(760) 471-8536

(Registrant's telephone number, including area code)

Jack K. Heilbron

Chief Executive Officer

365 S. Rancho Santa Fe Road, Suite 300

San Marcos, CA 92078

(760) 471-8536

Copies to:

Bruce J. Rushall, Esq.

Rushall & McGeever

6100 Innovation Way

Carlsbad, California 92009

760-438-6855

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

Securities to be registered pursuant to Section 12(g) of the Act:

Common Stock, Series A, no par value

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   o	Accelerated filer   o
Non-accelerated filer   o	Smaller reporting company   x (Do not check if a smaller reporting company)

 

TABLE OF CONTENTS

PART I

Item 1	Business
Item 1A	Risk Factors
Item 2	Financial Information
Item 3	Properties
Item 4	Security Ownership of Certain Beneficial Owners and Management
Item 5	Directors and Executive Officers
Item 6	Executive Compensation
Item 7	Certain Relationships and Related Transactions, and Director Independence
Item 8	Legal Proceedings
Item 9	Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters
Item 10	Recent Sales of Unregistered Securities
Item 11	Description of Registrant's Securities to be Registered
Item 12	Indemnification of Directors and Officers
Item 13	Financial Statements and Supplementary Data
Item 14	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 15	Financial Statements and Exhibits

Articles of Incorporation

First Amendment to Articles of Incorporation

 

CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS

AND INDUSTRY DATA

This registration statement contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, many of which are beyond our control. Our actual results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in this registration statement. Important factors that may cause actual results to differ from projections include, but are not limited to:

•	specific risks that may be referred to in this registration statement, including those set forth in the "Risk Factors" section of the Registration Statement;
•	adverse economic conditions in the real estate market;
•	adverse changes in the real estate financing markets;
•	our inability to raise sufficient additional capital to continue to expand our real estate investment portfolio;
•	unexpected costs, lower than expected rents and revenues from our properties, and/or increases in our operating costs;
•	inability to attract or retain qualified personnel, including real estate management personnel;
•	adverse results of any legal proceedings; and
•	changes in laws, rules and regulations affecting our business.

All statements, other than statements of historical facts, included in this registration statement regarding our strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects, current expectations, forecasts, and plans and objectives of management are forward-looking statements. When used in this registration statement, the words "will," "may," "believe," "anticipate," "intend," "estimate," "expect," "should," "project," "plan," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this registration statement. We do not undertake any obligation to update any forward-looking statements or other information contained in this registration statement, except as required by federal securities laws. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements in this registration statement are reasonable, we cannot assure you that these plans, intentions or expectations will be achieved. We have disclosed important factors that could cause our actual results to differ materially from our expectations under the "Risk Factors" section of this registration statement and elsewhere in this registration statement. These cautionary statements qualify all forward-looking statement attributable to us or persons acting on our behalf.

Information regarding market and industry statistics contained in this registration statement is included based on information available to us that we believe is accurate. We have not reviewed or included data from all sources, and we cannot assure you of the accuracy or completeness of the data included in this registration statement. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We undertake no obligation to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. See the "Risk Factors" section of this registration statement for a more detailed discussion of uncertainties and risks that may have an impact on our future results.

 

ITEM 1.

BUSINESS

Our Company, NetREIT

NetREIT (who we sometimes refer to as "we", "us" or the "Company") is a California corporation formed on January 28, 1999 that operates as a real estate investment trust as defined under the Internal Revenue Code ("REIT"). We are a self-administered REIT, meaning that our operations are under the control of our board. We have no outside advisor. We do use an affiliated property manager, CHG Properties, Inc. ("CHG Properties"), to manage the day-to-day operations of our properties.

Our goal is to create current income and growth for our shareholders by seeking promising financial opportunities to acquire commercial, retail and multi-unit residential real estate located primarily in the western United States.

