JCM PARTNERS LLC - 10-Q Quarterly Report

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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No þ

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No þ⁽¹⁾

As of August 16, 2004, the registrant had the following Classes of Units outstanding of which the following number of Units were owned by a wholly owned subsidiary of the registrant:


⁽¹⁾	The Company did not file a Form 10-Q for the period ending June 30, 2001. However, the Company’s Form 10, filed with the Securities and Exchange Commission on October 3, 2001, contains certain financial information for the six-month period ended June 30, 2001.

Certain information included in this Quarterly Report contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “intend,” and variations of such words and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” or similar expressions. Forward-looking statements, including those relating to our business strategy, capital expenditures, refinancing activities, occupancy levels, financial performance, and liquidity and capital resources are subject to risks and uncertainties. Actual results or outcomes may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors. Those risks and factors include unanticipated adverse business developments affecting us or our properties, defaults or non-renewal of leases, adverse changes in the real estate markets, increases in interest rates and operating costs, increased competition, changes in general and local economies, environmental uncertainties, risks related to natural disasters, increases in real property tax rates, and federal, state and local governmental regulations that affect us. Forward-looking statements speak only as of the date they are made and we assume no duty to update them.

JCM Partners, LLC and its subsidiaries (the “Company”) own, operate and manage apartment complexes and commercial income properties located in Northern California.

The accompanying condensed consolidated financial statements for the Company are unaudited and reflect all normal, recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. The Company’s interim results are not indicative of results for a full year.

These unaudited consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2003 included in the Company’s 10-K filed with the Securities and Exchange Commission.

For properties accounted for under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), the operating results for properties sold during the period or designated as held for sale at the end of the period are required to be classified as discontinued operations. The property-specific components of net earnings that are classified as discontinued operations include all property-related revenues and operating expenses during the reporting period, depreciation expense recognized prior to the classification as held for sale, and property specific interest expense to the extent there is secured debt on the property, as well as the net gain or loss on disposal.

In May 2003, we listed for sale our office building in San Francisco, California for $5,400,000. The carrying value of the assets (real estate investments held for sale) of the property was $4,602,000 at June 30, 2004. The mortgage note of $1,408,000 was paid off in December 2003.

In May 2004, the Company entered into an Option Agreement to sell our undeveloped land in Vallejo, California for $500,000. The carrying amount of the asset (real estate investments held for sale) of the property was $500,000 at June 30, 2004. There is no debt on the property. In March 2004, we recorded a $250,000 charge for loss on impairment of assets so the carrying value reflects the sale price as negotiated in the Option Agreement.

Subsequent to June 30, 2004, we sold a 48 unit property in Modesto, California for $3,300,000 in August 2004. We received initial net sale proceeds of $1,853,000 with the balance of the purchase price being a promissory note in the amount of $1,300,000 and bearing interest at 8.00% per annum. The promissory note is due and payable as portions of the property are sold with the entire balance becoming due and payable on June 30, 2007. The promissory note is secured by a deed of trust on the property in a first lien position and shall provide for partial releases as portions of the property are sold. The carrying value of the asset (real estate investments held for sale) of the property was $1,527,000 at June 30, 2004. There is no debt on the property.

We also signed a listing agreement in July 2004 to sell a 25 unit property in Concord, California for $2,600,000. The carrying values of the asset (real estate investments held for sale) and liability (mortgage note payable) of this property was $1,367,000 and $1,332,000, respectively at June 30, 2004.

The table below includes operating results for discontinued operations, including 2003 data from Rose Glen, an apartment property sold in May 2003.

During the quarter, we obtained a revolving line of credit with a borrowing capacity of $6,000,000 that matures July 1, 2005 and is secured by one of our previously debt-free properties. The interest rate per year on the line of credit is the “Prime Rate” index plus 1.00% with a minimum rate of 5.00% on the amount borrowed plus initial loan costs of $39,000. The line of credit contains a financial covenant as to debt service coverage ratio with which we were in compliance. This revolving secured line of credit is available for general corporate purposes. We did not use this line of credit for the three months ended June 30, 2004.

The Company’s mortgages payable generally require monthly interest and principal payments. The obligations include twenty-nine fixed rate loans and seventeen variable rate loans which are secured by deeds of trust on the Company’s real estate investments. The Company is required by the terms of certain of the mortgage loans to maintain lender impound accounts for insurance, property taxes, reserves for property improvements and a bond account which are recorded as restricted cash.

Subsequent to June 30, 2004, we completed the financing of a second mortgage loan for $1,218,000 at an annual fixed interest rate of 5.86%. The loan requires monthly payments of principal and interest. The loan is partially amortizing and will require payment of the remaining balance on February 1, 2012. We also completed a loan modification of an existing mortgage loan where we received loan proceeds of approximately $1,400,000 and decreased the annual interest rate on the total mortgage loan amount from 7.00% to 5.63% fixed for three years and converting to a variable rate for the remaining twenty-four years. The proceeds were used to repurchase Class 1, Class 2 and Class 3 Units.

The Company has authorized 300,000,000 Units and Preferred Units, of which 25,000,000 may be designated as Preferred Units. During the six months ended June 30, 2004, Unit holders converted 38,986,037 Class 1 Units to 9,397,193 Class 2 Units and 29,588,844 Class 3 Units. The Units were converted on a 1-to-1 basis. The Company is required to redeem the Class 1 and Class 2 Units by June 2007 and June 2012, respectively, provided the unit holder has timely exercised the unit holder’s put right. The Class 3 Units are not redeemable at the option of the unit holder. The redeemable and non-redeemable units outstanding are accounted for under EITF D-98 “Classification and Measurement of Redeemable Securities” and Accounting Series Release No. 268, “Presentation in Financial Statements of Redeemable Preferred Stocks.” Under these standards the redeemable units are presented separately from the non-redeemable units on the consolidated

During the six months ended June 30, 2004, the Company made distributions to holders of Units required by the Certificates of Designations of the Class 1, Class 2 and Class 3 Units, respectively, plus voluntary distributions (excluding voluntary distributions related to tax payments to the California Franchise Tax Board), as follows:


(1)	The Class 1 mandatory monthly distribution is equal to 1/12 of $0.0775 per Class 1 Unit, or a total of $0.0775 per Class 1 Unit each year.


