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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

JCM Partners, LLC

(Exact Name of Registrant as Specified in Its Charter)

(925) 676-1966

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Class 1 Units

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

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

      State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant: Not applicable, since the registrant has no established trading market.

      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 March 31, 2005, the registrant had the following Classes of Units and Series of Preferred Units outstanding of which the following number of Units and Preferred Units were owned by a wholly owned subsidiary of the Company:

      Documents Incorporated by Reference:

      Portions of the registrant’s Definitive Proxy Statement to be held in conjunction with registrant’s annual meeting of members to be held in June 2005 are incorporated by reference into Part III.

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JCM PROPERTIES, LLC

TABLE OF CONTENTS

ANNUAL REPORT ON FORM 10-K

Forward Looking Statements

Certain information included in this Annual 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, adverse changes in the real estate markets, increases in interest rates, increased competition, changes in general and local economies, 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.

PART I

Background

JCM Partners, LLC, a Delaware limited liability company (“JCM Partners”, “JCM” or the “Company”), was organized on May 15, 2000. We are the reorganized entity which emerged from the bankruptcy proceedings in the United States Bankruptcy Court for the Eastern District of California entitled In re IRM Corporation, et al. (the “IRM entities”), Case Number 98-32231-A-11. Pursuant to a plan of reorganization confirmed on June 5, 2000, all of the assets of the IRM entities were vested in our company. We commenced operations on June 30, 2000 pursuant to the confirmation order and the plan. Additional background information about the bankruptcy proceedings from which we emerged is set forth later in this Item 1 — Business, under “The IRM Bankruptcy Proceedings.”

We adopted “fresh start” accounting rules as of June 30, 2000 in accordance with AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code.” Accordingly, all of the assets and liabilities of JCM Partners were reflected at their reorganization value, which approximated fair value at the date of the reorganization, June 30, 2000. As a result, our financial results during the period from June 30, 2000 to December 31, 2000 serve as benchmark data for future comparisons, but generally are not comparable to prior periods.

Our principal executive offices are located at 2151 Salvio Street, Suite 325, Concord, California, 94520.

Overview

JCM Partners is a limited liability company with activities related to the ownership, development, acquisition, renovation, management, marketing and strategic disposition of multifamily apartment communities and commercial properties in California. Through our wholly-owned subsidiaries, we own 51 properties. Management’s strategy is to be a regional, highly efficient provider of quality apartment communities. We seek to be a market leader by operating a sufficiently sized portfolio of apartments within each of the markets in which we own properties in order to drive down operating costs through economies of scale and management efficiencies.

As of December 31, 2004, our real estate portfolio consisted of:

All of our real estate assets are located in Northern California, primarily in the Sacramento Metropolitan Area, the Central Valley communities of Tracy, Manteca, Modesto, Turlock and Stockton and the San Francisco Bay Area.

We are subject to the risks inherent in the ownership of real property, such as fluctuating land values, interest rates, vacancy rates and rental values. Further, there could be difficulties in selling the properties as a result of general and local economic conditions, the condition of the properties, the demand for the properties and real property tax rates.

In addition, certain expenditures associated with real estate equity investments (principally, mortgage payments, real estate taxes, and maintenance costs) are not necessarily decreased by events adversely affecting our income from the properties. Thus, the cost of operating and holding the properties, or certain of them, may exceed the properties’ resale value and income producing ability, and we therefore may have to borrow funds in order to protect our investment or be required to dispose of the properties, or certain of them, at a loss. Our ability to meet our debt and other obligations, and thereafter to make distributions to our members in accordance with our Operating Agreement and Certificates of Designations, will depend on these and other factors. We are also subject to the rights of our Class 1 and Class 2 holders to require us to redeem their Units

in 2007 and 2012, respectively. See “Item 5. Market for Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities — Redemption Rights.”

Our Operating Agreement provides that the purposes of JCM Partners are:

We have focused our activities on those related to the ownership, development, acquisition, renovation, management, marketing and strategic disposition of multifamily apartment communities and commercial properties in California. We currently intend to continue this focus, but our Board of Managers could, without member approval, decide to engage in other activities. Beginning in August 2004, we also began disposing of selected properties to raise funds to purchase Class 1 Units from our members. Similarly, our Board of Managers has broad discretion with respect to our investments and has the power to determine which types of investments are in the best interests of our Company and its members. Although we are not limited by our Operating Agreement, we currently intend to continue our focus on investing in apartment communities and commercial properties in California. We currently hold these properties primarily for capital appreciation and income. However, in connection with the redemption rights of the holders of our Class 1 and Class 2 Units, we may need to sell some of our properties. Although we do not have a policy as to the amount or percentage of assets which will be invested in any specific property, it is our intent to maintain a diversified portfolio of properties.

Policies with Respect to Other Activities

Except as described below, we have not adopted any formal policies regarding the extent to which we will engage in specific activities such as issuing senior securities, borrowing money, making loans, investing in the securities of other issuers for the purpose of exercising control, underwriting securities of other issuers, engaging in the purchase and sale (or turnover) of investments, offering securities in exchange for property, repurchasing or otherwise reacquiring our Units, or making annual or other reports to our members.

Under the terms of our Operating Agreement, we have the discretion to repurchase or otherwise reacquire Units from our members. In December 2001, our Board of Managers authorized us from time to time to repurchase Units from our members, although we are not obligated to do so. In March 2004, our Board of Managers modified our repurchase guidelines to allow us to repurchase up to $20 million of Units in any single month. In November 2004, our Board of Managers supplemented our repurchase guidelines by adopting the following policies:

Notwithstanding the above, in connection with our obligations to redeem the Class 1 Units of Members who exercise their Class 1 Unit Put Rights, we, and any of our affiliates, will stop making repurchases of Class 1 Units from the date we mail the Class 1 Exercise Notice (anticipated to be July 20, 2005) until the last day

the Class 1 Put Rights may be exercised (September 28, 2005). We, and our affiliates, are doing this should the exercises of the Class 1 Put Rights be subject to Rule 14e-5 of the Exchange Act.

In addition, under guidelines approved by our Board of Managers, we provide information to our members that allow them to contact each other in order to facilitate trading of Units among members. In 2004, through a wholly-owned subsidiary, we repurchased 16,233,773 Class 1 Units, 399,827 Class 2 Units and 830,740 Class 3 Units for an aggregate price of $27,164,000. We paid the same price for repurchases of Class 1, 2 and 3 Units. From January 1, 2005 through March 31, 2005, through a wholly-owned subsidiary, we repurchased an additional 43,574 Class 1 Units, 30,643 Class 2 Units and 102,872 Class 3 Units for an aggregate price of $276,259. We paid the same price for repurchases of Class 1, 2 and 3 Units. As of March 31, 2005, our wholly owned subsidiary owned 7,639,481 Class 1 Units, 6,401,672 Class 2 Units and 13,948,007 Class 3 Units. Pursuant to a resolution of our Board of Managers in March 2004, as our members convert their Units into different Classes of Units, we have a policy of converting Units held by our wholly-owned subsidiary into the same Class of Units, so that our wholly-owned subsidiary will proportionately own the same number of different Classes of Units as those owned by our members.

Effective December 31, 2004, our Series B Preferred Units came into existence when the Certificate of Designations of the Series B Preferred Units (“Series B COD”) was signed by our Chief Executive Officer. Our Board of Managers had approved the issuance of the Series B Preferred Units on November 19, 2004. Our Series B Preferred Units are senior in priority to our Class 1, 2 and 3 Units upon our liquidation or if we are involved in a change of control (as defined in the Series B COD). See Sections 6.2.3 and 6.2.4 of our Description of Securities (as revised March 31, 2005) for further information, which information is expressly incorporated by reference herein. Our Class 1, 2 and 3 Units are senior in priority to our Series B Preferred Units with respect to the payment of mandatory monthly distributions. See Sections 6.2.1 of our Description of Securities (as revised March 31, 2005) for further information, which information is expressly incorporated by reference herein. We issued the Series B Preferred Units in connection with our need to raise capital to finance the Class 1 Unit Put Right.

The Apartment Properties

As of December 31, 2004, our apartment properties consisted of 43 apartment complexes located in the following counties: twenty-one in Sacramento County, five in Solano County, six in Stanislaus County, seven in San Joaquin County and four in Contra Costa County. Subsequent to December 31, 2004, one property located in Contra Costa County has been sold. The majority of these properties are classified as “second tier” or “class B,” meaning that they are considered to be typically well located, older properties in average to good condition. Additional information about these properties can be found under “Item 2 — Properties.”

Revenues from our apartment properties result primarily from rents. These rents are required to be paid on a monthly basis. Our business strategy includes seeking to increase the cash flow generated by our apartment properties through rent increases upon tenant turnover and lease expiration, while maintaining high occupancy rates and prudent management of our operating expenses. Our ability to increase rents is subject to market conditions and general economic conditions. Accordingly, there can be no assurance that we will be able to implement our operating strategy successfully. We do not institute such increases based on a pre-determined range, nor are such increases based on increased services and/or renovations. We will generally make the increased cash flow, if any, available for our operating and capital expenses and cash distributions, but may offer some increased services and/or renovations as determined by market conditions. The average occupancy rate of our apartment properties was 94.6% at December 31, 2004, 94.8% at December 31, 2003, and 95.7% at December 31, 2002.

In general, the tenants in our apartment properties enter into our standard form of lease, as modified, if necessary, to comply with local ordinances or custom. The term of these leases varies with market conditions, although six-month leases are most common. Generally, the leases provide that unless the parties agree in writing to a renewal, the tenancy will convert at the end of the lease term to a month-to-month tenancy, subject to the terms and conditions of the lease, unless either party gives the other at least 30 days’ prior notice

of termination. All leases are terminable by us for nonpayment of rent, violation of property rules and regulations, or other defaults specified in the lease.

Approximately 60% of the tenants in our apartment properties leave each year, and rents are adjusted to reflect market conditions existing at the time any new rental relationship commences. As a result of the relatively short-term stay of the majority of our tenants, our apartment properties tend not to have long-term leases that lock in current market rates.

Our employees are responsible for marketing, maintenance and leasing activities at our apartment properties. These employees meet with prospective residents, show models, rent vacant units and strive to maintain contact with current tenants to monitor their level of satisfaction. From time to time, we have employed the services of, and paid customary fees to, apartment locator services and existing tenants for locating prospective tenants. In 2004, we contracted with a vendor to provide call center coverage for our apartment properties on a 24 hour 7 day a week basis to improve contact with prospective renters that seek rental information during non-office hours.

All of our apartment properties are located in developed areas that include other apartment properties serving comparable tenant populations. An increase in the number of competitive apartment properties in a particular area could have a material adverse effect on rents and our ability to maintain occupancy levels. Construction of a significant number of new apartment properties during the last three years in Sacramento and Solano Counties, combined with high unemployment, has had an adverse effect on rents and occupancy levels of our properties located in those counties. In addition, we compete with providers of other forms of multifamily residential properties and single-family housing. Buying or renting single-family housing was the reason given by 39% of residents who moved out of our apartment properties during 2004.

The Commercial Properties

As of December 31, 2004, our commercial properties consist of eight sites in Northern California, including the Concord, California building housing our executive offices. Our commercial properties are located in the following counties: six in Napa County; and one each in Contra Costa County and Solano County. Subsequent to December 31, 2004, one property located in Napa County has been sold. Additional information regarding our commercial properties can be found in “Item 2 — Properties.”

Except for a vacant lot, revenues from our commercial properties are derived primarily from commercial tenants’ rents and common area maintenance charges. The rents are payable monthly.

As with our apartment properties, we seek to increase cash flow at our commercial properties through periodic rent increases for existing tenants according to the terms of their leases, through rent increases at tenant turnover and lease expiration, by maintaining high occupancy rates and through prudent management of our operating expenses. Our ability to increase rents is subject to market conditions and general economic conditions. Accordingly, there can be no assurance that we will be able to implement our operating strategy successfully. Currently, market rates upon lease expiration have been below our lease rates at some of our commercial properties. We do not institute such increases based on a pre-determined range, nor based on increased services and/or renovations. We will generally make the increased cash flow, if any, available for our operating and capital expenses and cash distributions. The average occupancy rate of our commercial properties was 86.2% as of December 31, 2004, 75.4% as of December 31, 2003 and 88.3% as of December 31, 2002.

We use a standard lease, modified at each property to the extent necessary to comply with local law or custom. The term of a lease varies with local market conditions, although multi-year leases with annual CPI rent increases are most common. Some of our leases include an option for the tenant to extend the term of the lease for an additional period. All leases are terminable by us for nonpayment of rent, violation of property rules and regulations, or other defaults specified in the lease.

In any given year, 6% to 25% of our existing commercial leases expire. Some tenants will exercise their option to extend the term of the lease, others will sign a new lease and extend their tenancy for an additional multi-year period, and others will vacate their spaces. Rents are adjusted to reflect market conditions for spaces that

are vacated or when leases are renewed. Currently, market rates are below some of the rates of expiring leases. Rents are also adjusted to reflect any changes in rental rates associated with a lessee’s option to extend their lease.