Our Management

As we have no outside advisor, our management is responsible for identifying and making acquisitions on our behalf. Our chief executive officer and president, Jack K. Heilbron, is responsible for managing our day-to-day affairs. We contract with CHG Properties, Inc. ("CHG Properties") for the management of our properties. Our board must approve each real property acquisition proposed by our executive officers, as well as other matters set forth in our articles of incorporation. We have five directors comprising our board. Four of our directors are independent of Mr. Heilbron and CHG Properties. Our directors are elected annually by the shareholders. We refer to our executive officers and any directors who are affiliated with them as our management. Currently, we have no such affiliated directors other than Mr. Heilbron

Our Property Manager

CHG Properties, Inc. manages our properties under the Property Management Agreement. The Property Management Agreement has been approved and is subject to continuing review by our directors, including a majority of our independent directors. CHG Properties is the wholly owned subsidiary of CI Holding Group, Inc. ("CI Holding"). Our CEO and president and our CFO, Mr. Heilbron and Mr. Elsberry, respectively, are minority shareholders of CI Holding. Also, Mr. Heilbron serves as chairman and president of CHG Properties, and Mr. Elsberry serves as its CFO and secretary and a director.

Under the Property Management Agreement, we will pay CHG Properties management fees in the amount up to 5 % of the gross revenues of each property managed for management of our properties. We believe these terms will be no less favorable to NetREIT than those customary for similar services in the relevant geographic areas of our properties. Depending upon the location of certain of our properties and other circumstances, we may retain unaffiliated property management companies to render property management services for some of our properties.

CHG Properties' primary business is property management. For the fiscal year ended December 31, 2007, CHG Properties reported $135,622 in gross operating revenues and a net profit of $48,998.

Our Contacts with CHG Properties

The Property Management Agreement.   CHG Properties provides property management services to us under the terms of the Property Management Agreement. Without limiting the generality of the following description, the property manager has agreed to provide services in connection with the rental, leasing, operation and management of our properties in consideration for a monthly management fee in the amount of up to 5% of Gross Rental Income, as defined in the Property Management Agreement, from all properties managed for the month for which the payment is made. In addition, we are required to compensate the property manager in the event it provides services other than those specified in the Property Management Agreement and to reimburse the property manager for its costs, other than its general, administrative and overhead costs, in providing services under the Agreement. We will maintain a property management agreement for each property, each of which will have an initial term ending December 31, in the year in which the property is acquired. Each Property Management Agreement will be subject to successive one-year renewals, unless we or the property manager notifies the other in writing of its intent to terminate the Property Management Agreement 60 days prior to the expiration of the initial renewal term.  Our right to terminate will be limited so that the Property Management Agreement will be terminable by us only in the event of gross negligence or malfeasance on the part of the property manager.

Under the Property Management Agreement, the property manager will hire, direct and establish policies for our employees who will have direct responsibility for each property's operations, including resident managers and assistant managers, as well as building and maintenance personnel. We may employ some persons who are also employed by CHG Properties or its other affiliates. CHG Properties may, as it deems necessary, engage one or more agents to perform services for us, including local property managers. In doing so, however, CHG Properties will not be relieved of its duties and responsibilities to us under the Property Management Agreement, and it must compensate any such agents without the right to any reimbursement from us or duplication of costs to us. CHG Properties will also direct the purchase of equipment and supplies and will supervise all maintenance activity.

Pursuant to the Property Management Agreement, CHG Properties is responsible for collection and bank deposit of rents, day-to-day maintenance of the properties, leasing and tenant relations, and will submit approved vendor invoices to us for payment. CHG Properties will also review and pay approved vendor invoices, monitor the payment of rents by tenants, and monitor the collection of reimbursements from tenants, where applicable, for common area maintenance, property taxes and insurance. Data relating to collections, payments and other operations of the properties will be entered and maintained on a computer data bank located in CHG Properties' office. CHG Properties will be responsible for monitoring and supervising any management employees on the properties, including on-site apartment building managers.

