Investment Proposal

REAL ESTATE INVESTMENT PARTNERSHIP PROPOSAL © Cris Molles 2006

OUTLINE

1. OBJECTIVE 2. HOW REAL ESTATE PROFITS ARE MADE A) Gross Rent Multiple (GRM) 1. Increase value by raising rents, other income 2. Decrease costs 3. THE FIVE PROFIT AREAS 4. QUESTIONS A) Aren’ t we in a real estate price “ bubble“ ? B) Why invest here? 1. Long Beach and Wilmington a) Port activity and building=increased jobs, rents and home prices 2. California--residents vs. housing units C) Why invest in 10-15 unit apartment buildings? 1. Bank guidelines more stringent--weeds out bad deals 2. More units helps to divide the costs 3. Each vacancy costs less 5. “THE BABY BOOMER EFFECT” 6. ADVANTAGES OF INVESTING IN THIS PARTNERSHIP 7. PARTNERSHIP PROPOSAL 8. CRIS MOLLES’APARTMENT PUCHASES AND SALES SINCE Jan. 2001 9. RENTAL PROPERTY PROFIT AND LOSS STATEMENTS

1. OBJECTIVE The objective of this partnership is to invest in quality apartment buildings in the Southern California area with the goal of retuning at least 40% per year on investment.

2. HOW REAL ESTATE PROFITS ARE MADE The most basic measurement of the value of a rental property is called the Gross Rent Multiple. It’ s important to understand this concept because we will be using it to make money over and over. The GRM is simply the selling price of a property divided by the ANNUAL rental income it produces. If an apartment sells for $1,000,000 and has total annual rents of $100,000, it has a GRM of 10. The lower the GRM (all other factors aside) the better the value of the building and the more cash flow it will return. We certainly consider many factors when evaluating the value of a potential purchase (including location, condition, price per square foot, the unit make-up of the building, etc.), but when evaluating hundreds of properties, the GRM is the quickest calculation of value. Based on the GRM calculation, another amazing fact appears--for every dollar we raise rents, the value of the building increases about $100! This is where investors generally make their money in apartment buildings. They buy a building that has below market rents, improve the building cosmetically, then raise the rents. If we can raise the rents in a 12-unit building just $50 per month each, that alone raises the value of the building by $60,000! Another easy way to make money is to improve the property so that we can sell it for a higher multiple. Picture the car business. Why do Mercedes’cost more than Fords? They both get you to where you’ re going. The difference is that the Mercedes has a lot more perceived value which translates into a higher selling price. We can take advantage of the same idea in rental real estate. We can try to find a cosmetically ugly building with a gross multiple in the 10 to 11 X GRM range and after fixing it up, sell it in the 11 to 12 X GRM range. If we buy a property that has annual income of $120,000 at 10 GRM and after fixing it up sell it at 11.5 GRM, that increase alone is worth $180,000 in selling price! Ideally, we will strive to do both with our investments--increase rents and improve GRM when we sell.

3. THE FIVE PROFIT AREAS There are five ways to make money in investment properties. Some of them are hidden and never really factored in by the average investor. The total of all of these profit opportunities when added together often produce investment returns in excess of 100% per year! These are… 1. NORMAL APPRECIATION 2. LOAN PAYOFF 3. POSITIVE CASH FLOW 4. TAX WRITE-OFF 5. FORCED INFLATION

Appreciation First, there is the normal appreciation that comes with owning investment property. In the last 6 years, Southern California properties have been increasing at about 20% per year. This is fabulous growth, but probably will not continue. Normal growth in the last 80 years is probably in the 5% to 6% range annually, including all the ups and downs along the way. Quality investment properties have grown at a greater rate than inflation and should continue to do so. In this way they make an excellent inflation hedge. While I cannot predict the appreciation of a single property, the general trend over several generations has been steady increases. Just as with stocks--I don’ t know the price of a blue-chip stock next week, but I know that in 10 years it will probably be substantially higher than it is today. In figuring appreciation, many potential investors miss the fantastic returns on rentals when they make an incorrect calculation… Let’ s say that you buy a $1,000,000 apartment building using $250,000 as a down payment. If that property increased 8% in value the first year, most investors would conclude that you made an 8% return ($80,000) on your investment. What they forgot is that you only put $250,000 down. Your actual return--just in appreciation alone--is 32% for the first year, not 8%!