(2)	The Class 2 mandatory monthly distribution is equal to 1/12 of $0.0800 per Class 2 Unit, or a total of $0.0800 per Class 2 Unit each year.

(3)	The Class 3 mandatory monthly distribution is equal to 1/12 of $0.0825 per Class 3 Unit, or a total of $0.0825 per Class 3 Unit each year.

(4)	Includes voluntary distributions to holders of Class 1, Class 2, and Class 3 Units, equal to 1/12 of $0.0025 per Unit or a total of $0.0025 per Class 1, Class 2 and Class 3 Unit each year. Excludes distributions to units held by the Company’s wholly owned subsidiary.

On December 10, 2002, the Board of Managers declared a voluntary distribution to be paid monthly in an amount equal to 1/12 of $0.0025 per Class 1 Unit (“Voluntary Distribution”). Pursuant to the Certificates of Designations of the Class 2 and Class 3 Units, respectively, the Class 2 and Class 3 Units are entitled to receive no less than the same Voluntary Distribution received by the holders of the Class 1 Units on a per Unit basis. The Voluntary Distribution remains in effect until it is terminated by the Board of Managers.

In March and April 2004, we paid $47,000 and $6,000 respectively to the California Franchise Tax Board on behalf of our non-California Unit holders who had been allocated income deemed taxable by the State of California. In April 2004, an equal and compensating amount of $0.00493 per Unit totaling $381,000 was paid to all other unit holders for whom the Company did not make a California tax deposit. These payments were in addition to the mandatory and voluntary distributions set forth in the chart above.

During the six months ended June 30, 2004, the Company, through a wholly owned subsidiary, repurchased 3,260,350 Units as follows:

All Units owned by the subsidiary are considered outstanding under the Company’s Operating Agreement for all purposes, except as noted below, including voting and participation in mandatory and other distributions paid by the Company. However, for financial reporting purposes, these Units are not considered outstanding and any distributions paid to the subsidiary are eliminated in consolidation. Accordingly, for financial reporting purposes, the number of Units outstanding at June 30, 2004 is the number of Units outstanding minus the Units owned by the Company’s subsidiary. However, for all other purposes, the Company has 90,152,151 Units outstanding. Repurchases of Units were recorded against the members’ equity balance.

In July 2004 and through August 16, 2004, the Company, through its wholly owned subsidiary, repurchased an additional 819,463 Class 1, 2 and 3 Units as follows:

As of August 16, 2004, the Company’s wholly owned subsidiary owned the following number of Class 1, 2 and 3 Units of the Company:


(1)	Units owned by the Company’s subsidiary are periodically allocated into Class 1, 2 and 3 Units in proportion to the Units held by all Members in accordance to Section 2.3.5 of the Company’s Operating Agreement.

As of June 30, 2004, the Company is not aware of any litigation threatened against the Company other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by liability insurance, and none of which is expected to have a material adverse effect on the consolidated financial statements of the Company.

Reclassifications were made to the 2003 condensed financial statements to conform to the 2004 presentation. Certain items were reclassified related to Discontinued Operations as presented in Note 2.

On June 22, 2004, the Members of the Company approved amendments to the Certificate of Designations of the Class 1 Units (“Class 1 COD”) and the Certificate of Designations of the Class 2 Units (“Class 2 COD”).

As a result of the amendment of the Class 1 COD, the Company may now pay, at the Company’s discretion, the exercise price for the Class 1 Units tendered to the Company pursuant to the Class 1 Put Right at any time on or before June 30, 2007, as long as the Board has held the meeting required by the Class 1 COD and has determined to continue the Company’s operations beyond June 30, 2007. The method of redemption is also at the Company’s discretion and is not required to be made pro rata or pursuant to any other particular method or procedure. In addition, if any put Class 1 Units are not redeemed by the Company by June 30, 2006, then any distributions paid on such Class 1 Units to holders of record on and after July 1, 2006 will not be deducted from the exercise price for such Class 1 Units.

As a result of the amendment of the Class 2 COD, the Company may now pay, at the Company’s discretion, the exercise price for the Class 2 Units tendered to the Company pursuant to the Class 2 Put Right at any time on or before June 30, 2012, as long as the Board has held the meeting required by the Class 2 COD and has determined to continue the Company’s operations beyond June 30, 2012. The method of redemption is also at the Company’s discretion and is not required to be made pro rata or pursuant to any other particular method or procedure. In addition, if any put Class 2 Units are not redeemed by the Company by June 30, 2011, then any distributions paid on such Class 2 Units to holders of record on and after July 1, 2011 will not be deducted from the exercise price for such Class 2 Units.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains forward-looking statements and should be read in conjunction with the Consolidated Financial Statements and Notes set forth in Item 1 above. See our statement that is set forth after the Table of Contents regarding forward-looking statements.

The Company generates revenues from the leasing and, to a lesser extent, sales of residential and commercial properties it owns in California. Revenues from the apartment properties were 93.3% of total revenues for both the three months and six months ended June 30, 2004.

Total revenues from our continuing operations decreased $183,000 or 1% year-over-year to $12,829,000 for the second quarter ended June 30, 2004 primarily due to higher vacancies and higher concessions. We expect no revenue growth from our continuing operations for the remainder of 2004 as some of our apartment markets have been experiencing increased supply from new construction and both our apartment and commercial markets have been experiencing slow to flat employment growth, dampening the demand for both rental housing and office space.