Under the Property Management Agreement, we indemnify CHG Properties and pay or reimburse reasonable expenses in advance of final disposition of any proceeding with respect to its acts or omissions. Conditions to our indemnification include: that the property manager acted in good faith and the course of its conduct which caused the loss or liability was in our best interests; that the liability or loss to be indemnified was not the result of its willful misconduct or gross negligence; and that, in any event, such indemnification or agreement to hold harmless is recoverable only out of our assets and not from the assets of our shareholders.

Right to Acquire Property Manager's Business.   During the term of the Property Management Agreement, we have the option to acquire CHG Properties' property management business, including its assets used in connection with that business. We have the right to do this without any consent of the property manager, its board, or its shareholders. We may elect to exercise this right at any time. Our board's decision to exercise this right will require the approval of a majority of our directors not otherwise interested in the transaction (including a majority of our independent directors). In the event this acquisition is consummated, CHG Properties and/or its shareholders will receive the number of shares of our common stock determined as described below. We sometimes refer to our common stock as "Shares". If the transaction is consummated, we will be obligated to pay any fees accrued under the contractual arrangements for services rendered through the closing date of the transaction.

In the event we choose to structure the transaction as a purchase of assets or a share exchange where we acquire the CHG Properties corporate entity, our articles and bylaws and California corporation law permit us to do so without obtaining approval of our shareholders. We presently do not intend to seek our shareholder approval if it is not then required.

The number of Shares we would issue to acquire CHG Properties' business will be determined as follows. First we would send notice to the property manager of our election to proceed with the acquisition (the "Acquisition Notice"). Next, an independent auditor will determine the net income of the property manager for the 6-month period immediately preceding the month in which the Acquisition Notice is delivered as determined in accordance with generally accepted accounting principles ("GAAP"). The net income so determined will then be annualized. CHG Properties will bear the cost of the audit. The annualized net income will then be multiplied by 90% and divided by our Funds From Operations per Weighted Average Share ("FFO Per Share") which shall equal the annualized Funds From Operations for our quarter ended immediately preceding the date the Acquisition Notice is delivered per our Weighted Average Shares during such quarter, as annualized. The FFO Per Share will be based on the quarterly report we file and deliver to our shareholders for such quarter. The resulting quotient will constitute the number of Shares we will issue in the transaction, which must be consummated within 90 days after the Acquisition Notice. FFO means generally net income (computed in accordance with GAAP), excluding gains or losses from debt restructuring and sales of properties, plus depreciation of real property and amortization, and after adjustments for unconsolidated joint ventures and partnerships.

Under certain circumstances, our acquisition of CHG Properties' business under this agreement can be entered into and consummated without seeking shareholder approval. Any acquisition of the property manager will occur, if at all, only if our board obtains a fairness opinion from a recognized financial advisor or institution providing valuation services to the effect that the consideration to be paid for the property manager's business is fair, from a financial point of view, to the shareholders. In the event the Property Management Agreement is terminated for any reason other than our acquisition of CHG Properties' business, all of CHG Properties' obligations and the Property Management Agreement will terminate.

Federal Income Tax REIT Requirements

Starting in our 2000 tax year, we have elected to be taxed as a REIT. As a REIT, we are generally not subject to federal income tax on income that we distribute to our shareholders. Under the Internal Revenue Code of 1986, as amended (the "Code"), to maintain our status as a REIT and receive favorable REIT income tax treatment, we must comply with certain requirements of federal income tax laws and regulations. These laws and regulations are complex and subject to continuous change and reinterpretation. We have received an opinion of special tax counsel that our Company will qualify as a REIT if it achieves certain of its objectives, including diversity of stock ownership and operating standards. However, there is no assurance that we will be able to achieve these goals and thus qualify or continue to qualify to be taxed as a REIT.