Loan Payoff The second way to make money on property is the loan payoff. This is one of the items forgotten by most investment analysts. With the rents you collect, you are paying off the loan to the bank. In the example above, you bought a $1,000,000 property with $250,000 down. That leaves a loan balance of $750,000. With a traditional 30-year loan,

you are paying off the balance at about 1.7% to 2% per year for the first couple of years. On our $750,000 loan example, you would be paying off about $15,000 per year. In other words, after year number one, you own a $1,080,000 property (after 8% increase) with a loan balance of $735,000 (after 2% loan payoff). You now have equity of $345,000. After year two, using the same example, your property will be worth $1,166,000 and you’ ll only owe $720,000, for equity of $446,000. After year three, the value is $1,259,000 and you will owe $705,000 for equity of $554,000. So far, a pretty good return--but we’ re not done yet!

Positive Cash Flow The third profit opportunity is free cash flow. This is the amount left over after you have collected all the rents and paid all the expenses (loans, taxes, insurance, maintenance, utilities, reserves, etc.). On our $1,000,000 apartment building example, using the 11 GRM explained above, our cash flow should generally be about $800 per month or $9600 per year. This is simply extra cash flow that is distributed between the investors at regular intervals. To increase cash flow, we can either raise rents or decrease expenses. Every dollar we can save on utilities, repairs, and other expenses is that much more we make in free cash flow. I am constantly shopping vendors to lower costs, as every dollar saved is equal to a dollar earned.

Depreciation Write-off The fourth source of profit is the depreciation write-off. This is simply an accounting entry on your tax return given by the government to help promote investment. You actually get to depreciate your property even though in truth it is going up in value. Here’ s how it works… On our $1,000,000 example, you have to calculate the land vs. improvement value. Let’ s assume that you use 70% for improvements and 30% for the value of the land. That means we can depreciate $700,000 on our property (the land value cannot be depreciated as the land isn’ t“ wearing out” ). The $700,000 is depreciated over 27½ years (this term may change at the whim of Congress). Which means you can deduct $25,454 off your taxes. Figuring a 25% tax rate, this deduction alone will save you $6,363 in taxes! This deduction is the reason that rental property often shows a “ loss”tax-wise even though you can be making a lot of money through cash flow. If we add up all the potential profits on our example, we have $80,000 appreciation, $15,000 loan payoff, $9,600 cash flow, and $6313 depreciation tax savings, for a total of $110,913 return on a $250,000 investment, or a return of 44% the first year!

Forced Inflation Finally, we can make money through what I call “ Forced Inflation“ . This is simply the old “ fixer-upper”strategy. We search for buildings that are under priced or have lower than market rents simply because they look bad cosmetically. After a professional property inspection and report (to make sure none of the repairs needed is unforeseen or unusually expensive), we purchase the property with the plan to fix it up, raise the rents to market levels and, after a year or two, resell the property. We then take the proceeds and using a 1031 tax-free exchange, invest in another, larger property and repeat the process over and over.

4. QUESTIONS AREN’ T WE IN A REAL ESTATE PRICE “BUBBLE“? Prices have been climbing at a pretty good clip for about 5 or 6 years now. Some real estate IS overpriced in my opinion, but that doesn’ t mean that the entire market is. We are talking about buying Southern California cash flow apartment buildings. With apartment buildings, we are simply buying a certain cash flow. The higher the cash flow, the more valuable the property. In fact, the inflated home prices are good news for apartment owners. Think about it for a moment. If someone cannot afford a new home, they are forced to rent. This puts a lot of upward pressure on rents, making buildings worth more. There are several other things to keep in mind. First of all, we are buying a single property, not “ the real estate market”in general. If an investor finds a quality property at a decent price, it doesn’ t matter what every other piece of property in America is doing. It doesn’ t matter what is happening to condos in Miami or single family homes in San Francisco. We are buying low GRM, quality apartment buildings in Wilmington and Long Beach, California. Just as there are individual stocks that will rise while the Dow Jones averages are dropping, many properties will rise regardless of what is happening to the real estate market overall. WHY INVEST HERE? (Advantages of the South Bay/Long Beach/Wilmington Area) We want to buy properties in an area with job growth. There is an almost one-toone correlation between population & job growth and a rise in real estate values. We are fortunate to live in one of the most beautiful places in the world. People around the U.S., tired of terrible winter weather, move here to enjoy the warm, mild California climate. Immigrants, both legal and illegal, continue to flock to Southern California from Mexico and Asia. All this influx puts upward pricing pressure on homes and apartments.