Our employees are responsible for marketing, maintenance and leasing activities at the commercial properties. Prospective tenant leads are generated through our marketing program, which includes traditional advertising in newspapers, drive-by traffic and commercial real estate broker referrals. We strive to maintain contact with our existing commercial tenants to determine their level of satisfaction with property management and operations. We may employ the services of, and pay customary fees to, unaffiliated real estate brokers for leasing services and for locating prospective tenants.

All of our commercial properties are located in developed areas that include other commercial properties serving comparable tenant profiles. An increase in the number of competitive commercial properties in a particular area could have a material adverse effect on our ability to maintain current occupancy levels and on our ability to maintain or increase the rental rates applicable to the properties.

Insurance

Each of our properties is covered by liability and casualty insurance provided by reputable companies and with commercially reasonable deductibles and limits, with such limits being equal to the replacement value of each property. Our management exercises its discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance on our investments at a reasonable cost and on suitable terms. Insurance costs for the apartment industry increased significantly after the events of September 11, 2001. By increasing our casualty loss deductible from $10,000 to $50,000 per claim, we were able to keep the costs of these insurance premiums from increasing on an annual basis effective November 1, 2003.

Where required by our lenders, flood insurance is obtained. However, we do not maintain earthquake insurance coverage due to the high premium cost. Accordingly, a loss resulting from earthquake damage could have a material adverse effect on our financial condition and our operating results. Even if a loss is covered by our insurance, our insurance coverage may not be sufficient to pay the full current market value or replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it infeasible to use insurance proceeds to replace a property after it has been damaged or destroyed.

As a general matter, concern about indoor exposure to mold has been increasing as such exposure has been alleged to have a variety of adverse health effects. As a result, there has been an increasing number of lawsuits in our industry against owners and managers of apartment communities relating to moisture infiltration and resulting mold. Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. To help limit mold growth, we educate residents about the importance of adequate ventilation and request or require that they notify us when they see mold or excessive moisture. We have established procedures for promptly addressing and remediating mold or excessive moisture from apartment homes when we become aware of its presence regardless of whether we or the resident believe a health risk is present. However, we cannot assure that mold or excessive moisture will be detected and remediated in a timely manner. If a significant mold problem arises at one of our communities, we could be required to undertake costly remediation to contain or remove the mold from the affected community and could be exposed to other liabilities.

The presence of, or the failure to remedy properly, mold or other hazardous substances may adversely affect both occupancy at affected apartment communities and also the ability to sell or finance the affected properties. In addition to the costs associated with investigation and remediation, the presence of mold on a property could result in claims by private plaintiffs for personal injury, disease, disability or other infirmities.

The terms of our property and general liability policies exclude mold-related claims. Should an uninsured loss arise against the Company, we would be required to use our own funds to resolve the issue, including litigation

costs. Therefore, we can make no assurance that future liabilities resulting from the presence of, or exposure to, mold will not have a material adverse effect on our financial condition or results of operations. To date, we have not incurred any material costs or liabilities relating to claims of mold exposure or to abatement of mold conditions. However, we are and have been party to alleged moisture infiltration and resulting mold lawsuits at some of our apartment properties. We believe these suits are without merit; nonetheless, in certain instances we have negotiated a settlement with certain of the plaintiffs in an effort to expedite the resolution of their claims and avoid potentially protracted litigation and associated attorney’s fees.

Possible Tax Consequences for Members

Disclaimer

The tax issues associated with the ownership of Units and Preferred Units of JCM Partners are extremely complex and are unique to each member’s own individual tax situation. The following summary of the tax laws may not be applicable to all of our members. Our members should consult their tax advisors concerning their individual tax situations with respect to the federal, state, local and foreign tax consequences arising from their ownership of JCM Partners Units and Preferred Units. For the purposes of this “Possible Tax Consequences for Members,” “Units” means both Units and Preferred Units, except where expressly set forth to the contrary.

Basic Concepts of Partnership Taxation

          Definitions

Definitions for many of the terms used throughout this section can be found at the end of the section.

          Member’s Income

JCM is treated as a partnership for tax purposes. Therefore, the Company is not subject to federal income tax. Instead, it files an annual information return with the Internal Revenue Service. Each member is required to report on the member’s personal tax return the member’s share of each item of Company income, gain, loss, deduction and credit, if any. Member’s taxable amounts may be different from the income, gain, loss, or deduction reported on the Company’s financial statements. During the first quarter of each year, the Company provides each member with a Form K-1 that reports that member’s pro rata share of the Company’s income, gains and/or losses for the previous calendar year. Each member is subject to tax on the member’s share of JCM income, even if no cash is distributed. Members who dispose of some or all of their Units during the year are allocated a pro rata portion of the income, gain, loss, deduction and credit that they would have otherwise received had they held such Units for the entire year. The proration is based on the portion of the Company’s taxable year that elapses prior to the disposition of the member’s Units.

The amount of any loss or deduction that a member may use in computing the member’s tax liability is limited to the member’s adjusted basis in the member’s Units. In other words, a deduction cannot be taken if it would cause the member’s adjusted basis to become negative. Additionally, losses are limited to the amount “at risk” and the amount of income and loss from other passive activities.

          Passive Loss Rules

The tax law restricts the ability of many types of taxpayers (including individuals, most trusts, estates, personal service corporations and closely held corporations) to deduct losses derived from so-called “passive activities.” Passive activities generally include any activity involving a business in which the taxpayer does not actively participate — including membership in limited liability companies such as JCM. For almost all JCM members, their membership interest will be treated as a passive activity. Accordingly, JCM’s income and/or loss will likely constitute passive income and/or loss to its members.

Generally, losses from passive activities are deductible only to the extent the taxpayer has income or gains from other passive activities. Therefore, passive losses are not allowed to offset other income — such as salary, compensation for personal service, active business income, dividends, interest, royalties, annuities or gains

from the sale of property held for investment. Passive losses that are not allowed in any tax year are suspended and carried forward indefinitely. Suspended losses may be used in future years to offset future passive income.

Upon the sale or transfer of a taxpayer’s entire interest in a passive activity in a taxable transaction to an unrelated person, suspended losses with respect to that activity will be allowed as a deduction against:

      (iii) Any other non-passive income or gain.

IRS regulations provide that similar investments, which are under common control and owned by a pass-through entity such as JCM, are generally treated as a single investment. Accordingly, suspended passive losses derived from an investment in JCM would not be available to members to offset non-passive income from other sources until the sale of all Company properties has occurred or until a member disposed of the member’s entire interest in JCM.

Member’s Basis

          Basic Concepts

The Company maintains a capital account for each member. This capital account is the beginning point in computing a member’s basis in the member’s JCM Units. A member’s adjusted basis in JCM is equal to the amount originally invested in IRM or JCM, plus the cumulative effect of all capital account adjustments reported annually to the investor by both IRM and JCM on Form K-1. More specifically, a member’s adjusted basis is the amount originally invested increased by:

and decreased by:

Distributions in excess of a member’s adjusted basis generally will be treated as a gain from the sale of a member’s interest in the Company.

A Member may not deduct from the member’s income, losses in an amount exceeding the member’s adjusted basis. If, in any one tax year, a member’s share of Company losses exceeds the member’s adjusted basis at the end of that year, the excess losses must be carried forward and applied against gains in future years. In general, these suspended losses cease being deductible whenever the member’s adjusted basis drops to zero.

          Non-recourse Debt

Non-recourse debt is any Company liability in which a member has a pro rata interest, but no personal responsibility (e.g. mortgages on JCM properties). Any increase in non-recourse liabilities allocable to a member is treated as a cash contribution by the member and increases the member’s basis. Any decrease in non-recourse liabilities allocable to a member is treated as a cash distribution to the member and decreases the member’s basis (but not below zero). These rules apply even though a member does not contribute or receive actual cash. Distributions in excess of a member’s adjusted basis generally will be treated as a gain from the sale of a member’s interest in the Company.

Sale or Disposition of JCM Property and Member’s Interest

          Tax Treatment of Gains and Losses

The gain or loss on the sale of a member’s Units is the difference between the sale amount and the member’s adjusted basis. This basis includes a pro rata portion of the income, gain, loss, deduction and credit that the member would have otherwise received had it held the transferred Units for the entire year. The proration is based on the portion of the Company’s taxable year that elapses prior to the sale of the member’s Units.

Generally, gain on the sale of Units that have been held for more than 12 months will be taxed as a long-term capital gain. For non-corporate taxpayers, long-term capital gains are taxed at special federal tax rates. For sales prior to May 6, 2003 and after December 31, 2008, long-term capital gains are subject to a maximum federal tax rate of 20% (10% for individuals in the 10% or 15% tax bracket). A lower federal tax rate of 8% (for individuals in the 10% or 15% tax bracket) may apply when the Units were held for more than five years.

For sales after May 5, 2003 and before January 1, 2009, long-term capital gains are subject to a maximum federal tax rate of 15% (5% for individuals in the 10% or 15% tax brackets). For years beginning after December 31, 2007, the long-term capital gains rate is reduced to 0% for the 5% income tax bracket.

A capital loss may generally be used to offset other capital gain in the year of the loss. If an individual taxpayer has a net capital loss in a given tax year, the amount of ordinary income against which he or she may deduct the capital loss is the lower of $3,000 ($1,500 for a married taxpayer filing a separate return) or the net amount of the loss. Capital losses in excess of these limitations may be carried forward to future tax years.

There is a separate federal capital gains tax rate applied to “unrecaptured gain” as described in section 1250 of the Internal Revenue Code. This class of gain includes real property that is subject to an allowance for depreciation. Unrecaptured section 1250 gain is currently subject to tax at a 25% federal rate, rather than the current federal long-term capital gain rate of 15% (5% for individuals in the 10% or 15% tax brackets).

The unrecaptured section 1250 gain tax is computed on the portion of the gain attributable to previously taken depreciation. For example, suppose a person bought a rental unit for $100,000, claimed depreciation deductions over several years of $40,000, thus reducing adjusted basis to $60,000, and then sold it for $130,000. There would be a total gain of $70,000 with the following taxes applying:

JCM has approximately $130,370,000 of aggregate unrecaptured section 1250 gain (the “Existing Unrecaptured Section 1250 Gain”). This amount reflects dollar-for-dollar reductions for the unrecaptured section 1250 gain that has been recognized by members in connection with sales of members’ Units to third parties (i.e. persons other than JCM or JCM’s wholly-owned subsidiary). Based on the current tax rules, the 25% tax rate on unrecaptured gain does not apply to the redemption of a member’s Units (i.e., the purchase of the Units by either JCM or JCM’s wholly-owned limited liability company subsidiary). Instead, upon the redemption of a member’s Units, the current federal long-term capital gain rate of 15% (5% for individuals in the 10% or 15% tax brackets) applies. JCM may be able to reduce the Existing Unrecaptured Section 1250 Gain to some extent due to the redemptions of members’ Units. However, the rules relating to such potential reduction are complex and the Company has not obtained a tax opinion regarding the amount of Existing Unrecaptured Section 1250 Gain that JCM may reduce as a result of the redemptions of members’ Units. Accordingly, there is no guarantee that the IRS will agree with our interpretation.

Members are subject to paying this special 25% federal tax rate applied to “unrecaptured gain” upon (i) the sale or exchange of a member’s Units to a third party or (ii) JCM’s sale of properties with “unrecaptured gain.” Therefore, upon the sale of a property by JCM, a portion of each member’s allocable share of gain may be subject to the 25% federal tax rate even though members may not actually receive any distribution upon the sale of the property. As discussed above, members whose Units are redeemed are not subject to this 25% tax

rate as a result of the redemption. However, because JCM prorates the income, gain, loss, deduction and credit that the member would have otherwise received had they remained a member for the entire year, a member is subject to a possible allocation of unrecaptured section 1250 gain for property sales that occur during a year (even after the redemption of the member’s Units). Depending on the member’s individual circumstances and the application of complex netting rules, a member may not be allowed to offset such allocation of unrecaptured Section 1250 gain against any potential capital loss associated with the redemption of the member’s Units.

Consequences of Exercise of the “Put” Options in 2005 and 2010 and Liquidation in 2007 or 2012

Our Certificate of Designations of Class 1 Units (“Class 1 COD”) gives our Class 1 Unit holders the right to require the Company to redeem some or all of their Class 1 Units on June 30, 2007. The exercise of this right by a sufficient number of Class 1 Unit holders may result in the liquidation of the entire Company under the terms of our Class 1 COD. However, since as of March 31, 2005, we have 16,454,319 Class 1 Units held by members other than our subsidiary, our management views the liquidation of the Company under the terms of the Class 1 COD as unlikely. Our Certificate of Designations of Class 2 Units (“Class 2 COD”) gives our Class 2 Unit holders the right to require the Company to redeem some or all of their Class 2 Units on June 30, 2012. The exercise of this right by a sufficient number of Class 2 Unit holders may also result in the liquidation of the entire Company under the terms of our Class 2 COD. Our management believes that it is too early to make a determination as to whether we would be required to liquidate the Company under the terms of the Class 2 COD. The redemption of Units or the liquidation of the Company will most likely result in gain to the members whose Units are redeemed or liquidated. This gain will be computed in a manner similar to that described above.

          Pre-Contribution Gains

As a result of the IRM bankruptcy proceedings, on June 30, 2000, persons who were equity investors in IRM (Equity Investors) and persons who were debt investors in IRM (Debt Investors) both became equity owners of JCM. The fact that their JCM Units originated from different types of IRM investments (i.e. equity and/or debt) will affect the determination of their future tax consequences.