The principal tax consequences of our being taxed as a REIT are that our shareholders may receive dividends that are partially sheltered from federal income taxation. In the event we fail to qualify as a REIT, we will be subject to taxation on two levels in that our income will be taxed at the corporate level because we will not be able to deduct dividends we pay to our shareholders. In turn, shareholders will be taxed on dividends they receive from us.

To continue to be taxed as a REIT, we must satisfy numerous organizational and operational requirements, including a requirement that we distribute at least 90% of our Real Estate Investment Trust taxable income to our shareholders, as defined in the Code and calculated on an annual basis. If we fail to qualify for taxation as a REIT in any year, our income will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify. Even though we qualify as a REIT for federal income tax purposes, we may still be subject to state and local taxes on our income and property and to federal income and excise taxes on our undistributed income.

1940 Act Considerations

Our management will continually review our investment activity in order to prevent us from coming within the application of the Investment Company Act of 1940 (the "1940 Act"). Among other things, management will attempt to monitor the proportion of our portfolio that is placed in various investments so that we do not come within the definition of an "investment company" under the act.  If at any time the character of our investments could cause us to be deemed an investment company for purposes of the 1940 Act, we will take the necessary action to ensure that we are not deemed to be an "investment company."

Our Offices and Employees

Our offices are situated in approximately 1,929 square feet of space in the Rancho Santa Fe Professional Building, an office building located in San Marcos, California. We sublease this space from CI Holding for monthly rent of $2,990 The sublease contains no renewal rights.  The lease expires on April 30, 2009.

We currently employ 14 full time employees and 5 part-time employees.

Certain Investment Limitations

Our bylaws place numerous limitations on us with respect to the manner in which we may invest our funds. These limitations cannot be changed unless our bylaws are amended, which requires the approval of the shareholders. Under our bylaws, we cannot:

•	Acquire a property if its purchase price, as defined, exceeds its appraised value and the total acquisition expenses, as defined, and real estate commissions paid do not exceed six percent (6%) of the purchase price (or in the case of a mortgage loan, six percent (6%) of the funds advanced), unless our board (including a majority of the independent directors) approves the transaction as being commercially competitive, fair and reasonable to us.
•	Invest in commodities, commodities futures contracts, foreign currency and bullion, with an exception for interest rate futures.
•	Invest in installment sales contracts for the sale or purchase of real estate (except in connection with the disposition of a property and where such contract is in recordable form and is appropriately recorded in the chain of title).
•	Invest in mortgage loans, unless such lien, plus the outstanding amount of the senior debt secured by the same property, if any, does not exceed 85% of the appraised value of the property securing the loan if, after giving effect thereto, the value of all mortgage loans secured by junior liens on real property would not exceed 25% of our tangible assets; or if the value of all of our investments in junior mortgage loans which do not meet the foregoing criteria would not exceed 10% of our tangible assets (which are included in the aforesaid 25%) and the directors (including a majority of the independent directors) determine substantial justification exists because of the presence of other underwriting criteria.
•	Invest in mortgage loans unless:
	—	the mortgagee's or owner's title insurance policy or commitment reflects the priority of the mortgage or the condition of title is obtained;
	—	the mortgage loan is not subordinate to any mortgage loan or equity interest by a member of our management or their affiliate; and
	—	the transaction is not with a member of our management or their affiliate unless an appraisal of the property securing the mortgage has been obtained from an independent qualified appraiser and the transaction is approved by a majority of the independent directors.
•	Invest in unimproved real property, as defined, or in mortgage loans secured by liens on unimproved real property, if the total of such investments exceeds 10% of our invested assets, as defined.
•	Trade, as compared to investment activities (other than investments made solely for hedging purposes).
•	Hold property primarily for sale to customers in the ordinary course of business.
•	Engage in the trading, underwriting or agency distribution of Securities issued by others.
•	Invest in the equity securities of any nongovernmental issuer representing less than 100% ownership of such issuer, including another REIT, for a period in excess of 18 months or in the equity securities of any affiliate of a member of management, except issuers formed by us to develop, own and/or operate specific properties.
•	Engage in any short sale, or borrowing on an unsecured basis, if such borrowing will result in an asset coverage of less than three hundred percent (300%), unless at least eighty percent (80%) of our tangible assets consist of first mortgage loans. For the purposes hereof, "asset coverage" means the ratio that the value of the aggregate book value of our assets, less all liabilities and indebtedness, except indebtedness for unsecured borrowings, bears to the aggregate of our unsecured borrowings.