Total net income decreased $388,000 for the three months ended June 30, 2004 compared to the same period in 2003. The decrease was due to higher total expenses and a decrease in total revenue.

The table below sets forth the overall weighted average occupancy levels for our properties, by type of property, at June 30, 2004, December 31, 2003 and June 30, 2003. The weighted average occupancy is calculated by multiplying the occupancy of each property by its square footage and dividing by the total square footage in the portfolio.

The overall weighted average occupancy level for our entire property portfolio as of June 30, 2004 was 90.1%, compared to 92.0% at June 30, 2003.

The occupancy at our apartment communities at June 30, 2004 shows a decrease to 94.1% from 94.8% at December 31, 2003. Contributing factors include the slowdown in the California economy, continuing competition with providers of other forms of multifamily residential properties and single-family housing and a significant increase in the construction of new apartment properties where our properties are located. We believe occupancy will remain relatively stable at this level for the remainder of 2004 due to a continuing management implemented cross-marketing program, resident referral program, resident retention focus and rent concession incentives.

Our future apartment occupancy rates will be subject to numerous factors, many of which are outside of our control. We believe that the remainder of 2004 will continue to be challenging on the leasing front. The overall slowdown of the California economy, the California deficit and other factors are impacting our sub-markets. Forecasts in trade journals and marketing reports indicate relatively flat rents and some decreasing occupancies with optimism for a pick up in late 2004 to early 2005. A large unknown factor for our portfolio will be how California’s large budget deficit will impact local economies as funding cuts roll downward. We believe that consumers are carefully considering how much they are willing to spend on housing, which is putting downward pressure on rents. In addition, historically low mortgage rates continue to enable more renters to purchase homes. Buying or renting single-family housing was the reason given by many residents who moved out of our apartment properties during the first six months of 2004. If mortgage rates increase, we

anticipate slightly less pressure on rents and occupancies, as renters may be less able to purchase homes; however, we cannot predict when changes in mortgage rates will occur. Qualified potential residents continue to be difficult to find. Our market surveys indicate that a number of competitors have decreased asking rents, as we have done at selected properties in order to remain competitive. Many of our competitors give rent concessions. We give them as well at many properties, such as a discount off a first month’s rent. Accordingly, there can be no assurance that our future occupancy or rental rates will not be significantly less than our occupancy and rental rates at June 30, 2004.

In the second quarter of 2004, occupancy at our commercial properties improved slightly over last quarter. We leased and began receiving rent on approximately 2,000 square feet of retail space at our Concord commercial property. We also negotiated a 3-year lease extension with an existing ground floor tenant for approximately 1,750 square feet. Additionally at this location, we signed leases for approximately 2,400 square feet which will become occupied later this year.

Market conditions for leased space in commercial buildings remain considerably weakened in the San Francisco Bay Area. The general economic decline and job loss in the technology industry have significantly reduced demand for commercial buildings in most San Francisco Bay Area sub-markets. Vacancy rates have gone up and rents have come down considerably from the peaks reached in early 2000. The possibility of a worsening economic slowdown, a continuation of the California budget problem, the technology-based recession or continuation of current economic conditions may result in higher vacancy rates, lower prevailing rents, increased rent concessions and/or more tenant defaults and bankruptcies.

We use a supplemental performance measure, Funds from Operations (“FFO”), along with net income, to report operating results. We believe that in our industry, FFO provides relevant information about operations and is useful, along with net income, for an understanding of our operating results. The Company believes that FFO is useful as a measure of the performance of the Company because, along with cash flows from operations, investing activities, and financing activities, they provide an understanding of the ability of the Company to incur and service debt, make capital expenditures and make distributions to members.

FFO is calculated by making various adjustments to net income. Depreciation, amortization and write off of deferred debt issuance costs are added back to net income as they represent non-cash charges. In addition, gains on sale of real estate investments and extraordinary items are excluded from the FFO calculation. FFO is not a measure of operating results or cash flows from operating activities as defined by generally accepted accounting principles in the United States. Further, FFO is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to cash flows as a measure of liquidity.

For the quarter ending June 30, 2004, FFO was $2,276,000 as compared to $2,627,000 for the same quarter last year, a decrease of $351,000. For the six months ending June 30, 2004, FFO was $5,060,000 as compared to $5,424,000 for the same period last year, a decrease of $364,000. These decreases were due to lower total revenue and higher total operating expenses as discussed in “Revenue from Continuing Operations” and “Expenses from Continuing Operations”. FFO on a per Unit basis remained relatively flat primarily due to the lower weighted average number of Units outstanding during the second quarter and first six months of 2004 compared to the same periods in 2003.

Three Months Ended June 30, 2004 Compared to the Three Months Ended June 30, 2003

Total rental revenue for the three months ended June 30, 2004 was $12,819,000, down approximately 1% or $138,000 from $12,957,000 for the same quarter last year, excluding revenues from discontinued operations. This decrease is primarily attributable to lower rental revenue at our apartment communities. The possibility of a worsening economic slowdown or recession or continuation of current economic conditions may result in higher vacancy rates, lower prevailing rents, increased rent concessions and/or more tenant defaults and bankruptcies.

During the second quarter of 2004, rental revenue generated by our apartment communities was $11,966,000, down approximately $137,000 from $12,103,000 for the second quarter last year, excluding revenues from discontinued operations. The decrease was primarily attributable to higher vacancy rates and higher concessions.

Rental revenue generated by our commercial properties was $853,000, down approximately $1,000 from $854,000 in the same quarter last year, excluding revenues from discontinued operations.

