $500,000 on or before the original maturity date of July 31, 2010, SPT AZ Land Holdings, LLC agreed to pay current, all project taxes including any special assessments. The $500,000 principal pay down date of July 31, 2010 was extended to August 31, 2010. SPT AZ Land Holdings, LLC paid the principal pay down of $500,000 on September 2, 2010.

On July 31, 2011, our affiliate SPT AZ Land Holdings, LLC, executed an additional extension on the existing $2,000,000 secured promissory note as previously amended with AZPro Development Inc. A one year extension of the maturity date was granted to SPT AZ Land Holdings, LLC by AZPro Development Inc. in exchange for a principal pay down of $300,000 on or before the current maturity date of July 31, 2011. In addition to the principal pay down of $300,000 on or before the current maturity date of July 31, 2011, SPT AZ Land Holdings, LLC agreed to pay current, all project taxes including any special assessments. All other terms of the secured promissory note as amended remained unchanged. Management made the principal payment of $300,000 on August 5, 2011.

If SPT AZ Land Holdings, LLC fails to pay any installment of interest by the fifth day of each calendar quarter, AZPro Developments, Inc. has the right to assess a late fee equal to 10% of the amount that is delinquent and the interest rate on the entire principal amount outstanding will adjust to 12% per annum from the date the delinquent payment was first due until the delinquent payment has been made. Similar penalties apply if the principal is not paid upon the maturity date.

For the year ended December 31, 2011, SPT AZ Land Holdings, LLC recognized interest expense of $110,268 on the outstanding note balance and made interest payments totaling $99,484 to AZPro Developments, Inc.

As of December 31, 2011 and 2010, the total outstanding principal balances related to this note were $1,200,000 and $1,500,000, respectively. This note is due in July 2012.

Tuscany Valley Properties Note Payable

As discussed in Note 4 and in connection with the closing of Tuscany Valley properties, SPT-Lake Elsinore Holding Co. LLC executed a $2,900,000 all-inclusive promissory note and deed of trust in favor of TSG Little Valley, L.P.

The note accrued interest at a rate of twelve percent per annum, and had an initial maturity date in twelve months at which time all accrued and unpaid interest and principal were due in full. No payments were due during the term of the note. The note with its loan balance of $2,900,000 includes the unpaid balance of that certain other promissory note having a loan date of April 3, 2006, in the original principal amount of $2,000,000, payable by TSG Little Valley, L.P to 1st Centennial Bank (the “Included Note”). The Included Note is secured by a deed of trust dated April 3, 2006 and recorded on April 10, 2006 in the Official Records of Riverside County, California as Instrument No. 2005-0254320. The outstanding principal balance on the Included Note as of November 3, 2009 was approximately $1,750,000 and had matured on February 1, 2009. The current payee under the Included Note is Multibank 2009-1 CRE Venture, LLC.

On March 5, 2010, our affiliate SPT-Lake Elsinore Holding Co., LLC, executed a one year extension on the existing $2,900,000 secured promissory note with TSG Little Valley, L.P. in exchange for a principal pay down of at least $500,000 on or before the original maturity date of November 6, 2010 and a two percent increase in the original interest rate beginning on the original maturity date of November 6, 2010. As of December 31, 2010, a principal pay down of $991,584 had been made on the TSG Little Valley, L.P. promissory note.

Should TSG Little Valley, L.P. fail to pay any installments when due upon the Included Note, SPT-Lake Elsinore Holding Co., LLC may make such payments directly to payee of the Included Note, and the amount shall be credited to the next following installment or installments due under the note. If SPT-Lake Elsinore Holding Co., LLC fails to make any payment when required under the note, TSG Little Valley, L.P. has the option to immediately declare all sums due and owing under the note.

On November 10, 2010, the Company received a Notice of Default And Election To Sell Under Deed of Trust (or “Notice”) from First American Title Insurance Company. This Notice was received when TSG Little Valley, L.P. failed to pay the outstanding principal balance to Multibank 2009-1 CRE Venture, LLC, the current payee (“Lender”) under the Included Note. Prior to receiving this Notice, representatives of TSG Little Valley, L.P. had been in discussions and ongoing negotiations with Lender regarding the Included Note with the intent of renegotiating the terms of or reaching a settlement on the Included Note. These discussions and ongoing negotiations were unsuccessful and TSG Little Valley, L.P. and the Company received the Notice. The Company, when it purchased the Tuscany Valley properties in November 2009, took ownership through a seller financed all-inclusive promissory note and deed of trust in favor of TSG Little Valley, L.P. that included the Lender note. The Company did not received a formal demand from TSG Little Valley, L.P. for payment to Lender. If TSG Little Valley, L.P. or the Company had failed to reach a resolution with Lender, the Company could have lost a portion of the Tuscany Valley properties (approximately 163 of the 519 lots). Management was in discussions with TSG Little Valley, L.P. regarding the Notice and believed that a satisfactory resolution would be reached prior to the completion of the foreclosure process, which was a minimum of 120 days from Notice recordation, or November 5, 2010. After January 30, 2011, the Lender had the right to file a Notice of Sale.