Capital gains and unrecaptured section 1250 gains associated with the sale of JCM properties will be allocated back to the former Equity Investors to the extent those gains or losses were unrealized at the time of JCM’s formation. These pre-contribution gains are substantial. Therefore, if JCM sold a large number of properties or liquidated entirely, there would be substantial gains allocated back to the original IRM Equity Investors. Any gains since JCM’s formation that are attributed to the appreciation of real property will be divided among all JCM members in accordance with their ownership interests. In connection with the exercise of the “puts” held by holders of Class 1 and Class 2 Units, JCM might be required to liquidate a large number of properties or to liquidate entirely. This action would cause the recognition of pre-contribution gains.

The pre-contribution rules also require the reduction in the difference between the tax basis of Debt Investors and that of Equity Investors through specific allocations of deductions. Section 704(c) of the Internal Revenue Code may require the allocation of depreciation associated with property contributed to a partnership, away from the contributing partner where the member’s capital account reflects an unrealized gain inherent in the contributed property. It is the responsibility of the Tax Matters Partner to select the method for making the allocations under Section 704(c) of the Tax Code. In general, the Tax Matters Partner has elected not to allocate depreciation to members with negative capital account balances.

          Gifts of Units

Generally, no gain or loss is recognized for income tax purposes as a result of a gift of property. However, if a gift of Units is made at a time when a member’s allocable share of non-recourse indebtedness exceeds the member’s adjusted basis in such units, the gifting member will recognize a gain upon the transfer to the extent of such excess. Any such gain will be computed in a manner similar to the tax treatment of gains on the sale of

Units as described above. Gifts of Units may also be subject to a gift tax imposed pursuant to the rules generally applicable to all gifted property.

A gift of Units will not cause any suspended passive losses to become deductible. The recipient’s basis in the gifted Units is the same as the donor’s basis at the time of the gifting, plus any suspended passive losses allocable to the gifted Units. It should be remembered, however, that the recipient’s basis, for purposes of determining loss on a later disposition, cannot exceed the fair market value of the Units on the date of the gift. Consequently, if the sum of the donor’s basis in the Units plus the suspended passive losses associated with those units exceeds the fair market value of the Units, the deductibility of a portion of the suspended losses could be permanently lost.

          Death of a Member

In general, the basis for inherited property is increased or decreased (“stepped up” or “stepped down”) from the decedent’s basis to the asset’s fair market value at the date of the decedent’s death. This adjustment to basis also applies to inherited JCM units. JCM has elected to reflect this adjustment in the tax basis of the property held by the Company. Any gain, loss or deduction associated with this step up or step down is specifically allocated to the member inheriting a deceased member’s JCM interest. To the extent the adjustment is allocated to depreciable property, the inheriting member is specifically allocated any related depreciation. Under current law, the unlimited “step up” in basis on death is scheduled to expire at the end of 2009 and to be replaced with a more limited “step up,” all in conjunction with the repeal of the federal estate tax effective in 2010. However, these rules are currently effective only for one year, in 2010, unless Congress passes additional legislation. Members are urged to discuss the income and estate tax rules with their own tax advisers in light of their varying situations.

JCM’s Treatment of Depreciation and Prepaid Expenses

          Depreciation

Current tax law provides for a Modified Accelerated Cost Recovery System (“MACRS”) of depreciation. Under this system, the cost of eligible residential real property, whether new or used, generally must be depreciated over a 27.5 year period using the straight-line method.

Furthermore, under MACRS, eligible personal property is divided into six classes (i.e. 3-year, 5-year, 7-year, 10-year, 15-year and 20-year). Any property, whether new or used, generally must be depreciated over specified periods using a prescribed accelerated method of depreciation or, if the taxpayer so elects, using the straight-line method over various periods. Property placed in service prior to 1987 was depreciated under an accelerated cost recovery system (“ACRS”), which provided for faster tax depreciation than under MACRS.

Generally, the real property owned by JCM is subject to a 27.5 year recovery period and is depreciated using the straight-line method. JCM’s personal property is generally depreciated over a seven-year period using the double declining balance method, switching to straight-line when appropriate to maximize the depreciation deductions.

          Prepaid Expenses

Some expenses may not be deductible in the year they were paid. To the extent this occurs, the taxable income of the partnership may exceed its cash receipts for the year in which the expense is paid. As discussed above, the costs of acquiring properties must generally be recovered through depreciation deductions over a number of years. Prepaid interest and loan fees, and prepaid management fees are other examples of expenses that may not be deducted in the year they were paid.

Tax Information and Returns

          Tax Reporting and Filing Issues

Members are required to treat partnership items on their tax returns consistently with the treatment on JCM’s return, unless a member files a statement with the IRS identifying the inconsistency. Failure to satisfy this requirement could result in an adjustment to conform the treatment of the items by the member to its treatment on JCM’s return. In the event such adjustments are imposed, the member may also be subject to interest and penalties.

JCM’s income tax returns may be examined by the Internal Revenue Service or the California Franchise Tax Board. Such examinations may result in the examination of the returns of its members. In an examination audit, various deductions claimed by members on their returns could be disallowed in whole or in part. Such an action would result in an increase in the taxable income or a decrease in the taxable loss of JCM, with no associated increase in distributions with which to pay any resulting increase in the members’ tax liabilities.

Examinations of the Company by the Internal Revenue Service or the California Franchise Tax Board would be conducted at the JCM level in a single proceeding, rather than in separate proceedings with each of JCM’s members. Administrative adjustments to items challenged in an examination can be initiated by JCM’s Tax Matters Partner or by a member. Suits challenging the Service’s determinations may be brought by the Tax Matters Partner or by JCM’s Board of Managers. Only one such action may be litigated. All JCM members generally will be bound by the outcome of final partnership adjustments made by the Internal Revenue Service, as well as the outcome of any judicial review of such adjustments.

          State Tax Returns

JCM has California source income. Therefore, members who are non-residents of California will be subject to tax in California with respect to their share of such income. California law requires JCM to withhold taxes from JCM’s non-resident members who:

JCM must remit the taxes to the California Franchise Tax Board. Withholding waivers can be obtained by members who file required California income tax returns. It is the responsibility of non-resident members to consult with their tax advisors regarding their California income tax return filing requirements. Many non-resident members may be required to file California income tax returns because of their JCM California source income.

In the past, JCM has declared a voluntary distribution to non-resident members in an amount sufficient to pay this tax. JCM then has paid this amount to the California Franchise Tax Board and has sent JCM’s other members, a cash distribution in an equal and compensating amount per Unit. JCM will not make a similar voluntary distribution in 2005. Currently, JCM does not intend to declare these additional distributions in the future. However, our Board of Managers has the authority to resume these distributions in the future.

As it has in past years, JCM will pay the California Franchise Tax Board the required tax withholding amount on behalf of non-resident Members. JCM plans to recover this tax from those Members over the remainder of the year. So for affected non-resident Members, JCM will begin withholding one-ninth of the total withholding amount paid on each Members’ behalf, starting with their April 2005 monthly distribution, so that each Member will have repaid the Company by the end of the year. If JCM repurchases or redeems Units or Preferred Units from one of these Members prior to the end of the year, the amount paid to that Member will be reduced by any remaining amount due to the Company. If such a Member sells, transfers or gifts Units or Preferred Units to another investor, JCM will require payment of the remaining withholding amount due the Company as part of the transfer paperwork.

JCM will not pay the amounts above on behalf of Managers of JCM who are non-resident Members, due to the limitations created by the Sarbanes-Oxley Act of 2002, should these amounts be treated as “loans” to our Managers and Executive Officers. Instead, Managers who are non-resident Members shall be required to pay JCM these amounts simultaneously or with our payment of these amounts to the California Franchise Tax Board.

          Exempt Organizations

Qualified plans (e.g. pension plans, profit sharing plans and IRA’s) and other tax-exempt entities should consult their tax advisors with regard to the tax issues unique to such entities, including, but not limited to, issues relating to the classification of partnership interests as plan assets, unrelated business taxable income (UBTI) and required distributions.

Any person who is a fiduciary of an IRA, Keogh Plan, Qualified Plan or other tax-exempt entity with an investment in JCM should be aware that most JCM properties are debt-financed properties. This indebtedness is considered acquisition indebtedness, creating UBTI. A trustee of a charitable remainder trust should be aware that if any portion of the income derived from its ownership of Units is deemed to be UBTI, the trust will lose its exemption from income taxation.

          Subsidiary Limited Liability Companies

JCM Partners, LLC is the single member in approximately 56 separate entities organized as California limited liability companies (LLCs), of which 51 are providing rental revenues as of December 31, 2004. These LLCs were established at the inception of JCM to hold title to the individual properties. For federal tax purposes these LLCs are disregarded and treated as if they did not exist. In general, California also disregards these entities, but imposes a minimum tax of $800 and a fee on the gross income of a limited liability company. This fee is a function of the LLC’s gross income and currently ranges from $900 where gross income is at least $250,000 to $11,790 where gross income is $5,000,000 or more. For purposes of the California tax returns for years 2000, 2001 and 2002, JCM took the position that these LLCs were mere agents of JCM and, therefore, had no gross income. Based on this, these entities paid the minimum tax but did not pay the LLC fee. The California taxing authorities may not concur with this position. For the year 2003, JCM paid $182,000 based on the gross income for JCM and all of the LLCs. For the year 2004, JCM will pay $184,000 based on gross income for JCM and all of the LLCs. JCM intends to pay the California taxing authorities based on gross income for JCM and the LLCs in future years. JCM may consider restructuring options regarding the LLCs in order to reduce the amount of these fees in the future, although the Company is not currently engaged in any restructuring planning.

Certain Considerations Regarding Taxation Disclosure

          Rulings from the Internal Revenue Service

In August 2003 JCM received a private letter ruling from the Internal Revenue Service confirming that the conversion from Class 1 Units to Class 2 or Class 3 Units is a non-taxable event. As such, converting members do not recognize gain or loss on the conversion and JCM disregards the conversion for tax purposes. Other than as discussed above, JCM has not obtained any rulings from the Internal Revenue Service regarding the tax issues discussed above. The Company relies on the opinions of its tax advisors. Their opinions are based upon representations and assumptions and are conditioned upon the existence of specified facts. The opinions are not binding on the IRS or the courts.

          Publicly-Traded Partnership

If JCM becomes classified as a “publicly-traded partnership,” we would be taxed as a corporation and our net income could be treated as portfolio income rather than passive income. The application of “publicly-traded partnership” rules to us will be based upon future facts. The IRS may determine that we should be treated as a “publicly-traded partnership” if our Units are readily tradable on a secondary market.

If JCM is classified as a publicly-traded partnership, but substantially all of its income is passive, it will avoid being treated as a corporation. However, in this situation, members would only be allowed to deduct JCM losses against JCM income. Any unused losses would be suspended and carried forward until they are either used against future JCM income or the member disposes of their entire interest in JCM.

Our issuance of the Series B Preferred Units increased our risk of the IRS determining that we should be treated as a “publicly-traded partnership,” since it removed a safe-harbor that we had previously relied upon. However, the application of publicly-traded partnership rules to JCM is based on an analysis of all surrounding facts and circumstances. Based on the advice of our tax advisors, we do not believe that we should be classified as a publicly-traded partnership. However, we have not obtained a legal opinion on this issue and there is no guarantee that the IRS will agree with us.

          Challenges to Allocations

Taxing authorities may challenge our allocations of income, gain, loss and deductions. JCM’s Operating Agreement provides for the allocation of income, gain, loss and deductions among the members. The rules regarding partnership allocations are complex. It is possible that the taxing authorities could successfully challenge the allocations in the Operating Agreement and reallocate items of income, gain, loss or deductions in a manner which reduces benefits or increases income allocable to JCM’s members.

The taxing authorities may disallow our deduction of some or all fees and expenses. The IRS could seek to reallocate our basis in properties among land, improvements and personal property. Such reallocation could result in reduced tax losses or increased income without a corresponding increase in net cash flow to JCM’s members.

          Income in Excess of Distributions

Members may be taxed on income which exceeds the cash distributions received by them. In any year in which we report income or gain in excess of expenses, members will be required to report their share of such net income on their personal tax returns even though they may have received total cash distributions which are less than the amount of net income they must report.

          Alternative Minimum Tax

Members may be subject to alternative minimum tax which could reduce the tax benefits, or increase the tax costs, of owning Units. The effect of the alternative minimum tax upon members depends on their particular overall tax and financial situation. Members should consult with their tax advisor regarding the possible application of this tax.

          Examination of Member Returns

An IRS examination of a member’s return could result in adjustments to items on the return that may or may not be related to JCM. There are special procedures pertaining to examinations of partnership tax returns which may reduce the control members would otherwise have over proceedings concerning any proposed adjustment of their tax items by the IRS. If the IRS determines that a member has underpaid taxes, that member would be required to pay the amount of the underpayment plus interest. Members may also be liable for penalties from the date the tax originally was due.