Also, our aggregate borrowings (secured and unsecured) must be reviewed by our board at least quarterly as being reasonable in relation to our net assets. The maximum amount of such borrowings in relation to our net assets shall, in the absence of a satisfactory showing that a higher level of borrowing is appropriate, not exceed 300%. Any excess in borrowing over such 300% level shall be approved by a majority of the independent directors and disclosed to shareholders in our next quarterly report, along with justification for such excess.

Our Policies Regarding Operating Reserves

We are not required to maintain a specified level of operating reserves nor do we have a policy to do so. Our directors continually monitor our short term cash needs for capital expenditures and property operation with a view towards maintaining cash reserves in sufficient amounts to meet our anticipated short term cash requirements in this regard. In addition, based on the nature, location, age and condition of our properties, and our requirements under our various leases, we attempt to maintain sufficient reserves to meet these obligations. However, we cannot assure our shareholders that we will have sufficient reserves at all times to meet our short term obligations, especially unforeseen obligations, such as those arising from losses suffered by reason of acts of God or unsecured casualties. In the event we encounter situations requiring expenditures exceeding our reserves, we will be forced to seek funds from other sources, including short term borrowing.

Restrictions on Our Transactions with Management and Their Affiliates

Our bylaws prohibit the following transactions with our management or their affiliates.

•	Any loan of funds to or borrowing of funds from such person, unless a majority of the directors (including a majority of the independent directors) not otherwise interested in such transaction, approve the transaction as being fair, competitive, commercially reasonable and no less favorable to us than loans between unaffiliated lenders and borrowers under the same circumstances.
•	Any transaction (other than through a joint venture or partnership) that involves the acquisition of a property from, or the sale of a property to, such person, except our acquisition of a property where such person has acquired the property for the sole purpose of facilitating our acquisition thereof, the total consideration we pay does not exceed the cost of the property to such person (including holding costs) and no special benefit results to such person.
•	Any transaction with a business organization with which such a person, in his individual capacity, is affiliated unless that transaction is approved by the board and a majority vote of the shareholders.
•	Any investment in a joint venture or partnership with such person unless amajority of the board (including a majority of the independent directors), excluding any director who is interested in the transaction, approve the transaction as being fair and reasonable to us and substantially on the same terms and conditions as those received by other joint venturers.
•	Any other transaction between us and such person, unless specifically prohibited, shall require the approval of the board (including a majority of the Independent Directors) excluding any director interested in the transaction, as being fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.

Restrictions on Our Ability to Issue Securities

Our bylaws prohibit us from issuing the following securities:

•	Warrants, options or rights, except as part of a public offering or other financing, a ratable distribution to or purchase by the shareholder or a stock option plan for our officers, directors and/or key employees.
•	Debt securities, unless the historical debt service coverage (in the most recently completed fiscal year), as adjusted for known changes, is sufficient to properly service that higher level of debt.
•	Assessable or non-voting equity securities.

ITEM 1A.

RISK FACTORS

Risks Relating to an Investment in Our Securities

If we are unable to find suitable investments, we may not be able to achieve our investment objectives or continue to pay dividends. The achievement of our investment objectives and to continue to pay regular dividends is dependent upon our continued acquisition of suitable property investments, our selection of tenants and our obtaining satisfactory financing arrangements. We cannot be sure that our management will be successful in obtaining suitable investments on financially attractive terms or that, if it makes investments on our behalf, our objectives will be achieved. If our management is unable to find suitable investments, we will hold the proceeds available for investment in an interest-bearing account, invest the proceeds in short-term, investment-grade investments or, ultimately, liquidate. In such an event, our ability to pay dividends to our shareholders would be adversely affected.