California’ s population is expected to top 50 million by the year 2020! That’ s up from about 37 million today. Builders will be hard pressed to construct that many more housing units. Also, we live in an environmentally friendly state. It’ s not easy for builders to get the approvals necessary to build large developments. Finally, we can only expand eastward--on the west we have the ocean. This puts additional upward pressure on South Bay real estate, as workers have to either bite the bullet and pay the high home prices or else move to Riverside or farther and face a two hour commute each way everyday.

We have excellent job growth in Southern California--especially in the Long Beach/Harbor area. There are two reasons for this. First, the port of Los Angeles is bringing in over 30% of all imports into the U.S.! Newer cargo ships are too large to pass through the Panama Canal, so goods have to be unloaded at West Coast ports and railroaded across the country. Have you heard how the Chinese are making everything we buy? It’ s sad but true, and a majority of their shipping offloads at the Ports of Los Angeles and Long Beach. That means a lot of high paying jobs in shipping, trucking, long shoring, and related industries. In addition, the Port of Long Beach is now becoming a major cruise ship terminal, which brings even more jobs. Secondly, the City of Long Beach has spent millions of dollars trying to make Long Beach a “ go to”place for dining and entertainment. They have done an amazing job. Someone driving down Ocean Blvd. for the first time in 5 years will be amazed at the improvements. The Convention Center, the New Pike, the Aquarium of Long Beach, Shoreline Village, and many other tourist areas are completely changing the Long Beach area. This means JOBS--which translates into higher occupancy rates and higher rents. This is another reason that real estate prices are so high here compared with, say, Michigan or Iowa. Those states may actually be losing population. It’ s tough to resell your home if people are leaving town. That tends to hold prices down in certain regions of the country. If everyone were moving to South Dakota, then South Dakota’ s real estate would begin to rise rapidly. It’ s simple demographics. If people are moving in, prices rise, if they are moving away, prices will fall.

WHY INVEST IN 10-15 UNIT APARTMENT BUILDINGS? WHY NOT SMALLER PROPERTIES?

Rental properties with 2-4 units can be purchased with the same loan terms as with single family home purchases. The loan is based on credit worthiness and income, not necessarily the value of the property. This can lead to 5% to 10% down payments (or even zero down situations) and negative cash flows. This kind of speculation shoots up GRM’ s to 15 or 20 or more. These are ridiculous levels. But again, the bank is basing the loan on the buyer, not so much the property itself. With 5+ unit buildings, the banks will only loan within certain guidelines for rents and expenses. A property has to” pencil out”and make sense financially before a lender will make a loan. Investors are usually required to put down at least 25% when buying. This weeds out those with little or no cash, and leaves owners with a little more staying power if the economy turns bad. Affluent apartment investors are less likely to walk away from such large investments and dump their properties on the market in a downturn. This fact gives the market a lot of stability. Sophisticated investors realize that even if the market goes down for a few years, they just have to ride it out and hang on. They don’ t have to sell in a downturn. Eventually the real estate market will turn around and inflation will assist the process and give them a good return on their money. This is why selecting apartments that produce good cash flow is so important. If the market doesn’ t rise as fast as we project, we just have to hold our building longer than we originally planned. As long as we have monthly cash flow, loan payoff, and tax benefits, we don’ t need to sell. Finally, with larger buildings come the economies of scale. For example, the trash bill may be about the same for a 6 unit as it is with a 15 unit building. Similarly the water, gas and electric bills rise less proportionally as a building gets larger. A vacancy also affects our cash flow less with a larger apartment than with a smaller one. One empty unit in a 4-plex means 25% a vacancy rate and 25% less income. In a 12-unit building that same vacancy is only 8% with only an 8% loss in rents. By pooling money from several investors we can buy larger buildings, achieve those economies of scale and greatly increase our return on investment.