          Future Events

Future events may result in federal income tax treatment of JCM and its members that is materially and adversely different from the treatment described here. This discussion of the federal income tax aspects of an ownership interest in JCM is based on current law, including the Internal Revenue Code, the treasury regulations, administrative interpretations and court decisions. Changes could affect taxable years arising before and after such events. We cannot assure members that future legislation and administrative interpretations will not be applied retroactively.

          Positions Taken During the IRM Bankruptcy Proceedings

Due to the history of the IRM entities that preceded the formation of JCM and the lack of specific tax law addressing the related issues, risks remain associated with the tax positions taken during the formation of JCM. Although these positions were believed to be reasonable, neither the taxing authorities nor the courts are bound by them. Therefore, there is a continuing risk that the taxing authorities and courts will not concur with these positions. All these risks were disclosed to the original investors in connection with the Plan of Reorganization that was approved by investors during IRM’s bankruptcy proceedings. JCM believes that any risks inherent in the positions taken during those proceedings apply only to those original investors and not to individuals who have subsequently become JCM members through a cash purchase or investment.

          Series B Preferred Units

The following discussion applies solely to our Series B Preferred Units:

Section 7.4.2.4(b) of the Company’s Operating Agreement provides for a special allocation of income whenever JCM Partners, LLC repurchases or redeems Preferred Units. As a result of this special allocation, Preferred Unit holders may recognize ordinary income on what otherwise might have been characterized as capital gains taxed federally at either a 15% or 25% rate. While JCM Properties, LLC, an affiliate of JCM Partners, LLC, currently repurchases units, there is no guarantee that JCM Partners, LLC may not wish to repurchase units in the future.

Therefore, the Company’s Board of Managers has approved submitting to a vote of the Company’s Members at the next Annual Meeting of Members, a proposal to allow Certificates of Designations to disregard Section 7.4.2.4(b) of the Operating Agreement, which currently requires the special allocation described above. If the Members approve such an amendment, Section 12 of the Series B Certificates of Designations provides that Section 7.4.2.4(b) of the Operating Agreement shall not apply to the Series B Units.

Unless and until this amendment is approved by our Members, holders of Series B Preferred Units will be subject to this special income allocation if they sell their Series B Preferred Units to JCM Partners, LLC instead of to JCM Properties, LLC.

Definitions

          Adjusted Basis

The amount you use to determine your profit or loss from a sale or exchange of property. To determine your adjusted basis for an asset owned directly, start with the original cost. Add your cost of improvements to the original cost and subtract deductions you have taken, such as depreciation.

          Capital Gain

Capital Gain is profit on the sale of a capital asset. Capital gains receive favorable tax treatment. Depending on your tax bracket and on how long you held a capital asset, you may pay about one to two-thirds less tax on a capital gain than you would have paid on the same amount of ordinary income.

          Depreciation

A deduction you are allowed for the wearing away over time of assets such as office equipment, vehicles, buildings and furniture. For assets that have an expected useful life of more than one year, you spread the cost of the asset over its estimated useful life rather than deducting the entire cost in the year you place the asset in service. For tax purposes, tax law specifies the depreciation term for specific types of assets.

          Disposition

The sale or other disposal of property that causes a gain or a loss.

          Gain or Loss

The difference between your adjusted basis in an asset and the value you receive when you sell or otherwise dispose of the asset.

          Non-recourse Debt

A type of debt for which a borrower is not personally liable. If you default on a non-recourse loan, the lender must recover the amount you owe by foreclosing on the property by which the loan is secured. At-risk rules limit the amount of loss you can take from activities with non-recourse financing.

          Partnership

An unincorporated business or investment organization having two or more owners. A partnership is not subject to income tax, but passes income, losses and other tax items through to its partners.

          Passive Activity

An activity in which you do not materially participate. Real estate rentals and limited partnerships are examples of passive activities. Passive loss rules apply to losses from passive activities.

          Portfolio Income

Income such as interest, dividends, royalties and gains or losses from investments.

          Publicly-Traded Partnership

A limited partnership, or LLC (normally taxed as a partnership) that has limited partnership or membership interests traded in an organized securities market or a substantial equivalent. Publicly-traded partnerships are taxed as corporations, except under certain circumstances.

          Section 1250

The section of the Internal Revenue Code that deals with depreciable real estate.

          Tax Matters Partner

The partner responsible for representing the partnership in IRS audit proceedings.

Regulatory Matters

Our commercial properties and the rental offices of our residential properties are required to comply with Title III of the Americans with Disabilities Act (“ADA”) to the extent that such properties are public accommodations as defined by the ADA. The ADA requires the removal of structural barriers to the extent that they are readily achievable in older buildings, and building upgrades to current construction standards whenever facilities are modified. The ADA does not, however, consider residential properties, such as our apartment properties, to be public accommodations. Residential common and living areas of apartment complexes are governed by the Fair Housing Act, which also requires certain accommodation for handicapped individuals. To comply with ADA, we have adopted an ADA Compliance Program, which includes an evaluation all properties and a multi-year plan to make readily achievable upgrades to accommodate the disabled. Failing to comply with the ADA could result in imposition of fines or an award of damages to private litigants. If we are required to make material changes to our properties to comply with the ADA our operating results could be materially adversely affected.

Environmental Matters

Under various federal, state and local environmental laws, ordinances and regulations, a current or former owner of real estate may be required to investigate, remove and clean up hazardous or toxic substances or petroleum product releases at such property or may be held liable to governmental entities or to third parties for property or natural resource damage and for investigation, removal, clean-up and other costs incurred by such parties in connection with the contamination. Such laws often impose clean-up responsibility and liability without regard to whether the owner knew of or caused the presence of the contamination. The liability under such laws has been interpreted to be joint and several, unless the harm is capable of apportionment and there is a reasonable basis for allocation of responsibility. Recently, indoor air quality issues, including mold, have been highlighted in the media and the industry is seeing mold claims from apartment residents rising. California state agencies are attempting to assess this issue.

Our leases generally provide that the tenant is responsible for compliance with applicable laws and regulations. However, this contractual arrangement does not eliminate our statutory liability or preclude claims against us by governmental authorities or persons who are not parties to such arrangement. The cost of an investigation and clean-up of site contamination can be substantial, and the fact that the property is or has been contaminated, even if remediated, may adversely affect the value of the property and the owner’s ability to sell or lease the property or to borrow using the property as collateral. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs that it incurs in connection with the contamination. Some state laws provide that such lien has priority over all other encumbrances on the property or that a lien can be imposed on any other property owned by the liable party. Finally, the owner of a site may be subject to common law claims by governmental agencies or third parties based on damages and costs resulting from the environmental contamination emanating from the site.

Other federal, state and local laws, regulations and ordinances govern the removal or encapsulation of asbestos-containing material when such material is either in poor condition or in the event of building remodeling, renovation or demolition. Still other federal, state and local laws, regulations and ordinances may require the removal or upgrade of underground storage tanks that are out of service or out of compliance. In addition, federal, state and local laws, regulations and ordinances may impose prohibitions, limitations and operational standards on, or require permits, licenses, approvals, or submission of reports or notifications in connection with, the discharge of wastewater and other water pollutants, the emission of air pollutants, the operation of air or water pollution equipment, the generation, storage, transportation, disposal and management of materials classified as hazardous or nonhazardous substances or waste, the use of electrical equipment containing polychlorinated biphenyls, the storage or release of toxic or hazardous chemicals, substances, or waste, the ownership or operation of underground storage tanks and workplace health and safety. Noncompliance with environmental or health and safety requirements may also result in the need to cease or alter operations at a property which could affect the financial health of a tenant and its ability to make lease payments. Furthermore, if there is a violation of such a requirement in connection with the tenant’s operations, it is possible that we, as the owner of the property, could be held accountable by governmental authorities, or as the result of a third party action, for such violation and could be required to correct the violation.

Such laws and regulations have not historically had a material effect on the operation of our properties. We are not aware of any environmental condition on any of our properties which would be likely to have a material adverse effect on our financial condition and results of operations. There may be, however, environmental problems that may have developed since our properties were acquired which remain latent or of which we are otherwise unaware.

Competition

The real estate industry in Northern California is generally fragmented and characterized by significant competition. Numerous developers, owners of apartment, industrial, office and retail properties and managers compete with us in seeking properties for acquisition, development or management and in attracting and retaining tenants. No one competitor owns a majority of the apartment units in any county in which our properties are located. Competition for tenants is principally on the basis of location, physical condition,

amenities and rental rates. There are competitors in each area in which we operate that have greater capital resources than we do. In addition, we compete for residential tenants with the housing market. When home mortgage rates are low, as they have been recently, we lose some of our most qualified tenants to home ownership. There can be no assurance that the existence of such competition will not have a material adverse effect on our business, operations and cash flow.

The IRM Bankruptcy Proceedings

As discussed above under “Background,” JCM Partners is the reorganized entity which emerged from the IRM entities bankruptcy proceedings. Pursuant to the plan of reorganization, the assets of the IRM entities were vested in JCM Partners on June 30, 2000. The real estate assets of JCM Partners are held through 51 wholly-owned subsidiaries as of December 31, 2004, all of which are single-asset limited liability companies. The creditors of the IRM entities were divided into classes, as set forth in the plan of reorganization, with Classes 21 through 25 (representing certain investors in the equity and loan partnerships) receiving preferred or common membership interests in JCM Partners in satisfaction of their claims against the IRM entities. The plan of reorganization stated that 100 units (either common or preferred, as applicable) would be issued to these creditors for every $10,000 of their allowed claims (i.e., one unit for every $100 of allowed claim). Creditors in other classes were treated as specified in the plan of reorganization, with many receiving immediate or deferred cash payment of all or part of their claims. None of the IRM entities received any payment or consideration for any claim against, or interest in, another IRM entity.

Under the terms of the plan of reorganization, each preferred membership unit had an initial redemption value equal to $40 (therefore representing a return of 40% of the holder’s claim), plus or minus that unit’s share of the profits or losses of JCM Partners. In September 2000, the board of managers of JCM Partners approved a split of units and an adjustment of each unit’s redemption value. Preferred unit holders would receive one unit, with a redemption value of $1.00, for every $2.50 of their allowed claim. For example, a preferred unit holder with an allowed claim of $100,000 would receive 40,000 preferred units, with a total redemption value of $40,000. This split simplified the correlation between the number of preferred units and the dollar amount of a complete redemption of the preferred units, while still achieving the result that each preferred unit holder would receive a 40% return of its claim amount upon redemption. As a result of the split, common unit holders received one unit for approximately every $1.53 of their allowed claim. The plan of reorganization and JCM Partners’ operating agreement provided for penalties in the event that JCM Partners did not redeem all of the preferred units by June 30, 2001. JCM Partners made a series of partial redemptions of preferred units, followed by a final and complete redemption of the preferred units on June 15, 2001. See “Item 7 — Management’s Discussion and Analysis of Financial Consideration and Results of Operations — Liquidity and Capital Resources” regarding the redemption obligations of JCM Partners for the Class 1 and Class 2 Units.

Employees

As of December 31, 2004, we had 205 employees. We consider our relationships with our employees to be good.

Executive Officers of the Registrant

The executive officers of JCM Partners are set forth below:

Gayle M. Ing has been a manager and our President, Chief Executive Officer, Secretary and Tax Matters Partner since April 11, 2001. From April 11, 2001 until October 2, 2002, Ms. Ing was also our Chief Financial Officer. From March 15, 2001 until April 11, 2001, Ms. Ing served as a consultant to JCM Partners through Computer Management Corporation. Prior to that, from December 1996 until March 2001, Ms. Ing was a management consultant, also through Computer Management Corporation, and was a volunteer with a child services facility. Ms. Ing served as the Vice President and Business Manager for Electronic Banking at Bank of America from January 1994 to November 1996.

Michael W. Vanni has been a manager of JCM Partners and Chairman of our Board since June 2000. Since 1978, Mr. Vanni has been the President of Computer Management Corporation, a data processing consulting company.

Marvin J. Helder has been a manager of JCM Partners and Vice Chairman of our Board since June 2000. Mr. Helder has been the President of Helder Construction, a commercial and residential construction and property management company, for the past nine years.

Brian S. Rein has been our Chief Operating Officer and Director of Property Management since June 2000. Mr. Rein was the Chief Operating Officer of JCM Partners’ predecessor, IRM Corporation, from October 1998 through June 2000. For the ten years prior to his employment with IRM and JCM Partners, Mr. Rein has had similar operations and management responsibilities serving as Vice President of John Connolly IV & Company where he directed the management of multifamily and commercial properties for institutional clients.

Cornelius Stam has been a Director of Property Management since June 2000, and our Chief Financial Officer since October 2002. Mr. Stam was the Executive Director of Property Management of IRM Corporation from August 1998 through June 2000. From 1983 to August 1998, Mr. Stam was the Senior Vice President of Property Management for IRM Corporation.

Mr. Vanni and Ms. Ing are husband and wife. There are no other family relationships among executive officers, or managers, or persons chosen by us to be nominated as a manager or appointed as an executive officer of JCM Partners or any of its subsidiaries.

Through our wholly-owned subsidiaries, we own 51 properties.

As of December 31, 2004, our real estate portfolio consisted of:

The ordinary course of our business operations includes ongoing renovation projects to our properties, including but not limited to exterior painting, roofing, siding, fencing, balcony and deck replacement, landscape upgrades, asphalt repairs and resurfacing, swimming pool resurfacing, new signage and interior unit remodeling. Costs are incorporated in operating budgets and covered by cash flow from operations or may be financed as required lender repairs during refinancing of certain properties.