During the three months ended June 30, 2004, average monthly rental rates per square foot for same-store apartment communities and commercial properties on a combined basis decreased by approximately 0.1%. However, same store rental rates increased approximately 0.4% compared to the quarter ended June 30, 2003 due to a slight increase in rental rates for same-store commercial properties. At June 30, 2004, the average monthly rental rate per square foot of our same-store apartment communities was $1.04, compared to $1.04 at June 30, 2003. At June 30, 2004, the average monthly rental rate per square foot of our same-store commercial properties was $1.26, compared to $1.25 at June 30, 2003. This increase was attributable to increased rents as included in existing leases or as negotiated in lease renewals with existing tenants and/or in leases with new tenants. Same-store properties are defined as those properties owned by us during all months of the reporting periods. Average monthly rental rates are defined as contract rents for occupied units plus estimated market rents for vacant units divided by the total square footage in the portfolio at the end of the reporting periods.

Our ability to continue to increase rent rates is largely dependent on the changes in the real estate market and on general economic conditions in the areas in which we own properties.

Interest revenue decreased by $44,000 for the three months ended June 30, 2004 as compared to the same period last year mainly due to lower cash balances.

Total expenses from continuing operations includes expenses from the property we acquired in May 2003. Total expenses (which includes interest expense, operating and maintenance, depreciation and amortization, general and administrative, real estate taxes and insurance, utilities, prepayment penalties and write-off of deferred debt issuance costs) were $12,943,000 for the three months ended June 30, 2004 compared to $12,692,000 for the same period in 2003, excluding expenses from discontinued operations. The various components of total expenses are discussed in more detail as follows:

Interest expense. In the second quarter 2004, interest expense was $2,849,000, down from $2,950,000 for the same period last year, a decrease of $101,000. This reduction was due to lower outstanding loan balances and lower average weighted interest rates than the second quarter of 2003.

Operating and maintenance expenses. For the quarter, operating and maintenance expenses were $4,344,000, up from $4,216,000 from the second quarter last year. The $128,000 increase was primarily due to expenses related to the May 2003 acquisition property and increased advertising and marketing costs to improve rental activity.

Depreciation and amortization expenses. During the second quarter in 2004, depreciation and amortization expense was $2,403,000, as compared to $2,345,000 for the second quarter in 2003, an increase of approximately 2%. This change was primarily attributable to an increase in real estate investments from capitalization of property improvements.

General and administrative expenses. General and administrative expenses were $844,000 for the quarter, down from $898,000 for the same period last year, a decrease of approximately 6%. This decrease is primarily due to non-recurring legal fees in 2003.

Real estate taxes and insurance expenses. In the quarter, real estate taxes and insurance expenses were $1,511,000, up from $1,335,000 for the same period last year, an increase of approximately $176,000. This change was mainly attributable to an increase in workers compensation insurance costs, real estate taxes, a one-time settlement payment of an uninsured claim and $60,000 from comparative real estate tax and insurance expense increases related to the May 2003 acquisition property.

Utility expenses. Utility expenses were $991,000 for the quarter, as compared to $948,000 for the same quarter last year, an increase of $44,000. This change was due primarily to rate increases for natural gas, sewer, water and $14,000 from comparative utility expense increases related to the May 2003 acquisition property.

During the three months ended June 30, 2004, net loss before discontinued operations was $114,000 compared to net income of $320,000 for the same period last year. The decrease in 2004 was due to a decrease in total revenue and increases in operating and maintenance, depreciation and amortization, real estate taxes and insurance and utility expenses partially offset by decreases in interest expense and general and administrative expense.

During the quarter ended June 30, 2004, income from discontinued operations was $30,000 compared to a loss of $16,000 for the same period last year. The increase was primarily due to a reduction in discontinued operating expenses, partially offset by a decrease in discontinued rental revenue as a result of the sale of one of our properties in 2003. See footnote 2 of the Notes to the Consolidated Financial Statements which describes discontinued operations in greater detail.

During the quarter ended June 30, 2004, we recorded a net loss of $84,000 compared to a net income of $304,000 for the second quarter last year, a decrease of $388,000. This decrease was due to lower revenue and higher expenses.

Total rental revenue for the six months ended June 30, 2004 was $25,697,000, a slight increase from the $25,650,000 for the same period last year, excluding revenues from discontinued operations.

During the six months ended June 30, 2004, rental revenue generated by our apartment communities was $23,990,000, up approximately $146,000 from $23,844,000 for the same period last year, excluding revenues from discontinued operations.

Rental revenue generated by our commercial properties was $1,706,000, down approximately $100,000 from $1,806,000 in the same period last year, excluding revenues from discontinued operations.

During the six months ended June 30, 2004, rental rates for same-store apartment communities and commercial properties on a combined basis remained unchanged.

Total expenses from continuing operations includes expenses from the property we acquired in May 2003. Total expenses (which includes interest expense, operating and maintenance, depreciation and amortization, general and administrative, real estate taxes and insurance, utilities, prepayment penalties and write-off of deferred debt issuance costs) were $25,461,000 for the six months ended June 30, 2004 compared to $24,918,000 for the same period in 2003, excluding expenses from discontinued operations. The various components of total expenses are discussed in more detail as follows:

Interest expense. In the six months ended June 30, 2004, interest expense was $5,698,000, down from $5,869,000 for the same period last year, a decrease of $171,000. This reduction was due to lower outstanding loan balances and lower average weighted interest rates than the same period in 2003.

Operating and maintenance expenses. For the period, operating and maintenance expenses were $8,349,000, up from $7,825,000 from the same period last year. The $524,000 increase was primarily due to comparative increased expenses related to the May 2003 acquisition property ($216,000), increased advertising and marketing costs to improve rental activity and increased legal costs associated with tenant issues.