5. THE “BABY BOOMER”EFFECT

Something else has fundamentally changed in the market to increase prices. There are about 70 million Baby Boomers in the U.S.--those born between 1946 and 1964. This is the largest generation in American history. Most of us are in this group. We are now between 40 to 60 years old. We are in our peak earning years and are closing in on retirement. We have just gone through a stock market bubble and want to get some of our money out of the stock market. It concerns us to have so much of our investments in stocks. Rental property, on the other hand, has shown a nice steady increase over the course of our lifetimes, and most of us remember when homes in California were a fraction of what they cost today. Millions of Baby Boomers are pulling out hundreds of billions of dollars from the stock market to invest in rental property. When millions of people have the same investment idea at the same time, that investment will rise dramatically. You might be wondering, “ But can’ t they all decide to get out of real estate at the same time too?”Two things work against this idea. First of all, when you invest in rental real estate, there are tax advantages to stay in real estate. When you sell a property and buy a more expensive property you can transfer the increase tax-free using a 1031 exchange. This tax free benefit tends to keep people in real estate. Investors don’ t bounce in and out of the market as they do with stocks and other investments. Secondly, real estate is not a very liquid investment. It tends to take months to list and sell a property to get your investment out. This eliminates the panic selling as there can be occasionally with other investments, and adds an additional layer of stability to apartment building prices.

6. WHY SHOULD WE INVEST WITH YOU? I’ ve explained the advantages of buying quality rentals in Southern California. You’ re next question might be “ why invest with you” ? There are several advantages… First of all, many investors love the idea of buying rental property, but don’ t have any experience and don’ t really want to be a landlord.

In our partnership, as the real estate agent, I will locate and handle the purchase of the apartment buildings. I will handle the entire sales transaction, including obtaining and qualifying for the loan, and setting up all inspections, escrows, and insurance. Your participation is welcome and encouraged, but certainly not required. I will do all the “ leg work“ . Once we own the property, I will manage it for the partnership for a nominal monthly fee through my management company. I will take care of all tenant issues (selecting tenants, collecting rents, evictions, emergency calls, etc.). I will also handle the maintenance and renovation of the property along the lines that all the partners have agreed to. I will collect all the rents and pay all the bills. Each partner in the property will get a monthly statement showing all income, expenses and current account information. The excess accumulated cash flow, minus our reserves, will be distributed quarterly. In short, I’ ll handle all the aspects of owning property that most people don’ t like. You’ ll have no tenant hassles and no midnight calls that the plumbing is stopped up. I’ ll take care of the property. You just sit back and enjoy the benefits of ownership. By partnering with a seasoned real estate investor and owner, you get the benefits of my experience, and all of the savings I receive as a real estate agent (lower escrow and title fees, lower management fees, etc.) Plus, in the last several years, I have found, through trial and error, a group of low cost, RELIABLE vendors (Painters, plumbers, roofers handymen, etc.). You don’ t have to go through the “ learning curve”and lose time and money making mistakes, and hiring costly or unreliable workers. This can save us thousands of dollars over the years.

7. PARTNERSHIP PROPOSAL

If this sounds interesting to you as an investor, please let me know. I am putting together several investors in a Limited Liability Corporation. This is simply a partnership that has the advantages of a corporation (limited liability, tax benefits, etc.). Each investor can put in any amount over $50,000. Our goal is to put cash pools of $250,000 to $400,000 together with 3-5 individual investors. With these amounts as down payments we can purchase quality multi-unit buildings in the $1,000,000 to $1,600,000 range. By selecting properties with good rent increase potential, our goal is to earn 40% per year (counting all sources of return--appreciation, loan payoff, tax write, cash flow, and forced appreciation). While I cannot guarantee that we’ ll do this well in the future, I have done much better than this in the past. I search through literally hundreds of properties for sale to find one that works for me. As a matter of fact, my biggest problem is finding properties that meet my stringent criteria. Your final assurance that we’ re buying quality investments is that I’ m“ putting my money where my mouth is” . I’ ll put in at least 15% of each property investment pool. My own money and potential profit will be on the line just like yours. If I do a good job, we all make out! Please call me anytime to discuss this investment proposal further.

Financial History and References Available Upon Request