The table below sets forth general information relating to the properties owned by our subsidiaries at December 31, 2004. Net book value is the gross carrying value (reorganization value plus cost of land, buildings and improvements subsequent to reorganization) of real estate investments and real estate investments held for sale less accumulated depreciation. All of the properties are suitable for the purpose for which they are designed and are being used. None of our properties accounted for 10% or more of our assets or accounted for 10% or more of our gross revenues during the year ended December 31, 2004.

Summary of Real Estate Holdings

None of our residential tenants occupy 10% or more of any individual property’s rentable square footage. Fifteen of our commercial tenants occupy 10% or more of an individual property’s rentable square footage. The principal nature of the businesses of our commercial tenants include sausage manufacturing, counseling, construction, publishing, plumbing supplier, dry cleaning, insurance and various facets of the wine industry including wine production and cork and label suppliers. Additional principal businesses carried on at our eight commercial properties include accounting, financial, food and retail service, home building, technology, property management services and engineering. For those tenants that occupy 10% or more of an individual property, such existing leases expire beginning March 31, 2006 and at varying times through April 8, 2009. Each lease provides for annual rental payments of between $38,000 and $377,000, with the average annual payment equaling $135,800. Six of such leases contain no renewal options. One lease has a two-year option which includes a CPI increase of 3 to 6%. One lease includes two three-year options; the first in which the rent will increase by 4%, the second in which rent will be at market rate. Three leases include a five-year renewal option. Of those, one tenant’s option is a choice of a 4% increase or market rate, one tenant’s option has a CPI increase of 3 to 5% and the third tenant’s option is at market rates. Two leases include two five-year renewal options at market rate for both tenants.

The following table sets forth occupancy information for the last five years by sub-markets for the properties owned by our subsidiaries at December 31 of each year.

Historical Occupancy^(A)

The following table sets forth the average rent per square foot by sub-market for the last five years for the properties owned by our subsidiaries at December 31 of each year.

Average Monthly Rent per Square Foot^(A)

The following sets forth a summary of tax information for the properties owned by our subsidiaries at December 31, 2004:

Summary Tax Information for the Properties

We are subject in the normal course of business to various legal proceedings in which claims for monetary or other damages may be asserted against us. Management does not believe any such legal proceedings are material.

We have obtained a court judgment against a tenant who vacated one of our commercial properties prior to the scheduled termination date in the lease. The judgment was for unpaid rent and additional charges for a total of approximately $1,100,000 which is not included as accrued revenues in the consolidated statement of operations. The tenant has posted a bond and filed an appeal. We are awaiting a hearing date. The Company believes the tenant is solvent. The costs of the litigation, $195,000 in 2003 and $219,000 in 2004, are included in operating and maintenance expenses in the consolidated statements of operations

None.

PART II

Market Information

There is no public trading market for any of our Classes of Units or series of Preferred Units and there can be no assurance that a market will ever develop for any of our Classes of Units or series of Preferred Units.

Holders

As of March 31, 2005, there were holders of record of our Units and Preferred Units as follows:

      Class 1: Approximately 280 holders.

      Class 2: Approximately 200 holders.

      Class 3: Approximately 290 holders.

      Series B Preferred: Approximately 15 holders.

Since our Class 1 Units are registered under the Exchange Act, we are required to file annual, quarterly and other reports with the SEC. It is possible that certain of our other classes of Units may be treated under Section 12(g)(5) of the Exchange Act as the same class of Units as our Class 1 Units. If a sufficient number of Class 1 Unit holders put all of their Class 1 Units to us pursuant to the Class 1 Put Rights, we may have less than 300 holders of record of our Class 1 Units (as determined under Section 12(g)(5) of the Exchange Act). In addition, if holders convert their Class 1 Units into other classes of Units, including Class 2 and 3 Units and any other classes of Units that the Board might create; we may in the future have less than 300 holders of Class 1 Units (as determined under Section 12(g)(5) of the Exchange Act). Under these circumstances, we could become eligible to cease filing reports with the SEC upon the filing of a Form 15 with the SEC. Unless the SEC denies termination of our registration pursuant to procedures under Section 12(g)(4) of the Exchange Act, we would not be required to file with the SEC annual reports, quarterly reports and proxy statements as currently required by SEC rules. We could cease filing these SEC reports and Members may receive more or less information about the Company and our financial condition, liquidity and results of operations. We currently provide our holders of Class 2 and 3 Units and Series Preferred B Units the same information we provide to our holders of Class 1 Units. Given the costs of being a public company, we may file a Form 15 with the SEC when it is deemed advisable by our Board of Managers.

Recent Sales of Unregistered Securities

We did not sell any securities during 2002, 2003 or 2004 that were not registered under the Securities Act. At our 2003 annual meeting of members, our members approved a change to our Operating Agreement that authorizes the Board of Managers to create multiple Classes of Units with differing terms. Pursuant to this authority, we created Class 2 Units, Class 3 Units and Series B Preferred Units. Under the terms of our Class 1 Units, holders of our Class 1 Units are currently able to convert their Class 1 Units into either Class 2 Units or Class 3 Units. During the last quarter of 2003, we began receiving Unit Conversion Forms from holders of Class 1 Units to convert their Class 1 Units into either Class 2 Units or Class 3 Units. Effective January 1, 2004, we converted the Class 1 Units submitted during 2003 for conversion to Class 2 Units or Class 3 Units. During 2004, we converted 19,212,208 Class 1 Units to Class 2 Units; 36,627,458 Class 1 Units to Class 3 Units and 1,687,746 Class 2 Units to Class 3 Units. We did not receive any consideration in connection with the conversions, other than the Class 1 or 2 Units, which effective upon their conversions assumed the status of authorized but unissued Units. All conversions of Units become effective the first of the month after a properly completed Conversion Form and any other required documentation is received by us. A sample of our Unit Conversion Form was filed with the SEC as Exhibit 99.1 to our Form 8-K, dated October 27, 2003. None of our Classes of Units may be converted into our Series B Preferred Units.

The conversions were made in reliance on Section 3(a)(9) of the Securities Act, which provides an exemption from the registration requirements of the Securities Act for securities exchanged by an issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. We processed the conversions internally and did not pay anyone to solicit the conversions. On September 26, 2003, we became our own transfer agent.

We originally filed information with the SEC regarding our Class 2 Units and Class 3 Units on a Form 8-K, dated October 15, 2003. See our Description of Securities filed as Exhibit 99.1 thereto and our Summary of Operating Agreement filed as Exhibit 99.2 thereto. We filed an updated Description of Securities (as revised September 22, 2004) and an updated Summary of Operating Agreement (as revised September 22, 2004) on a Form 8-K, dated September 30, 2004, as exhibits 99.1 and 99.2, respectively. In addition, in connection with our issuance of Series B Preferred Units, we filed an updated Description of Securities (as revised March 31, 2005) on a Form 8-K, dated March 31, 2005. Our Description of Securities (as revised March 31, 2005) and our Summary of Operating Agreement (as revised September 22, 2004) are collectively referred to as the “Securities Disclosure Documents.”

The conversion rights of our Class 1, 2 and 3 Units and Series B Preferred Units are set forth in Sections 4.1.8, 4.2.8, 4.3.5 and 6.2.6 of the Description of Securities, which are expressly incorporated by reference herein.

Purchases of Equity Securities

The table below summarizes our repurchases of equity securities during the fourth quarter of 2004.

Issuer Purchases of Equity Securities

Distributions

Distributions for the Past Two Years

Pursuant to the terms of our Class 1 Units, we are required to pay a monthly mandatory distribution equal to 1/12 of $0.0775 ($0.006458) per Class 1 Unit. In addition, in December 2002 our Board of Managers declared a voluntary monthly distribution, to be paid in addition to the mandatory monthly distribution on an ongoing basis, of 1/12 of $0.0025 ($0.00021) per Class 1 Unit. Accordingly, in 2003 and 2004 we paid each month distributions of $0.00667 per Class 1 Unit. We issued Class 2 and Class 3 Units beginning on January 1, 2004 in connection with conversions of Class 1 and Class 2 Units. Pursuant to the terms of our Class 2 Units, we are required to pay a monthly mandatory distribution equal to 1/12 of $0.08 ($0.006667) per Class 2 Unit. Pursuant to the terms of our Class 3 Units, we are required to pay a monthly mandatory distribution equal to 1/12 of $0.0825 ($0.006875) per Class 3 Unit. We are required to pay our Class 2 and 3 Units the same voluntary distribution that we pay to the Class 1 Units. Accordingly, in 2004, we paid each month distributions of $0.006875 and $0.0070835 per Class 2 and Class 3 Unit, respectively.

In addition, in April 2004 and April 2003 we made distributions, ratified in June of these years, of $0.00493 and $0.00710 per Unit (except for Units held by our wholly-owned subsidiary), respectively, to offset state income tax liabilities incurred by our members in 2003 and 2002 due to their ownership interests in JCM. These payments were made either to members directly or to the California Franchise Tax Board on their behalf. We will not be making a similar distribution in 2005 to offset state income tax liabilities incurred by our members in 2004. In addition, we do not currently intend to make such voluntary tax distributions in future years. See “Part I, Item 1. Business — Possible Tax Consequences for Members — State Tax Returns.”

We did not have any Class 2 or Class 3 holders of record in 2003, since the first conversions of Class 1 Units to Class 2 or Class 3 Units were effective January 1, 2004. Accordingly, we did not make any distributions to holders of Class 2 or Class 3 Units during 2003. We did not have any Series B Preferred Units outstanding in 2003 or 2004, and, accordingly, we did not pay any distributions to the holders of Series B Preferred Units during those years.

Distributions Required by Our Operating Agreement and Certificates of Designations

Distributions to holders of our Class 1 Units required by our Operating Agreement and Class 1 COD are described in Sections 4.1.1 and 4.1.2 of our Description of Securities (as revised March 31, 2005), which is expressly incorporated by reference herein.

Distributions required to holders of our Class 2 Units by our Operating Agreement and Class 2 COD are described in Sections 4.2.1 and 4.2.2 of our Description of Securities (as revised March 31, 2005), which is expressly incorporated by reference herein.

Distributions required to holders of our Class 3 Units by our Operating Agreement and Class 3 COD are described in Sections 4.3.1 and 4.3.2 of our Description of Securities (as revised March 31, 2005), which is expressly incorporated by reference herein.

Our Board of Managers may declare additional distributions for Units on a Class-by-Class basis, provided that no Class of Units may receive an additional distribution that is double the additional distribution declared for any other Class of Units on a per-Unit annualized basis. However, we must pay the Class 2 and Class 3 Units at least the same amount of additional distributions that we pay on our Class 1 Units on a per Unit basis. In addition, we must pay the Series B Preferred Units at least the same amount of additional distributions that we pay our Class 3 Units.

Our Board of Managers may not create a Class of Units with a right to receive a priority in payment upon our liquidation or dissolution over any other Classes of Units that may be in existence. However, this provision does not affect our Board of Managers’ ability to create Preferred Units with a right to receive a priority in payment upon our liquidation over the Class 1, Class 2, Class 3 or any other Class of Units. Our Series B Preferred Units have a priority in payment upon our liquidation over the Class 1, Class 2, Class 3 or any other Class of Units. See Section 6.2.4 of our Description of Securities (as revised March 31, 2005), which is expressly incorporated by reference herein. If we have a shortfall in our ability to pay distributions when due to Class 1, Class 2 and Class 3 Units, then Class 1, Class 2 and Class 3 Units will share in any shortfalls on a pro-rata basis. Our Series B Preferred Units are subordinate to the rights of our Class 1, Class 2 and Class 3 Units with respect to the payment of mandatory distributions, except upon our liquidation. See Sections 6.2.1 and 6.2.4 of our Description of Securities (as revised March 31, 2005), which is expressly incorporated by reference herein.

Redemption Rights

Our Class 1 COD provides that, each holder of Class 1 Units as of June 30, 2005 will have the right to require us to redeem all or, if so elected by the holder, a portion, of his or her Class 1 Units on June 30, 2007. See Article 1 and Sections 4.1.3 through 4.1.6 of our Description of Securities (as revised March 31, 2005), which are expressly incorporated by reference herein for further information regarding these rights.

Our Class 2 COD provides that, except as set forth below, each holder of Class 2 Units as of June 30, 2010, will have the right to require us to redeem all, of if so elected by the holder, a portion, of his or her Class 2 Units on June 30, 2012. See Article 1 and Sections 4.2.3 through 4.2.6 of our Description of Securities (as revised March 31, 2005), which are expressly incorporated by reference herein for further information regarding these rights.

The holders of Class 3 Units do not have a Put Right similar to the Class 1 Units or Class 2 Units, or any other right to require JCM to redeem their Class 3 Units.

The holders of Series B Preferred Units have a put right upon our change of control (as defined in the Series B COD). See Section 6.2.3 of our Description of Securities (as revised March 31, 2005), which is expressly incorporated by reference herein for further information regarding this right. In addition, if we dissolve, we are

required to redeem the Series B Preferred Units. See Section 6.2.4 of our Description of Securities (as revised March 31, 2005), which is expressly incorporated by reference herein for further information regarding this obligation.