Our continued growth depends on external sources of capital. We may not be able to acquire or develop properties when strategic opportunities exist, satisfy our debt service obligations, or make the cash distributions to our stockholders necessary to maintain our qualification as a REIT if we do not have the necessary capital. We may not be able to fund our future capital needs as they arise, including acquisition financing, from our operating cash flow because of our distribution payment requirements. To maintain our qualification as a REIT, the Internal Revenue Code requires us to annually distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding income from capital gains. As a result, we must rely on outside sources to fund our needs. Our access to third-party sources of capital depends, in part, on the following: general market conditions, the market's perception of our growth potential, our current debt levels, our current and expected future earnings, our cash flow and cash distributions, and the market price per Share of our common stock.

We may be legally prevented from paying dividends. Under California Corporations Law, our directors may be personally liable for our payment of any distributions, including dividends, on our equity Shares if at the time payment is made we do not satisfy certain solvency tests, including current assets and current liabilities ratio tests. In the event our board determines that we do not satisfy these statutory tests, we will not pay dividends on our common stock.

We may change one or more of our investment policies. One or more of our investment policies may be changed, subject to certain investment limitations in our bylaws, or modified from time to time by our management, subject to review by our independent directors who are charged with the responsibility and authority to review our investment policies and criteria at least annually to determine that the policies we are following are in the best interests of our shareholders.

Our shareholders have a very limited right to influence our business or affairs. Our executive officers, under the direction of our board of directors, have the exclusive right to manage our day-to-day business and affairs. Except for certain major decisions (such as mergers or the sales of substantially all of our assets) which require the vote of our shareholders, our shareholders generally do not have the right to participate in our management or investment decisions. Moreover, shareholders do not have the right to remove directors except for cause.

We depend on key personnel. Our ability to achieve our investment objectives and to pay dividends is dependent to a significant degree upon the continued contributions of certain key personnel in acquiring our investments, the selection of tenants and the determination of any financing arrangements. Our key personnel includes Mr. Jack K. Heilbron and Mr. Kenneth W. Elsberry, each of whom would be difficult to replace. If any of our key employees were to cease employment, our operating results could suffer. We also believe that our future success depends, in large part, upon our ability to hire and retain skilled and experienced managerial, operational and marketing personnel.  Competition for skilled and experienced personnel is intense, and we cannot assure our shareholders that we will be successful in attracting and retaining such skilled personnel.

The availability and timing of cash dividends is uncertain. We bear all expenses incurred in our operations, which are deducted from cash funds generated by operations prior to computing the amount of cash dividends to be distributed to the shareholders. In addition, the board of directors, in its discretion, may retain any portion of such funds for working capital. We cannot assure our shareholders that we will have sufficient cash to pay dividends to our shareholders.

Our bylaws may prevent our participation in certain business combinations. Provisions of our bylaws require our shareholders owning at least 67% of the Shares to approve certain business combinations. These requirements could have the effect of inhibiting a change in control even if a change in control were in the best interests of our shareholders. These provisions do not apply, however, to business combinations that are approved or exempted by our board of directors prior to the time that someone becomes an interested shareholder.

A limit on the number of Shares a person may own may discourage a takeover.   Our articles of incorporation restrict ownership by one person to not more than 9.8% of our outstanding common Shares. This restriction may discourage a change in control of our voting stock and may deter individuals or entities from making tender offers for Shares, which offers might be financially attractive to shareholders or which may cause a change in our management.