Depreciation and amortization expenses. During the six months ended June 30, 2004, depreciation and amortization expense was $4,785,000, as compared to $4,585,000 during the six months ended June 30, 2003,

an increase of approximately $200,000. This change was primarily attributable to an increase in real estate investments from capitalization of property improvements and $57,000 from improvements related to the May 2003 acquisition property.

General and administrative expenses. General and administrative expenses were $1,753,000 for the six months ended June 30, 2004, down from $1,897,000 for the same period last year, a decrease of approximately 8%. This decrease is primarily due to non-recurring legal fees in 2003.

Real estate taxes and insurance expenses. In the six months ended June 30, 2004, real estate taxes and insurance expenses were $2,876,000, up from $2,577,000 for the same period last year, an increase of approximately $299,000. This change was mainly attributable to increases in workers compensation insurance costs and real estate taxes, a one-time settlement of an uninsured claim and $105,000 from comparative increases in real estate tax and insurance expenses related to the May 2003 acquisition property.

Utility expenses. Utility expenses were $2,000,000 for six months ended June 30, 2004 as compared to $1,851,000 for the same period last year, an increase of $150,000. This change was due primarily to rate increases for natural gas, sewer, water and $39,000 from comparative increases in utility expenses related to the May 2003 acquisition property.

Prepayment penalty. During the first quarter of 2003, we recorded $303,000 of prepayment penalties related to debt which was retired in connection with the refinancing of three mortgages.

Write-off of deferred debt issuance costs. During the first quarter of 2003, we recorded a loss of $11,000 to reflect the write-off of deferred debt issuance costs related to debt which was retired in connection with the refinancing of three mortgages.

During the six months ended June 30, 2004, net income before discontinued operations was $265,000 compared to net income of $839,000 for the same period last year. The decrease in 2004 was due to lower revenues and increases in operating and maintenance, depreciation and amortization, real estate taxes and insurance and utility expenses, partially offset by lower interest expense, general and administrative expense, prepayment penalties and write-off of deferred debt issuance costs.

During the six months ended June 30, 2004, loss from discontinued operations was $164,000 compared to income of $21,000 for the same period last year. The decrease was primarily due to a $250,000 charge for impairment of assets related to a parcel of land located in Vallejo, California so that the carrying value reflects the sale price negotiated in the Option Agreement. See footnote 2 of the Notes to the Consolidated Financial Statements which describes discontinued operations in greater detail.

During the six months ended June 30, 2004, net income was $101,000 compared to net income of $860,000 for the same period last year, a decrease of $759,000. The decrease was due to a decrease in net income from continuing operations and a $250,000 charge for impairment of assets related to a parcel of land located in Vallejo, California.

We believe the direct effects of inflation on our operations have been inconsequential.

As of June 30, 2004, our short-term liquidity needs included normal operating requirements, ongoing capital improvements, monthly principal amortization of our debt, repurchase of Class 1 Units, Class 2 Units and Class 3 Units and certain mandatory distributions required to be made to our Class 1, Class 2 and Class 3 Unit

holders, as described in Note 6 of our Notes to Consolidated Financial Statements set forth in Item 1 above. We expect to meet these requirements through cash provided by operations and available cash. However, if needed for repurchase of Class 1 Units, Class 2 Units and Class 3 Units or capital improvements, we may increase debt by drawing on our line of credit, refinancing certain mortgage obligations, mortgage borrowing on our debt-free properties or we may sell some properties. We do not expect that rent increases upon tenant turnover and lease expirations, subject to market and general economic conditions, will have a significant impact on our short-term liquidity.

Our long-term liquidity requirements include scheduled debt maturities, significant capital improvements, certain mandatory distributions required to be made to our Class 1, Class 2 and Class 3 Unit holders, as described in Note 6 of our Notes to Consolidated Financial Statements set forth in Item 1 above and repurchases of Class 1, Class 2 and Class 3 Units. Cash flows from operations, including the effects of any rent increases, will not be sufficient to meet some of these long-term requirements, such as remaining balances due at loan maturities, and it will be necessary for us to refinance the mortgages on certain of our properties. There can be no assurance that we will be able to refinance on terms advantageous to us, however, especially if interest rates rise in the future.

Our Class 1 Unit holders have the right to require us to redeem some or all of their Class 1 Units by June 2007. If a sufficient number of Class 1 Unit holders exercise their right to have their Class 1 Units redeemed, our continued operation beyond June 30, 2007 may not be reasonably feasible. Accordingly, the Class 1 COD requires our Board of Managers to meet no later than June 30, 2006 to determine whether we should continue operations beyond June 30, 2007. In addition, our Class 2 Unit holders have a similar right to require us to redeem some or all of their Class 2 Units by June 2012 and a determination by our Board of Managers no later than June 30, 2011 to determine whether we should continue operations beyond June 30, 2012.

In order to fund the Class 1 redemptions, we will use cash from operations, available cash, loan financing proceeds, the proceeds from our intended offering of Series B Preferred Units, other capital sources and, if necessary, we may be required to liquidate some or all of our assets. The mix of funds we receive from various sources is dependent primarily on two variables. The first variable is the amount of additional debt we can prudently borrow. The second variable is the amount of proceeds we will raise from our intended offering of Series B Preferred Units. To the extent that we do not raise sufficient funds from our intended Series B Preferred Unit offering and additional borrowings, we will be required to sell some of our properties in order to redeem the put Class 1 Units. We believe that it is too early for us to evaluate our liquidity requirements related to the Class 2 redemptions.

At June 30, 2004, we had unrestricted cash totaling $2,607,000, compared to $6,972,000 at December 31, 2003. This decrease is attributable to net cash provided by operations of $6,666,000, net cash used in investing activities of $1,026,000 and net cash used in financing activities of $10,005,000.