Additional Information Regarding our Units and Preferred Units

Additional information regarding the other rights of our Units and Preferred Units are set forth in our Securities Disclosure Documents on file with the SEC.

Securities Authorized for Issuance under Equity Compensation Plans.

We have no compensation plans under which equity securities are authorized for issuance.

We were organized as a Delaware limited liability company on May 15, 2000 and commenced operations as JCM Partners, LLC, the successor company to the IRM entities, on June 30, 2000.

The following table sets forth selected financial data for JCM Partners for the years ended December 31, 2004, 2003, 2002 and 2001 and as of December 31, 2004, 2003, 2002 and 2001. From January 1, 2001 through December 31, 2003, we did not have any Class 2 or Class 3 Units outstanding. From January 1, 2001 through December 31, 2004, we did not have any Series B Preferred Units outstanding.

The following table sets forth selected financial data, not excluding discontinued operations, for the properties owned by JCM Partners, LLC for six months ended December 31, 2000 and for the properties owned by IRM entities for the period from January 1, 2000 to June 29, 2000.

Basis of Presentation of IRM Entities’ Operations

The foregoing combined statement of operations data presents operating results of the properties owned by the IRM entities for the period from January 1, 2000 to June 29, 2000. This data was prepared pursuant to SEC Regulation S-X, Rule 3-14, “Special instructions for real estate operations to be acquired.” Accordingly, the presentation excludes certain items not comparable to the future operations of the property, such as mortgage interest, leasehold rental, depreciation and corporate expenses.

We are not aware of any material factors relating to the properties transferred by the IRM entities to us that would cause the reported results of operations not to be necessarily indicative of future operating results.

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains forward-looking statements. See our statement that is set forth after the Table of Contents regarding Forward Looking Statements.

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes set forth in Item 8 below.

Overview

The Company generates revenues from the leasing and, to a lesser extent, sales of commercial and residential properties it owns in California.

In a continuing challenging economic environment, total rental revenues from our continuing operations increased $161,000 year-over-year for the year ended December 31, 2004. The rental revenue increase was primarily from our continuing residential properties and was partially offset by a slight decrease in our continuing commercial properties. Approximately 94% of total rental revenues from continuing operations came from continuing residential properties and 6% from continuing commercial properties. We expect very little, if any, rental revenue growth in 2005 from our continuing operations as some of our residential markets have been experiencing increased supply from new construction and both our residential and commercial markets have been experiencing slow to non-existent employment growth, dampening the demand for both rental housing and office space.

We realized a net income of $5,912,000 for the year ended December 31, 2004, an increase of $4,338,000 from the year ended December 31, 2003, primarily due to gain on sales realized from properties sold in 2004. For accounting purposes, gain on sales is the sale price, minus the costs of the sale and minus net book value.

One commercial property and three residential properties were sold during 2004. Management responded to the continuing significant vacancies in the San Francisco office sub-market and listed our San Francisco office property for sale during May 2003 at which time we also designated the property as a real estate investment held for sale. The building was sold in December 2004 for $4,900,000 realizing a gain on sale of $3,000. As part of the sale transaction, we carried back a promissory note in the amount of $3,000,000 with monthly interest only payments at 6% per annum. The promissory note, secured by a deed of trust on the property in a first lien position, is due and payable on June 23, 2006.

In August 2004, we sold a property consisting of 48 individual condominiums in Modesto, California for $3,300,000 resulting in a gain on sale of approximately $1,692,000. As part of the sales transaction, we carried back a promissory note in the amount of $1,300,000 with monthly interest only payments at 8% per annum. The principal payments on the promissory note are due and payable as portions of the property are sold, with the entire balance 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 provides for partial releases as portions of the property are sold.

In October 2004, we sold a 14 unit property in Stockton, California for $1,200,000 resulting in a gain on sale of $647,000.

In December 2004, we sold a 84 unit property in Antioch, California for $7,325,000 resulting in gain on sale of $3,065,000.

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 December 31, 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.

We believe we have made extensive progress in our rehabilitation and deferred maintenance programs and believe they are essential to realizing the full income potential of our properties. In accordance with our accounting policies on capital expenditures, certain of these improvements are expensed and are included as operating and maintenance expenses, rather than being capitalized. The improvements that we expensed

include appliance and fixture replacements, window coverings, exterior painting, asphalt repairs and seal coating, major roof repairs and coatings, major carpentry repairs to balconies, siding and fencing, major landscaping projects and swimming pool resurfacing. These improvements were $3,143,000 in 2004, $4,825,000 in 2003 and $4,200,000 in 2002 for continuing operations. We expect to spend approximately $2,597,000 in 2005 for these items. We also capitalized various capital improvements (which includes such items as new carpet and vinyl flooring, new fencing, new roofs, new monument signs, new HVAC units and commercial tenant improvements). We had capital improvements of $2,353,000 in 2004, $1,687,000 in 2003 and $3,089,000 in 2002 for continuing operations. We are expecting to spend approximately $2,319,000 for capital improvements in 2005.

As a result of our ongoing long term debt refinancing strategy, the Company reduced its interest expense by approximately $303,000 in 2004 compared to 2003 even though the principal balances of our mortgages payable increased by $9,797,000 between December 31, 2004 and December 31, 2003. The weighted average interest rate for our mortgage debt was 5.87%, 6.13% and 6.57% at the end of 2004, 2003 and 2002 respectively.

We believe that the sustained reduction in long term interest rates over the last few years has had a significant effect on the value of our properties. We believe that the yield (rate of return on investment) expectations of real estate investors of income producing properties have been reduced, thereby reducing capitalization rates (see below) used by potential buyers. The effect of reduced capitalization rates, when income and expenses are held constant, is an increase in property values. However, we also believe that a sustained increase in long term interest rates could cause property values to decrease, as buyers require higher yields on income producing properties, thereby increasing capitalization rates used by potential buyers. We believe that long term interest rates will have a significant effect on the appraisals we are required to obtain on our properties in the second quarter of 2005 in connection with the Class 1 Put Rights. However, we cannot forecast with any accuracy what long term interest rates will be at any given time in the future.

The capitalization rate is a shorthand term for the relationship between a buyer’s estimate of the property’s first year of net operating income and the price the buyer is willing to pay. For example, if a buyer expects a property to earn $1,000,000 in net operating income in its first year of operations and the buyer is seeking an 8% capitalization rate, then the buyer would be willing to pay $12,500,000 for the property (i.e., an 8% return on $12,500,000 is $1,000,000). A decrease in the capitalization rate to 7.5 % in this example would increase the property’s value to $13,333,000 and an increase in the capitalization rate to 8.5% in this example would decrease the property’s value to $11,765,000. Accordingly, a 1/2% point change in the capitalization rate would affect the property’s value by approximately 6%.

The value of our properties will be important to our Members who exercise their Class 1 or Class 2 put rights or otherwise sell their Units, since redemption prices will be based, in large part, on the value of our properties. Similarly, other sales of Units should also be based, in large part, on the value of our properties. In addition, the value of our properties will be important should we ever engage in a change-of-control transaction.

We believe that a portion of the increased valuation of our properties caused by the decline in long-term interest rates has been offset by increased expenses including industry-wide increases in the cost of insuring income producing properties, due in part to the insurance industry’s response to the events of September 11, 2001. We believe that potential purchasers will forecast higher operating expenses due to these increased costs, which will result in lower estimates of net operating income. Currently, we believe the effect of lower long-term interest rates, even with increased operating expenses, has been an overall increase in the value of our properties. However, if long-term interest rates and capitalization rates rise and income and operating expenses remain constant, the value of our properties could decrease.

Although we cannot predict the sales market for income producing properties, we believe that in connection with the Class 1 Put Rights, the Company’s properties may be appraised at or near the top of a sellers’ market, in part due to purchases by buyers in the current market that may be deemed unusually high relative to recent historical capitalization rates in the markets in which our properties are located. Therefore, it is likely that the appraised values for our properties in connection with the Class 1 Unit Put Rights may result in appraised values that (i) could be substantially higher than values used by us in determining the price we are willing to

pay for Units under our repurchase program and (ii) reflect low capitalization rates or high gross rent multipliers, relative to both historical and possible future rates. Accordingly, we can give no assurance that the appraised values for our properties, which we will obtain during the second quarter of 2005, will be an accurate assessment of the future value of our properties.

Critical Accounting Policies

The accompanying discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance accounting principles generally accepted in the United States (US GAAP). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience, industry practices and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment.

We believe the following critical accounting policies, in addition to those described in Note 2 to our financial statements, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Depreciation of Properties

Our rental properties are carried at reorganization value plus improvements less accumulated depreciation. Depreciation is calculated using the straight-line method. The estimated useful lives for the properties range from 20 to 40 years for buildings and from 5 to 15 years for improvements, all of which are judgmental determinations made by management.

Rental Income Recognition

Our apartment communities are generally leased under operating leases with terms of six to twelve months. Rental income is recognized according to the terms of the underlying leases, which approximates the revenue which would be recognized if recognized evenly over the lease term. Rental revenue on our commercial properties is recognized over the term of the related lease.

Capital Expenditures

Amounts paid for new buildings or for permanent improvements made to increase the value of the property or substantially prolong its life are capitalized. These expenditures are depreciated over estimated useful lives determined by management. Tenant improvements and leasing commissions paid in operating our commercial properties are capitalized and amortized over the life of the respective lease. We expense certain improvements related to the operation of our apartment communities, including appliance replacements, window coverings, major carpentry repairs to balconies, siding and fencing, exterior painting as well as those expenditures necessary to maintain our properties in ordinary operating condition. The determination as to whether expenditures should be capitalized or expensed, and the period over which depreciation is recognized, requires management’s judgment.

Asset Impairments

The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the expected undiscounted cash flows expected to be generated by those assets are less than the related carrying amounts. If a rental property is determined to be impaired, the impairment would be measured based upon the excess of the asset’s carrying value over the fair value. The Company reports assets to be disposed of at the lower of carrying amount or fair value less cost to sell.

During the fourth quarter ended December 31, 2003, we recorded a $1,250,000 charge for loss on impairment of assets related to undeveloped land located in Vallejo, California, so the carrying value reflects the appraised value obtained on the property. During the first quarter ended March 31, 2004, we recorded an additional $250,000 charge for loss of impairment of assets related to the same property so the carrying value reflects the sale price as negotiated in the Option Agreement.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 clarifies the application of Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements” to variable interest entities (VIEs) in which equity investors lack an essential characteristic of a controlling financial interest or do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties. In the past, the Company has formed numerous subsidiaries in which properties are owned. All of these subsidiaries are included in the consolidated financial statements. The adoption of FIN 46 did not have an impact on the Company’s 2003 consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and, otherwise, is effective at the beginning of the first interim period beginning after June 15, 2003. Certain provisions have been deferred indefinitely by the FASB under FSP 150-3. The Company has adopted this standard and it did not have a material impact on the consolidated financial position or results of operations; however, the Company does have redemption provisions related to Class 1 and Class 2 units that will be effected by this standard once unit holders notify the Company of their intent to put the units back to the Company. The unit holders do not have the right to put units back to the Company until after June 30, 2005. The redemption rights and provisions are more fully described in Note 9 to our Financial Statements.

Results of Operations

Property Occupancy

The table below sets forth the overall weighted average occupancy levels for properties owned, by type of property, at December 31 for the last three years. 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 December 31, 2004 was 93.2% compared to 91.1% at December 31, 2003 and 94.3% at December 31, 2002.

The occupancy at our apartment communities in the year ending December 31, 2004 shows a slight decrease to 94.6% from 94.8% for the year ended December 31, 2003. Contributing factors include very little new job creation in the Northern 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 the occupancy will remain relatively

stable at this level for 2005 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 2005 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 stable and flat rents with optimism for a pick up in late 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 continue to carefully consider how much they are willing to spend on housing, which is putting pressure on rents. In addition, historically low mortgage rates have enabled 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 2004. If mortgage rates increase, we anticipate over time slightly less pressure on rents and occupancies, as renters may be less able to purchase homes; however, we can not 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 some 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 December 31, 2004.

Increased occupancy at our commercial properties is primarily due to the sale of the San Francisco office building which was 8% occupied at the time of sale. The commercial property occupancy at December 31, 2003, excluding the San Francisco office building, would have been 84.5%. Our six Napa properties were fully leased at December 31, 2003 and 2004, with our Concord office building showing an improved occupancy to 69.6% at December 31, 2004 from 65.7% at December 31, 2003. While affected by the soft market for large blocks of office space in the San Francisco Bay Area, our Concord office building rental rates are moderate and the building is located and designed to serve small local users and regional branch offices with a portion of the ground space designated for retail. Since we have the financial capacity to remodel or divide existing suites to suit market demand and can provide significant tenant improvements to attract new tenants, we expect the demand from such tenants to improve occupancy in the coming periods. We are aggressively marketing the available space.

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 tenant defaults and bankruptcies.

Funds From Operations

We use a supplemental performance measure, Funds from Operations (“FFO”), along with net income, to report operating results. FFO is calculated by making various adjustments to net income. Depreciation, amortization, impairment loss, 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 are excluded from the FFO calculation.