Possible acquisition of our affiliated property manager's business. We have the option to acquire the property management business of our property manager, CHG Properties, at any time, in return for Shares of our common stock, the number of which will be determined by the property manager's net income and our Funds From Operations per Share in accordance with a prescribed formula. Under this right, we can acquire our property manager's business without a vote or the consent of our shareholders or the consent of the property manager or its shareholders. Thus, in the event we acquire the property manager's business, the owner of the property manager, which is affiliated with our executive management, would receive payment in the form of Shares of our common stock, the amount of which could be substantial. This formula is intended to result in our issuance of a number of our common shares equal to the fair value of the property manager's business, including consideration for the cancellation of its contractual relationship with us and the loss of future fees. However, there is no assurance that the value we would pay for the property manager's business and assets would not exceed the value non-related purchasers would pay in an arms-length transaction. To exercise this right, it must be approved by a majority vote of our directors not otherwise interested in the transaction and by a majority of our independent directors.

Possible future transactions with our executive management or their affiliates. Under prescribed circumstances, our bylaws permit us to enter into transactions with our affiliates, including the borrowing and lending of funds, the purchase and sale of properties, and joint investments. Currently, our policy is not to enter into any transaction involving sales or purchases of properties or joint investments with our executive management or their affiliates, or to borrow from or lend money to such persons. However, our policies in each of these regards may change in the future.

Our return to our shareholders could be reduced if we are required to register as an investment company. We are not registered as an investment company under the 1940 Act. If we were obligated to register under the 1940 Act, we would incur additional expenses. Also, because we would have to comply with a variety of substantive requirements of the 1940 Act, operations could be materially altered. We plan to continue to rely on an exemption from registration under the 1940 Act. Compliance with this exemption generally requires that our activities are primarily in the business of investing in real estate. Under this exemption, we may temporarily invest unused funds in government securities and other specified short-term investments. Also, in order to comply with these exemption requirements, we may from time to time acquire indirect assets and real estate, or invest in sole or participatory ownership of secured loans and certain other qualifying assets. Inasmuch as our compliance with this exemption will, in large part, depend on the facts and circumstances of our operations, there is no assurance that we will be able to maintain this exemption. Moreover, our ability to invest in sufficient qualifying real estate assets and/or real estate-related assets may be impacted by future changes in the 1940 Act and regulations thereunder or by future interpretations by the Securities and Exchange Commission or the courts. Any of these future developments could cause us to lose our exemption and force us to reevaluate our portfolio and business strategy. Any such changes may materially and negatively impact our business.

Risks Relating to Private Offering Exemption and Lack of Liquidity

Private placement offering – compliance with exemption requirements. We have in the past and may continue from time to time to sell our Shares to investors in reliance on the private placement offering exemption from registration under the 1933 Act and applicable state securities laws. Many of these requirements are subjective and must ultimately be determined upon the specific facts and circumstances of the Offering. There is no assurance that the Securities and Exchange Commission, any state securities law administrator, or a trier of fact in a court or arbitration proceeding would not determine that we failed to meet one or more of these requirements. In the event we cannot rely on an exemption from registration under the 1933 Act and/or the securities laws of any state, we would likely be liable to one or more investors for rescission and possibly damages. If a number of investors were successful in seeking rescission and/or damages, we could face severe financial demands that would adversely affect our business as a whole and our shareholders' investment in our Shares.

Moreover, since 2005, we have conducted multiple private placement offerings, all in reliance upon the private placement exemptions from registration under the 1933 Act and applicable state securities laws. Under applicable law and regulations, we believe these multiple offerings will be combined (or integrated) and treated as a single offering for federal and state securities law purposes.  If so integrated, the offerings would be treated as a single offering and would be required to meet each of the requirements for the exemption relied upon. While we have structured each of these offerings individually so that if they are combined they would meet the requirements of the Rule 506 exemption, the area for application of this exemption to integrated offerings remains somewhat unclear and has not been fully defined by the Securities and Exchange Commission or the courts. Thus, there is uncertainty as to our burden of proving that we have correctly relied on one or more of these private placement exemptions.