Net cash provided by operations during the six months ended June 30, 2004 was $6,666,000, which reflects net income of $101,000, loss on disposal of assets of $43,000, loss of $250,000 for impairment of assets, non-cash depreciation and amortization charges of $4,872,000 and the net increase of the effect of changes in operating assets and liabilities of $1,400,000, primarily a decrease in restricted cash.

The terms of certain of our mortgages require impound accounts for the payment of insurance, property taxes, replacement reserves and lender holdbacks on proceeds from new mortgages for immediate repair improvements, as well as scheduled principal and interest payments on the debt. We classify these impound accounts as restricted cash on our balance sheet.

Net cash used in investing activities for the six months ended June 30, 2004 consisted of improvements to real estate investments of $1,026,000 which were primarily carpet and vinyl replacements, new fences and additions or improvements to new or existing structures. Net cash used in investing activities of $8,784,000 for the six months ending June 30, 2003 consisted primarily of the acquisition of a new property in Sacramento, California.

Net cash used in financing activities for the six months ended June 30, 2004 was $10,005,000. The uses of cash were as follows: repurchases of Class 1, Class 2 and Class 3 Units in the amount of $5,011,000, principal

payments on mortgage notes of $1,334,000, distributions to unit holders in the amount of $3,594,000 and additions to deferred financing costs of $66,000. For the same period last year, net cash provided by financing activities was $3,511,000. This consisted of proceeds received from the refinance of certain mortgage loans of $7,032,000 and the addition of a new mortgage of $5,300,000. The uses of cash were as follows: distributions to Class 1 Unit holders in the amount of $3,922,000, early payoff of one mortgage note totaling $2,144,000, principal payments on mortgage notes of $1,190,000, change in other assets of $781,000 that is primarily cash in transit for repurchase of additional Class 1 Units, net deferred financing costs totaling $371,000 and repurchases of Class 1 Units in the amount of $412,000.

Our long-term debt consists of 46 real estate mortgages totaling $184,127,000 as of June 30, 2004. Each of the mortgages is secured by one of 45 properties with two mortgages secured by the same property. This debt generally requires monthly payments of principal and interest. As of June 30, 2004, the weighted average interest rate on our real estate mortgages was 6.15% compared to 6.21% at the same time last year.

Subsequent to June 30, 2004, we completed the financing of a second mortgage loan for $1,218,000 at an annual interest rate of 5.86%. The loan requires monthly payments of principal and interest. The loan is partially amortizing and will require payment of the remaining balance on February 1, 2012. We also completed a loan modification of an existing mortgage loan where we received loan proceeds of approximately $1,400,000 and decreased the annual interest rate on the total mortgage loan amount from 7.00% to 5.63%, fixed for three years and converting to a variable rate for the remaining twenty-four years. The proceeds were used to repurchase Class 1, Class 2 and Class 3 Units.

In August 2004, we sold a 48 unit property in Modesto, California for $3,300,000. We received initial net sale proceeds of $1,853,000 with the balance of the purchase price being a promissory note in the amount of $1,300,000 and bearing interest at 8.00% per annum. The promissory note is due and payable as portions of the property are sold with the entire balance becoming due and payable on June 30, 2007. The promissory note is secured by a deed of trust on the property in a first lien position and shall provide for partial releases as portions of the property are sold. The carrying value of the assets (real estate investments held for sale) of the property was $1,527,000 at June 30, 2004. There is no debt on the property. The proceeds will be used for repurchases of Class 1, Class 2 or Class 3 Units, increasing our working capital or improvements to real estate investments.

To provide our Unit holders with additional liquidity, we continue to follow the guidelines adopted by our Board of Managers to allow us to repurchase Units from members and to provide information to our members that will allow members to contact each other in order to facilitate trading of Units among our members. See Part II, Item 2 — “Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities” for additional information about the Company’s repurchases of Units.

During the six months ended June 30, 2004, the Company, through a wholly owned subsidiary, repurchased 2,949,596 Class 1 Units for an aggregate price of $4,539,000; 23,157 Class 2 Units for an aggregate price of $35,000; 287,597 Class 3 Units for an aggregate price of $437,000. In July 2004 and through August 16, 2004, the Company, through its wholly owned subsidiary, repurchased an additional 628,138 Class 1 Units for an aggregate price of $980,000 and 191,325 Class 3 Units for an aggregate price of $293,000. As of August 16, 2004, the Company’s wholly owned subsidiary owned 7,305,243 Class 1 Units, 1,670,642 Class 2 Units and 5,451,659 Class 3 Units.

Changes In Member’s Units and Retained Earnings for the Period Ended June 30, 2004

The following schedule reflects the changes in our members’ units and retained earnings during the six months ended June 30, 2004 for financial reporting purposes:

Our primary market risk exposure results from changes in interest rates on our debt obligations. We are vulnerable to increases in the interest rates on our variable rate mortgage notes. We are also vulnerable to significant increases in interest rates to the extent we refinance our fixed rate mortgage notes or incur additional debt in the future. We may need to incur additional debt to help finance the redemption of the Class 1 and Class 2 Units that we are required to redeem on June 30, 2007 and on June 30, 2012, respectively. On an ongoing basis, we actively monitor and manage interest costs on our variable rate debt through refinancing of certain of our mortgage loans with variable interest rates and converting them to favorable fixed interest rates or more favorable variable interest rates as opportunities arise.

The following table presents information about our debt obligations at June 30, 2004. The table presents scheduled principal payments and related weighted average interest rates by expected maturity dates.


(1)	Twenty-nine loans with rates ranging from 5.21% to 9.19%.

(2)	Seven loans with rates ranging from 4.60% to 7.38% that become variable between July 2004 and January 2008.