FFO is not a measure of operating results or cash flows from operating activities as defined by accounting principles generally accepted 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. We believe, however, that FFO provides relevant information about operations and is useful, along with net income, for an understanding of our operating results.

Comparative Funds From Operations

For the year ended December 31, 2004 FFO was $10,099,000 as compared to $9,272,000 for the year ended December 31, 2003 an increase of approximately 9% or $827,000. FFO decreased $289,000 in 2003 compared to the $9,561,000 for the year ended December 31, 2002. FFO, on a per unit basis, increased $0.03 due to increased net income, primarily from decreased operating expenses and the lower weighted average number of units outstanding during 2004.

Comparisons of Years ended December 31, 2004, 2003 and 2002

Revenue From Continuing Operations

Total rental revenues were $50,205,000 in 2004, $50,044,000 in 2003 and $48,796,000 in 2002, excluding revenues from discontinued operations.

Total rental revenues from our apartment communities were $47,223,000 in 2004, $47,041,000 in 2003 and $45,502,000 in 2002, excluding revenues from discontinued operations. The approximate $182,000 increase in 2004 is primarily attributable to rental revenue in 2004 from a property acquired in May 2003, and partially offset by higher rent concessions in 2004. The approximate 3% increase in 2003 is primarily attributable to increases in average monthly rental rates and rental revenue of $585,000 from the newly acquired property purchased in May 2003.

Total rental revenues from our commercial properties were $2,982,000 in 2004, $3,003,000 in 2003 and $3,294,000 in 2002, excluding revenues from discontinued operations. The rental revenues were flat in 2004 and 2003. The approximate 9% decrease in 2003 from 2002 is primarily attributable to lower occupancy at our Concord office building due to a lease default by a major tenant in early 2003 and lower building operating costs billable to tenants, partially offset by improved occupancy at our light industrial buildings located in Napa, California. The tenant that defaulted, is on lease through July 31, 2007 and owes rent from February 1, 2003. The tenant claims that they had an option to cancel the lease which we dispute. We have obtained a

court judgment for unpaid rent and additional charges of approximately $1,100,000 which is not included as accrued revenues on the consolidated statement of operations. The tenant has posted a bond and filed an appeal and we are awaiting a hearing date. The Company believes the tenant is solvent.

During the year ended December 31, 2004, the average monthly rental rate per square foot for same-store apartment communities and commercial properties on a combined basis increased by approximately 0.6%. In 2003 the same store average monthly rental rate per square foot increased 1.1% on a full-year basis. Our ability to continue to increase rents will largely depend on the changes in the real estate market and on general economic conditions in the areas in which we own properties. 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.

During the year ended December 31, 2004, the average monthly rental rate per square foot for same-store apartment communities increased 0.3%. In 2003 the same store average monthly rental rate per square foot increased 1.2% on a full-year basis. The increases in both years were attributable to increased rents both to existing tenants upon lease expiration and to new tenants upon move in. The average monthly rental rate per square foot for same-store apartment communities were $1.04, $1.04 and $1.03 as of December 31, 2004, 2003 and 2002 respectively.

At December 31, 2004, the average monthly rental rate per square foot for same-store commercial properties increased by approximately 4.2%. In 2003 the same store average monthly rental rate per square foot increased by approximately 0.2% on a full-year basis. These increases were attributable to increased rents to existing tenants upon lease expiration, rent adjustments as allowed in existing leases and to new tenants upon move in. Average monthly rental rate per square foot for same-store commercial properties were $1.28, $1.22 and $1.22 as of December 31, 2004, 2003 and 2002 respectively.

Average monthly rental rate per square foot for same-store properties at December 31 were as follows:

Our ability to continue to increase rental rates will materially depend on the changes in the real estate market and on general economic conditions in the areas in which we own properties. We expect very little, if any, rental rate increases at any of our properties based on current sub-market conditions.

Interest and other revenue were $52,000 in 2004, $196,000 in 2003 and $360,000 in 2002. The decreases in 2004 and 2003 were primarily due to lower average cash balances and lower interest rates.

Expenses From Continuing Operations

Total expenses. 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 $49,626,000 in 2004, $50,274,000 in 2003 and $49,670,000 in 2002, excluding expenses from discontinued operations. The various components are discussed in more detail as follows.

Interest expense. Interest expense was $11,089,000 in 2004, $11,391,000 in 2003 and $12,895,000 in 2002, excluding interest expense from discontinued operations. The 3% decrease in 2004 was primarily due to continued successful mortgage refinancing activity which resulted in lower interest rates, partially offset by higher mortgage debt. The approximate 12% decrease in 2003 was also primarily due to our successful mortgage refinancing activity which resulted in lower interest rates. The weighted average interest rate for our mortgage debt was 5.87%, 6.13% and 6.57% at the end of 2004, 2003 and 2002 respectively.

Operating and maintenance expenses. Operating and maintenance expenses (which includes repair and maintenance, certain improvements, on-site staff payroll, advertising and other direct operational expenses) were $15,799,000 in 2004, $16,675,000 in 2003 and $15,443,000 in 2002, excluding operating and maintenance expenses from discontinued operations. This reflects a decrease of $876,000 or 5% in 2004 compared to 2003, primarily due to decreased expenditures for our apartment rehabilitation program partially offset by increases in other operating and maintenance expenses. The $1,232,000 or 8% increase in 2003 compared to 2002 was primarily attributable to the increased expenditures for our apartment rehabilitation program, additional expenditures on deferred maintenance projects and increased advertising costs due to competitive leasing market conditions.

We expense certain improvements related to the operation of our properties, including appliance and fixture replacements, window coverings, exterior painting, asphalt repairs and seal coating, major roof repairs and coatings, major carpentry repairs to balconies, siding and fencing, major landscaping projects and swimming pool resurfacing. These improvements were $3,143,000 in 2004, $4,825,000 in 2003 and $4,200,000 in 2002, excluding discontinued operations. We expect to spend approximately $2,597,000 in 2005 for these items.

Depreciation and amortization expenses. Depreciation and amortization expenses were $9,372,000 in 2004, $8,930,000 in 2003 and $8,337,000 in 2002, excluding depreciation and amortization expenses from discontinued operations. The approximate increase of $442,000, or 5% in 2004 over 2003 was primarily attributable to a full year of expenses in 2004 for a newly acquired property in May 2003 and the capitalization of property improvements to existing properties. The approximate increase of $593,000, or 7% in 2003 over 2002 was primarily attributable to an increase in real estate investments due to the acquisition of the new property and the capitalization of property improvements to existing properties.

General and administrative expenses. General and administrative expenses were $3,703,000 in 2004, $3,696,000 in 2003 and $3,410,000 in 2002. There was little change in general and administrative expenses between 2004 and 2003. The 8% increase in 2003 was primarily due to legal and consulting expenses and increases in California LLC fees. See Part I, Item 1 — Business — Possible Tax Consequences for Members — Subsidiary Limited Liability Companies.”

Real estate taxes and insurance expenses. Real estate taxes and insurance expenses were $5,589,000 in 2004, $5,288,000 in 2003 and $4,838,000 in 2002, excluding real estate taxes and insurance expenses from discontinued operations. Increased real estate taxes of $150,000 from higher assessed values and increased workers compensation insurance of $98,000 were primary reasons for the increase in 2004 over 2003. Increased real estate taxes of $291,000 from higher assessed values and increased workers compensation insurance of $229,000 were the primary reasons for the increase in 2003 over 2002.

Utility expenses. Utility expenses were $4,072,000 in 2004, $3,863,000 in 2003 and $3,548,000 in 2002, excluding utility expenses from discontinued operations. The 5% increase in 2004 was due primarily to rate increases for sewer, trash removal and water. The 9% increase in 2003 was due primarily to rate increases for natural gas, sewer, trash removal and water.

Prepayment penalty. There were no prepayment penalties incurred during 2004, excluding prepayment penalties from discontinued operations. In 2003, we recorded $356,000 of prepayment penalties related to debt which was retired in connection with the refinancing of two mortgages and the payoff of three mortgages. In 2002, we recorded $745,000 of prepayment penalties in connection with the refinancing of five mortgages and the payoff of five mortgages.

Write off of deferred debt issuance costs. During the twelve months ended December 31, 2004, we recorded a loss of $3,000 to reflect the write-off of deferred debt issuance costs related to debt which was retired in connection with the refinancing of one mortgage loan. During the twelve months ended December 31, 2003, we recorded a loss of $74,000 to reflect the write-off of deferred debt issuance costs related to debt which was retired in connection with the refinancing of two mortgages and the payoff of three mortgages. During the same period in 2002, we recorded $454,000 of write-offs of deferred debt issuance costs.

Net Income Before Discontinued Operations

Net income before discontinued operations. During the year ended December 31, 2004, net income before discontinued operations was $631,000 compared to a net loss of $33,000 for the prior year and a net loss of $514,000 in 2002. The increase in 2004 was due primarily to decreases in interest expense, operating and maintenance expense, prepayment penalties and write off of deferred debt issuance costs, offset by increases in depreciation and amortization, real estate taxes and insurance and utility expenses as described above. The increase in 2003 was due to both increases in rental revenue and decreases in interest expense, prepayment penalties and write off of deferred debt issuance costs, offset by increases in operating and maintenance, depreciation and amortization, general and administrative, real estate taxes and insurance and utility expense as described above.

Discontinued Operations

Discontinued Operations. In October 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which became effective on January 1, 2002. For properties accounted for under SFAS No. 144, the results of operations 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 expenses including those recognized prior to the classification as held for sale, and property-specific interest expense to the extent there is secured debt on the property. In addition, the net gain or loss on the eventual disposal of properties held for sale is reported as discontinued operations.

During the twelve months ended December 31, 2004, income from discontinued operations was $5,281,000 compared to $1,607,000 for the same period last year. The increase was primarily due to a gain of $5,406,000 from sales of four properties offset by a $250,000 charge for loss on impairment of assets related to a parcel of land located in Vallejo, California so the carrying value of the property reflected the sale price as negotiated in an Option Agreement to sell the land. The increase in 2003 was primarily due to a gain of $2,735,000 as a result of selling an 88 unit apartment complex as part of a Section 1031 exchange transaction, offset by a $1,250,000 charge for loss on impairment of assets related to the parcel of land located in Vallejo, California so the carrying value of the property reflected the appraised value obtained on the property.

Net Income

Net income. During the year ended December 31, 2004, net income was $5,912,000 compared to $1,574,000 for the prior year, an increase of approximately $4,338,000. The increase was partially due to an increase in income from continuing operations and primarily due to income from property sales associated with discontinued operations. During the year ended December 31, 2003, net income was $1,574,000 compared to $563,000 for 2002, an increase of approximately $1,011,000. The increase was due to increases in net income from continuing operations and in income from discontinued operations as described above.

Effects of Inflation on Operations

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

Distributions to Unit Holders

          2004

During 2004, we made cash distributions to our Unit holders of $6,507,000, excluding distributions made to our wholly owned subsidiary for units owned in 2004. This included a March payment to the California Franchise Tax Board of $47,000 on behalf of our non-California Unit holders who had been allocated income deemed taxable by the State of California and an April distribution of $336,000 to our members who were not required to make a California tax deposit. This special April distribution and the payments to the California Franchise Tax Board were intended to offset certain state income tax liabilities incurred by our members due

to their ownership of our Class 1 Units. All of the distributions in 2004 were made from cash from operations and available cash.

          2003

During 2003, we made cash distributions to our Unit holders of $7,168,000, excluding distributions made to our wholly owned subsidiary for units owned in 2003. This included an April payment to the California Franchise Tax Board of $105,000 on behalf of our non-California Unit holders who had been allocated income deemed taxable by the State of California and a distribution of $489,000 to our members who were not required to make a California tax deposit. This special April distribution and the payments to the California Franchise Tax Board were intended to offset certain state income tax liabilities incurred by our members due to their ownership of our Class 1 Units. All of the distributions in 2003 were made from cash from operations and available cash.

          2002

During 2002, we made cash distributions to our Unit holders of $6,573,000, excluding distributions made to our wholly owned subsidiary for units owned in 2002. This included an April payment to the California Franchise Tax Board of $125,000 on behalf of our non-California Unit holders who had been allocated income deemed taxable by the State of California and a distribution of $614,000 to our members who were not required to make a California tax deposit. This special April distribution and the payments to the California Franchise Tax Board were intended to offset certain state income tax liabilities incurred by our members due to their ownership of JCM Partners’ Class 1 Units. All of the distributions in 2002 were made from cash from operations and available cash.

Liquidity and Capital Resources

As of December 31, 2004, our short-term liquidity needs included normal operating requirements, ongoing capital improvements, monthly principal amortization of our debt, repurchases of Class 1 Units, Class 2 Units, Class 3 Units and certain mandatory distributions required to be made to our Class 1, 2 and 3 Unit holders, as described at “Item 5 — Market for Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities — Distributions Required by Our Operating Agreement and Certificates of Designations.” We expect to meet these requirements through net cash provided by operations and available cash. However, if needed for Class 1, 2 and 3 Unit repurchases or capital improvements, we may increase debt by refinancing certain mortgage obligations or through mortgage borrowing on our debt-free 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.