On April 28, 2011, upon a request from TSG Little Valley, L.P., the Company made a $100,000 interest payment to TSG Little Valley, L.P.

On May 12, 2011, the Company paid all outstanding principal and interest due on the Tuscany Valley properties note payable to TSG Little Valley, L.P. (to and including the Included Note), and in return for payment, a full release and reconveyance was executed by TSG Little Valley, L.P. and documentation was received from the Lender confirming payoff of the Included Note. The aggregate payment to TSG Little Valley, L.P. was $2,046,404 and consisted of $137,988 in accrued and unpaid interest and $1,908,416 in principal.

For the year ended December 31, 2011, SPT-Lake Elsinore Holding Co., LLC recognized interest expense of $96,623, on the outstanding all-inclusive promissory note and made interest payments totaling $237,988 to TSG Little Valley, L.P.

As of December 31, 2011 and 2010, the net outstanding balances related to this loan were $0 and $1,908,416, respectfully.

Underwood Note Payable

As discussed in Note 1 and in Note 4, on August 31, 2010, SPT-Lake Elsinore Holding Co. LLC (“Borrower”), closed a secured loan from Cardinal Investment Properties – Underwood, L.P. (“Lender”). The Lender is not affiliated with the Company. The loan amount was $1,000,000 and was made pursuant to a loan agreement between Borrower and Lender dated August 30, 2010.

The loan bore interest at a rate of twelve percent per annum, and had a maturity date in twenty-four months at which time all accrued and unpaid interest and principal was due in full. A non-refundable interest payment equal to the first year’s interest for the loan was prepaid out of the Loan amount of the initial Loan funding in the amount of $120,000. Thereafter, interest was due and payable quarterly, commencing on the date that is six months after the one-year anniversary of the disbursement date. An initial loan fee of five percent of the Loan amount, or $50,000, was payable to Lender upon the earliest to occur of (i) full repayment of the loan, (ii) a default by the Borrower under the loan, or (iii) the first anniversary date of the Loan. Borrower could extend the loan for up to two additional periods of six months, provided (i) Borrower was not in default at the time of the extension, (ii) Borrower gave written notice to Lender of its intent to extend no less than ten days prior to the then-current maturity date, (iii) Borrower made payment to Lender of a two percent loan extension fee, based on the then-outstanding loan balance, and (iv) Borrower made payment to Lender of any unpaid interest accrued under the loan. Interest accruing under the loan during an extension period would be paid monthly in arrears.

The loan was secured by a deed of trust with assignment of rents in favor of Lender on property purchased by the Company on May 19, 2009. The collateral was comprised of five hundred forty-three unimproved residential lots in the City of Menifee, California (the Underwood Project). Borrower agreed to indemnify and hold harmless Lender from and against any and all indemnified costs directly or indirectly arising out of or resulting from any hazardous substance being present or released in, on or around, or potentially affecting, any part of the property securing the loan.

If Borrower failed to make any payment when required under the promissory note, Lender had the option to immediately declare all sums due and owing under the promissory note.

Borrower used the proceeds from this loan (i) to pay a delinquent special assessment from the Watson Road Community Facilities District, payable to the City of Buckeye in Arizona, in the approximate amount of $276,434, (ii) to make a $500,000 principal payment to AZPro Developments, Inc. as required under a secured promissory note in favor of AZPro Developments, Inc. This payment was originally due July 31, 2010 but was extended by one month to August 31, 2010, and (iii) for payment of other outstanding liabilities of the Company.

On May 10, 2011, SPT-Lake Elsinore Holding Co., LLC sold the Underwood Project to CV Communities, LLC, a Delaware limited liability company not affiliated with the Company. As a condition of this closing, all outstanding principal and interest and unpaid loan fees owed on the Underwood note payable were paid in full to Cardinal Investment Properties – Underwood, L.P. and in return for payment, a full release and reconveyance was executed by Cardinal Investment Properties – Underwood, L.P. The aggregate payment to Cardinal Investment Properties – Underwood, L.P. was $1,050,000.