(3)	Ten loans with rates from 3.09% to 8.50% at June 30, 2004.

Under the supervision and with the participation of Gayle M. Ing, the Company’s Chief Executive Officer, and Cornelius Stam, the Company’s Chief Financial Officer, management carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective.

There has been no change in the Company’s internal control over financial reporting during the period covered by this report that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities


(a)	See footnote 10 to the Notes to the Consolidated Financial Statements, which describes the amendments to our Class 1 Certificate of Designations and our Class 2 Certificate of Designations, which information is incorporated herein by reference.

(e)	See the chart below.


(1)	Only our Class 1 Units are registered under the Exchange Act.

(2)	In addition to the Units that may be repurchased as described in footnote 3 below, the Company is obligated to redeem Class 1 and Class 2 Units that are put to the Company in accordance with the put rights of the Class 1 and Class 2 Units, respectively. See the Company’s Description of Securities, dated October 15, 2003, previously filed with the SEC.

(3)	In March 2004, the Board of Managers authorized the repurchase of up to $20,000,000 of Units in any given month, superceding the previous authorization set in December 2001. The authorization will remain in effect until modified or terminated by the Board of Managers. The Company, through its wholly-owned subsidiary, may repurchase its Units from Members, when opportunities exist to buy at prices which are consistent with the Company’s Unit Repurchase Guidelines. Under this authorization and its guidelines, the Company will deduct $0.40 per Unit, representing “all anticipated costs and expenses (including but not limited to the estimated costs and expenses of liquidating all of the Company’s properties)”, when determining the maximum amount that the Company might be willing to pay. This fixed charge per Unit will replace the amount of “costs and expenses” illustrated in Frequently Asked Question 1.7 in the Company’s “Description of Securities”. Units redeemed by the Company pursuant to the Class 1 or Class 2 Put Rights will not be counted against the $20,000,000 of funds available for repurchase under this program.

See our Form 8-K referred to it Part II, Item 6(b) below for the results of our Annual Meeting of Members held on June 22, 2004, which information is incorporated herein by reference.

We filed a Form 8-K on July 7, 2004 (June 22, 2004 event date) reporting on the matters discussed in Part II, Items 2(a) and 4 above.

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.

Date: August 16, 2004


	By: /s/ GAYLE M. ING

	Gayle M. Ing
	President and Chief Executive Officer

	By: /s/ CORNELIUS STAM

	Cornelius Stam
	Chief Financial Officer
	(Principal Financial Officer)


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended June 30, 2004
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-32653


Delaware		94-3364323
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2151 Salvio Street, Suite 325 Concord, CA		94520
(Address of principal executive offices)		(Zip Code)


Class of Unit		Owned by Members		Owned by Subsidiary		Total Outstanding

Class 1			33,180,540		7,305,243		40,485,783
Class 2			11,755,617		1,670,642		13,426,259
Class 3			30,788,450		5,451,659		36,240,109
	Total		75,724,607		14,427,544		90,152,151


		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)		3
	Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003		3
	Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2004 and June 30, 2003		4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and June 30, 2003		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19
Item 4.	Controls and Procedures		19
PART II. OTHER INFORMATION

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		20
Item 4.	Submission of Matters to a Vote of Security Holders		21
Item 6.	Exhibits and Reports on Form 8-K		21
Signature Page			22


				June 30,		December 31,
				2004		2003

ASSETS
Real estate investments, net				$	233,198,999	$	240,487,447
Real estate investments held for sale					7,996,435		4,632,636
Cash					2,607,318		6,972,448
Restricted cash					1,530,271		2,460,650
Rents receivable					186,299		200,308
Prepaid expenses					654,142		1,141,212
Deferred costs, net					2,007,412		2,118,896
Other assets					496,415		1,313,251

			TOTAL ASSETS	$	248,677,291	$	259,326,848

LIABILITIES, MEMBERS’ UNITS AND RETAINED EARNINGS
LIABILITIES:
	Mortgages payable			$	184,126,751	$	185,461,243
	Tenants’ security deposits				2,939,751		2,886,954
	Accounts payable and accrued expenses				2,287,561		3,147,458
	Accrued interest				943,253		961,808
	Unearned rental revenue				180,229		165,736

			Total liabilities		190,477,545		192,623,199


MEMBERS’ UNITS AND RETAINED EARNINGS
	Redeemable Units (See Note 5)
		37,558,033, redeemable Class 1 Units, $1 par value and 79,804,420 redeemable Class 1 Units, $1 par value outstanding at June 30, 2004 and December 31, 2003, respectively;			26,855,239		63,624,360
		9,397,193 redeemable Class 2 Units, $1 par value outstanding at June 30, 2004			6,797,690		—

	Preferred units
		No undesignated Preferred Units authorized or outstanding, at June 30, 2004, and not authorized nor outstanding at December 31, 2003			—		—

	Non-Redeemable Units
		29,588,844 Class 3 Units, $1 par value outstanding at June 30, 2004			21,366,834		—

	Retained Earnings				3,179,983		3,079,289

			TOTAL LIABILITIES, MEMBERS’ UNITS AND RETAINED EARNINGS	$	248,677,291	$	259,326,848


			Three Months			Three Months			Six Months			Six Months
			Ended			Ended			Ended			Ended
			June 30,			June 30,			June 30,			June 30,
			2004			2003			2004			2003

REVENUES:
	Rental		$	12,819,029		$	12,957,230		$	25,696,676		$	25,650,032
	Interest			9,963			54,281			29,595			106,410