In 2004, through a wholly-owned subsidiary, we repurchased 16,233,773 redeemable Class 1 Units for an aggregate price of $25,263,000; 399,827 redeemable Class 2 Units for an aggregate price of $622,000; 830,740 non-redeemable Class 3 Units for an aggregate price of $1,279,000; for a total aggregate price of $27,164,000. In order to repurchase the Class 1, 2 and 3 Units, we sold four properties receiving net cash proceeds of approximately $7,300,000, we obtained financing on five properties receiving net cash proceeds of approximately $16,200,000 and used available cash for the balance of the repurchases. From January 1, 2005 through March 31, 2005, through our wholly-owned subsidiary, we repurchased an additional 43,574 Class 1 Units, 30,643 Class 2 Units and 102,872 Class 3 Units for an aggregate price of $276,000. We paid the same price for repurchases of Class 1, 2 and 3 Units. As of March 31, 2005, our wholly owned subsidiary owned 7,639,481 Class 1 Units, 6,401,672 Class 2 Units and 13,948,007 Class 3 Units.

Our long-term liquidity requirements include scheduled debt maturities, significant capital improvements, certain mandatory distributions required to be made to our Class 1, 2 and 3 Unit holders, as described at “Item 5 — Market for Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities — Distributions Required by Our Operating Agreement and Certificates of Designations” and repurchases of Class 1, 2 and 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.

As described at “Item 5 — Market for Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities — Redemption Rights,” our Class 1 Unit holders have the right to require us to redeem some or all of their Class 1 Units in June 2007. In addition, our Class 2 Unit holders have the right to require us to redeem some or all of their Class 2 Units in June 2012. In order to fund those redemptions, we will use cash from operations, available cash, loan financing proceeds, proceeds from our offering of Series B Preferred Units, other capital sources and, if necessary, we may be required to liquidate some of our assets.

At December 31, 2004, we had unrestricted cash totaling $6,569,000, compared to $6,972,000 at December 31, 2003 and $14,898,000 at December 31, 2002. The decrease in 2004 is attributable to cash provided by operations of $12,115,000, cash provided by investing activities of $9,185,000 and cash used in financing activities of $21,703,000.

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, in addition to the scheduled principal and interest payments on the debt. We classify these impound accounts as restricted cash on our balance sheet. At December 31, 2004, our restricted cash totaled $1,234,000 compared to $2,461,000 at December 31, 2003 primarily due to the release of lender holdbacks for completed required repair improvements.

Net cash provided by operations for the year ended December 31, 2004 was $12,115,000, which reflects net income of $5,912,000, non-cash depreciation and amortization charges of $9,682,000, gain on sales of $5,406,000, net loss of $92,000 on disposal of assets, a loss of $250,000 for the impairment of assets and the net decrease of the effect of changes in operating assets and liabilities of $1,585,000, primarily from a decrease in restricted cash.

Net cash provided by investing activities was $9,185,000 for the year ended December 31, 2004. This consisted of $3,620,000 in capital improvements and was offset by proceeds from the sale of four properties of approximately $12,804,000. In 2003, net cash used in investing activities was $4,951,000. We acquired a new property in May 2003 for $7,900,000 and used $2,121,000 for capital improvements (which includes such items as new carpet and vinyl flooring, new fencing, new roofs, new monument signs, new HVAC units and commercial tenant improvements) to existing properties. These uses were partially offset by proceeds from the sale of a property in July 2003 of $5,070,000. In 2002, net cash used in investing activities was $2,990,000. This consisted of capital improvements of $3,253,000 as part of our asset rehabilitation program and offset by proceeds from the disposal of assets of $263,000. We are expecting to spend approximately $2,317,000 for capital improvements in 2005.

Net cash used in financing activities was $21,703,000 for the year ended December 31, 2004. The sources of cash consisted of proceeds received from the refinance of five mortgage loans of $16,668,000, advances from the line of credit of $4,300,000 and subscription proceeds of $2,605,000 received prior to the issuance of Series B Preferred Units. The uses of cash were as follows: distributions to Class 1, 2 and 3 Unit holders in the amount of $6,507,000, payoff of two mortgage notes totaling $4,238,000, principal payments on mortgage notes of $2,633,000, repurchases of Class 1, 2 and 3 Units in the amount of $27,164,000, payments of $4,300,000 on the line of credit, and net deferred financing costs totaling $434,000.

Our long-term debt consists of 47 real estate mortgages totaling $195,258,000 as of December 31, 2004. Each of the mortgages is individually secured by one of 45 properties with two properties each having a second mortgage. This debt generally requires monthly payments of principal and interest. As of December 31, 2004, the weighted average interest rate on our real estate mortgages was 5.87% compared to 6.13% at the same time last year.

At December 31 2003, our long-term debt consisted of 46 real estate mortgages totaling $185,461,000. At December 31, 2002, our long term debt consisted of 48 real estate mortgages totaling $185,769,000.

In July, 2004, 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 debt service coverage ratio financial covenant with which we were in compliance during 2004. This revolving secured line of credit is available for general corporate purposes and is renewable on an annual basis. We used the line of credit for a short period in the last month of 2004 to repurchase Class 1 Units and repaid the amount borrowed prior to the close of the month with cash proceeds from the sale of two properties described below.

In July 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. The net loan proceeds were used to repurchase Units.

We also completed a loan modification in August 2004 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 net loan proceeds were used to repurchase Units.

In August 2004, we also completed a new $8,000,000 loan on our commercial building in Concord, California, paying off the prior mortgage with a remaining principal balance of approximately $7,300,000 at an annual interest rate of 9.19%. The new loan has an initial annual interest rate of 4.09% and requires interest only payments for the first twelve months of the loan. The interest rate is adjustable every six months but not by more than one percentage point and with a ceiling cap of 10.5%. The remaining balance of the loan is due in ten years with principal payments required beginning the thirteenth month on a twenty-four year amortization basis. Other options of the loan include the ability to borrow an additional $3,250,000 if the company meets certain provisions by March 1, 2006 and a conversion option to fix the interest rate for five years anytime within the first thirty-six months of the loan. The Lender has recourse to JCM Partners for up to 25% of the highest unpaid principal balance of the loan. The net loan proceeds will be used for improvements to real estate investments or for Class 1 Unit redemptions.

On September 30, 2004 we paid off the remaining $346,000 loan balance of our 14 unit property that was sold in October 2004.

We completed a new $10,500,000 loan in October 2004 on one of our debt free properties located in the Sacramento area. The loan is for 10 years with a fixed annual interest rate of 5.47% and monthly principal payments are amortized over thirty years. The net loan proceeds were used to repurchase Units.

In December 2004 we completed a new $2,775,000 loan on one of our debt free properties located in Napa, California. The loan is for 10 years with a fixed annual interest rate of 5.38% for the first five years and converting to a variable rate for the remaining five years. The loan requires monthly payments of principal and interest. The loan is partially amortizing and will require payment of the remaining balance on January 1, 2015. The Lender has recourse to JCM Partners for up to 25% of the original principal balance of the loan. The net loan proceeds will be used to repurchase Units or for Class 1 Unit redemptions.

In August 2004, we sold a property consisting of 48 individual condominiums in Modesto, California for $3,300,000 resulting in a gain on sale of approximately $1,692,000. As part of the sales transaction, we carried back a promissory note in the amount of $1,300,000 with monthly interest only payments at 8% per annum. The principal payments on the promissory note are due and payable as portions of the property are sold, with the entire balance 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 provides for partial releases as portions of the property are sold. There was no debt on the property. The net loan proceeds were used for repurchases of Units, increasing our working capital or improvements to real estate investments.

In September 30, 2004, we sold a 14 unit property in Stockton, California for $1,200,000 resulting in a gain on sale of $647,000 in October 2004. The net sale proceeds were used for repurchases of Units.

In December 2004, we sold our office building in San Francisco, California for $4,900,000 realizing a gain on sale of $3,000. As part of the sale transaction, we carried back a promissory note in the amount of $3,000,000 with monthly interest only payments at 6% per annum. The promissory note, secured by a deed of trust on the property in a first lien position, is due and payable on June 23, 2006. There was no debt on the property. The net sale proceeds were used to pay down our line of credit.

In December 2004 we also sold an 84 unit property in Antioch, California for $7,325,000 resulting in gain on sale of $3,065,000. We paid off the $3,892,000 balance on the mortgage loan and used the remaining net sale proceeds to pay down our line of credit.

Subsequent to December 31, 2004, we completed the financing of one mortgage loan for $4,300,000 secured by three properties located in Napa, California in January 2005. The loan is for 10 years with a fixed annual interest rate of 5.38% for the first five years and converting to a variable rate for the remaining five years. 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, 2015. The Lender has recourse to JCM Partners for up to 25% of the highest unpaid principal balance of the loan. One of the properties was debt free and we used $1,625,000 of the loan proceeds to pay off the mortgage loans secured by the other two properties with the remaining proceeds to be used for repurchases of Units or for Class 1 Unit redemptions.

Subsequent to December 31, 2004, we sold a 25 unit property in Concord, California for $2,550,000 resulting in gain on sales of $1,072,000 in January 2005. We paid off the $1,324,000 balance on the mortgage loan secured by the property, an additional $235,000 for prepayment penalties and the balance to be used as part of a Section 1031 exchange transaction for a property still to be identified. The net carrying value of the asset (real estate investments held for sale, net) of the property was $1,360,000 and the liability (mortgages payable on real estate investments held for sale) was $1,325,000 at December 31, 2004.

Subsequent to December 31, 2004, we sold a 14,920 square foot light industrial building in Napa, California for $1,750,000 resulting in a gain of sale of $815,000 in February 2005. We paid off the $434,000 balance on the mortgage loan and will use the remaining net sale proceeds for repurchase of Units or for Class 1 Unit redemptions. The net carrying value of the asset (real estate investments held for sale, net) of the property was $827,000 and the liability (mortgages payable on real estate investments held for sale) was $435,000 at December 31, 2004.

Subsequent to December 31, 2004, we also modified an existing variable rate mortgage loan with a remaining balance of approximately $927,000 effective March 1, 2005. We reduced (i) the annual interest rate from 8.5% to 4.768% with adjustments every six months not to exceed 1%; (ii) the maximum annual interest rate to be charged from 14.5% to 10.5% and (iii) the minimum annual interest rate to be charged from 8.5% to 4.5%. The final payment date for the remaining balance was also extended from July 1, 2007 to March 1, 2015.

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. However, in connection with our obligations to redeem the Class 1 Units of Members who exercise their Class 1 Unit Put Rights, we, and all of our affiliates, will stop making repurchases of Class 1 Units from the date we mail the Class 1 Exercise Notice (anticipated to be July 20, 2005) until the last day the Class 1 Put Rights may be exercised (September 28, 2005). We, and our affiliates, are doing this should the exercises of the Class 1 Put Rights be subject to Rule 14e-5 of the Exchange Act.

We are subject to the normal risks associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest, the risk that indebtedness on our properties, or unsecured indebtedness, will not be able to be renewed, repaid or refinanced when due or that the terms of any renewal or refinancing will not be as favorable as the existing terms of such indebtedness. If we were unable to refinance our indebtedness on acceptable terms, or at all, we might be forced to dispose of one or more of the properties on disadvantageous terms, which might result in losses to us. Such losses could have a material adverse effect on us and our ability to make distributions to our members and pay amounts due on our debt. Furthermore, if a property is mortgaged to secure payment of indebtedness and we are unable to meet

mortgage payments, the mortgage holder could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of our revenues and asset value. Foreclosures could also create taxable income to our members without accompanying cash proceeds.

Contractual Obligations as of December 31, 2004

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.

The following table presents information about our debt obligations at December 31, 2004. The table presents principal cash flows and related weighted average interest rate by expected maturity dates.

Item 8.     Financial Statements and Supplementary Data

JCM PARTNERS, LLC

TABLE OF CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Managers of JCM Partners, LLC:

We have audited the accompanying consolidated balance sheet of JCM Partners, LLC and its subsidiaries (the “Company”), as of December 31, 2004 and 2003 and the related consolidated statements of operations, members’ units and retained earnings and cash flows for the years ended December 31, 2004 and 2003. Our audit also included the financial statement Schedule III – Real Estate and Accumulated Depreciation. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of JCM Partners, LLC and its subsidiaries as of December 31, 2004 and 2003 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement Schedule III, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Moss Adams LLP

San Francisco, California

February 11, 2005

(March 31, 2005 as to subsequent events described in Note 16)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Managers of JCM Partners, LLC:

We have audited the consolidated statements of operations, members’ equity, and cash flows of JCM Partners, LLC and subsidiaries (the “Company”), for the year ended December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of JCM Partners, LLC and subsidiaries for year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 3 to the consolidated financial statements, the operations of certain properties have been reclassified as discontinued operations in the accompanying 2002 consolidated financial statements.

/s/ Deloitte & Touche, LLP

Sacramento, California

February 21, 2003
(March 23, 2005 as to the effects of the reclassifications described in Note 3)

JCM PARTNERS, LLC

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

JCM PARTNERS, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements.

JCM PARTNERS, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ UNITS AND RETAINED EARNINGS

See notes to consolidated financial statements.

JCM PARTNERS, LLC

CONSOLIDATED STATEMENT OF CASH FLOWS