For the year ended December 31, 2011, SPT-Lake Elsinore Holding Co., LLC recognized interest expense of $80,000 on the outstanding note balance and reduced the previously mentioned pre-paid interest payment of $120,000 by $80,000 to reflect the interest payment to Lender. As of December 31, 2011, the pre-paid interest payment of $120,000 had been reduced to $0.

As of December 31, 2011 and 2010, the net outstanding balances related to this loan were $0 and $920,000, respectfully.

Vantage Point Note Payable

As discussed in Note 4 and in connection with the closing of the Vantage Point property, SPT – Vantage Point, LLC executed three promissory notes; one in the amount of $1,100,100 in favor of Steven F. Dallman (“Seller”) and two in the aggregate amount of $2,600,000 in favor of Lundieck Investments, Ltd. and three deeds of trusts, one in favor of the Seller and two in favor of Lundieck Investments, Ltd.

In connection with the Vantage Point Agreement, SPT-Vantage Point, LLC executed two first lien promissory notes (the “First Lien Promissory Notes”) in favor of Lundieck Investments, Ltd. which in aggregate total $2,600,000. One First Lien Promissory Note (the “Tracts A and B Promissory Note”), is in the amount of $1,405,560. The second First Lien Promissory Note (the “Tracts C and D Promissory Note”) is in the amount of $1,194,440. Interest on both First Lien Promissory Notes accrues on the principal outstanding from the date of the First Lien Promissory Note at a rate of five and one-half percent (5.50%) per annum with interest paid semi-annually on the semi-annual and annual anniversary dates of the First Lien Promissory Notes. SPT-Vantage Point, LLC agreed to pay a principal pay down of $135,150 on the first through fifth anniversary dates of the First Lien Promissory Note for the Tract A and B Promissory Note. SPT-Vantage Point, LLC agreed to pay a principal pay down of $114,850 on the first through fifth anniversary dates of the Note for the Tract C and D First Lien Promissory Note. On the maturity date of the two First Lien Promissory Notes, November 14, 2017, the entire outstanding principal balance and all unpaid interest on the two First Lien Promissory Notes will be due and payable in full. The two First Lien Promissory Notes are secured by two first lien Deeds of Trust which encumber separate portions of the Vantage Point property. Buyer may prepay in whole or in part the principal amount outstanding under the two First Lien Promissory Notes, together with accrued and unpaid interest thereon computed to the date of prepayment and any sums owing to Lundieck Investments, Ltd., without penalty or premium.

If SPT-Vantage Point, LLC fails to pay any installment of principal or interest when due, SPT-Vantage Point, LLC will be considered in default and the First Lien Promissory Note will thereafter bear interest at the rate of twelve percent (12%) per annum.

In connection with the Vantage Point Agreement, SPT-Vantage Point, LLC also executed a $1,100,100 second lien promissory note (the “Second Lien Promissory Note”) in favor of Seller. Interest on the Second Lien Promissory Note will accrue on the principal outstanding from the date of the Second Lien Promissory Note at a rate of six percent (6.00%) per annum for the first ninety days of the note term and at nine percent (9.00%) thereafter. On the maturity date of the Second Lien Promissory Note, 180 days from the close of escrow, the entire outstanding principal balance and all unpaid interest on the Second Lien Promissory Note will be due and payable in full. The Second Lien Promissory Note is secured by a second lien Deed of Trust which encumbers the entire Vantage Point property. SPT-Vantage Point, LLC may prepay in whole or in part the principal amount outstanding under the Second Lien Promissory Note, together with accrued and unpaid interest thereon computed to the date of prepayment and any sums owing to Seller, without penalty or premium.

If SPT-Vantage Point, LLC fails to pay any installment of principal or interest when due, SPT-Vantage Point, LLC will be considered in default and the principal and all accrued interest will thereafter bear interest at the rate of eighteen percent (18%) per annum until paid in full.

For the year ended December 31, 2011, SPT – Vantage Point, LLC recognized interest expense of $7,671 on the outstanding note balance and made interest payments totaling $0 to Seller.

For the year ended December 31, 2011, SPT – Vantage Point, LLC recognized interest expense of $16,618 on the outstanding note balances and made interest payments totaling $0 to Lundieck Investments, Ltd.

As of December 31, 2011, the total outstanding principal balance related to the Seller note was $1,100,100. This note is due in May 2012.

As of December 31, 2011, the total outstanding principal balance related to the Lundieck Investments, Ltd notes was $2,600,000. These notes are due in November 2017.

Future Minimum Principal Payments

Future minimum principal payments due on notes payable as of December 31, 2012 and for the years ending on December 31 approximated the following:

2012	$	2,550,100
2013		250,000
Thereafter		2,100,000
	$	4,900,100

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References+ Details

Shopoff Properties Trust, Inc. 10-K