		Total revenues		12,828,992			13,011,511			25,726,271			25,756,442

OPERATING EXPENSES:
	Interest expense			2,849,017			2,949,624			5,698,342			5,868,971
	Operating and maintenance			4,343,989			4,215,648			8,348,725			7,824,688
	Depreciation and amortization			2,403,141			2,345,361			4,784,969			4,585,465
	General and administrative			844,308			897,992			1,752,900			1,897,332
	Real estate taxes and insurance			1,511,237			1,335,248			2,875,946			2,576,572
	Utilities			991,273			947,772			2,000,235			1,850,573
	Prepayment penalty			—			—			—			303,483
	Write off of deferred debt issuance costs			—			—			—			10,578

		Total expenses		12,942,965			12,691,645			25,461,117			24,917,662

		Net Income (loss) before discontinued operations		(113,973	)		319,866			265,154			838,780

Discontinued operations:
	Loss on impairment of assets			—			—			(250,000	)		—
	Discontinued operations, net			29,529			(16,104	)		85,540			20,943

	Income (loss) from discontinued operations			29,529			(16,104	)		(164,460	)		20,943

NET INCOME(LOSS)			$	(84,444	)	$	303,762		$	100,694		$	859,723

Income (loss) per outstanding Unit:
	From continuing operations		$	(0.00	)	$	0.00		$	0.00		$	0.01
	From discontinued operations		$	0.00		$	(0.00	)	$	(0.00	)	$	0.00

NET INCOME (LOSS) PER UNIT —
	Basic and diluted		$	(0.00	)	$	0.00		$	0.00		$	0.01

WEIGHTED AVERAGE UNITS OUTSTANDING
	Basic and diluted			77,297,742			83,173,121			78,294,779			83,213,737



	Three Months Ended						Six Months Ended
	June 30,						June 30,

	2004			2003			2004			2003

Rental revenues	$	291,709		$	480,328		$	603,215		$	954,574
Interest and other		7			15			14			62
Interest expense		(22,685	)		(88,295	)		(45,434	)		(176,149	)
Operating and maintenance		(122,696	)		(231,570	)		(253,192	)		(423,084	)
Depreciation and amortization		(42,990	)		(65,713	)		(87,348	)		(130,774	)
General and administrative		(7,500	)		(4,000	)		(2,500	)		(4,000	)
Real estate taxes and insurance		(45,755	)		(60,002	)		(88,949	)		(119,174	)
Utilities		(20,561	)		(46,867	)		(40,266	)		(80,512	)
Loss on impairment of assets		—			—			(250,000	)		—

Total discontinued operations	$	29,529		$	(16,104	)	$	(164,460	)	$	20,943


Class of Unit		Amount

Class 1(1)(4)		$	1,633,000
Class 2(2)(4)		$	391,000
Class 3(3)(4)		$	1,135,000

	Total	$	3,159,000


Class of Unit		# of Units		Amount

Class 1			2,949,596	$	4,539,000
Class 2			23,157	$	35,000
Class 3			287,597	$	437,000

	Total		3,260,350	$	5,011,000


Class of Unit		# of Units(1)

Class 1			7,305,243
Class 2			1,670,642
Class 3			5,451,659

	Total		14,427,544


10.	CHANGES IN CAPITAL STRUCTURE AND CLASS 1 AND CLASS 2 CERTIFICATES OF DESIGNATIONS


	Occupancy at			Occupancy at			Occupancy at
	June 30, 30,			December			June 30,
Property Type	2004			31, 2003			2003

Apartment Communities		94.1	%		94.8	%		95.4	%
Commercial Properties		72.3	%		75.4	%		77.4	%


Balance, December 31, 2003		$	66,703,649
	Repurchase of Redeemable Class 1 and 2 Units		(4,573,595	)
	Repurchase of Non-Redeemable Class 3 Units		(436,976	)
	Distributions		(3,594,026	)
	Net Income		100,694

Balance, June 30, 2004		$	58,199,746


		2004			2005			2006			2007			2008			Thereafter

Mortgage loans with fixed rates maturing through March 2012(1)		$	1,696,131		$	1,783,702		$	1,930,374		$	8,994,730		$	2,062,224		$	111,086,414
	Average interest rate		6.55	%		6.55	%		6.55	%		6.55	%		6.55	%		6.55	%
Mortgage loans with fixed rates that become variable between July 2004 and January 2008 maturing through 2033(2)		$	531,140		$	561,078		$	592,747		$	626,251		$	661,700		$	33,233,593
	Average interest rate		5.60	%		5.60	%		5.60	%		5.60	%		5.60	%		5.60	%
Mortgage loans with variable rates maturing through 2031(3)		$	463,521		$	475,108		$	492,364		$	6,867,361		$	403,287		$	11,665,024
	Average interest rate		4.67	%		4.67	%		4.67	%		4.67	%		4.67	%		4.67	%


							Approximate
					Total Number of Units		Dollar Value that
					Purchased as Part of		May Yet Be
	Total Number of		Average Price		Publicly Announced		Purchased Under the
Period	Units Purchased(1)		Paid per Unit		Plans or Programs		Plan or Programs(2)

April 1-30, 2004		1,223,133 Class 1	$	1.57		12,084,347	$	20,000,000	(3)
		0 Class 2	$	0.00		19,657
		82,089 Class 3	$	1.57		187,597

May 1-31, 2004		309,600 Class 1	$	1.57		12,393,947	$	20,000,000	(3)
		3,500 Class 2	$	1.53		23,157
		65,000 Class 3	$	1.53		252,597

June 1-30, 2004		903,380 Class 1	$	1.53		13,297,327	$	20,000,000	(3)
		0 Class 2	$	0.00		23,157
		35,000 Class 3	$	1.53		287,597

Total Second Quarter		2,436,113 Class 1	$	1.56		13,297,327	$	20,000,000	(3)
		3,500 Class 2	$	1.53		23,157
		182,089 Class 3	$	1.55		287,597


	31.1			Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2			Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1			Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2			Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


Designation		Description

Exhibit 31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002