There is no public market for our common stock. A public market for our Shares does not exist. While we plan eventually to have the Shares publicly traded, we do not know and cannot estimate when or if a regular public market for the Shares will develop. When our common stock is registered under the 1934 Act by the filing of this Form 10, we will be a "publicly held company" and, in general, our common stock will be eligible for listing on the NASDAQ bulletin board market. We may also be eligible to file for registration on one or more securities exchanges, including the American Stock Exchange. We have not yet determined when we will endeavor to list or register our Shares for trading in any of these markets. Until we do so, there will unlikely be a regular market for the resale of our common stock. The establishment of and maintaining a registration in these markets is costly and can be a time-consuming process. When we do so depends on a number of factors, including the amount of common stock we sell in this Offering and any subsequent offerings, the number of shareholders we have, the costs and expense of such registration, and the deemed overall benefits of registration to us and to our shareholders. Until a regular public market for the Shares exists, our shareholders may not be able to liquidate their investment in the Shares in the event of emergency or for any other reason, and the Shares may not be readily accepted as collateral for a loan. The purchase of the Shares, therefore, should be considered only as a long-term investment.

Risks Relating to Real Estate Investments

An investment in our Shares may be affected by adverse economic and regulatory changes.   We could be subject to risks generally incident to the ownership of real estate, including:

•	changes in general economic or local conditions;
•	future changes in the federal income tax laws which affect the way we and/or our shareholders are taxed;
•	changes in supply of or demand for similar or competing properties in an area;
•	changes in interest rates and availability of permanent mortgage funds which may render the sale of a property difficult or unattractive;
•	changes in tax, real estate, environmental and zoning laws; and
•	periods of high interest rates and tight money supply.

For these and other reasons, we cannot assure our shareholders that we will be profitable or that we will realize growth in the value of our properties.

Continuing problems in the subprime residential lending market may have negative effects on our future debt and possibly on our short term investment portfolio. We do not have direct exposure to the subprime residential lending market which, over recent months, has sustained substantial losses and led to the failure of a number of subprime lenders and investors. We have not invested directly or indirectly in assets that could be classified as subprime residential mortgages, and we do not have direct exposure to the subprime residential lending market. However, we anticipate that the decline of the subprime residential market may have broad-reaching effects on the real estate mortgage market in general. These effects may include, but not be limited to, increases in interest rates, tightening in eligibility requirements for mortgage loans and, possibly, the unavailability of certain mortgage loans to all except certain prime borrowers. As a result, we anticipate we may face increased interest rates over the short to mid-term. Increased interest rates will not only increase our costs of acquiring and maintaining leveraged real estate investments, but may also decrease funds available for dividends and possibly decrease the value of our existing investments.

Increase in energy prices. Energy prices, especially the price of gasoline and petroleum products, have disproportionately increased over the past three years to record or near-record prices. The causes for these increases, including increased world demand, limited supply and conflicts and uncertainties in the Middle East, Africa, and other oil-producing areas are expected to continue into the indefinite future. These price increases are expected to continue into the near future. Also, significant shortages of one or more of these petroleum products could also occur. Such increased prices and shortages will have a negative impact on the real estate market and exert upward pressures on rents and operating expenses. Inability to increase our rents to cover increased costs will negatively impact our business and the returns we can realize from the operation and disposition of our properties.

We are not required to set aside and maintain specific levels of cash reserves. We do not anticipate that a permanent reserve for maintenance and repairs, lease commissions or tenant improvements of real estate properties will be established. However, to the extent that we have insufficient funds for such purposes, we may establish reserves. To the extent that expenses increase or unanticipated expenses arise and accumulated reserves are insufficient to meet such expenses, we would be required to obtain additional funds through borrowing or the sale of additional equity, if available. Our ability to repay any indebtedness incurred in connection with the acquisition of a property or any subsequent financing or refinancing will depend in part upon the sale, refinancing or other disposition of that property prior to the date such amounts become due. There can be no assurance that any such sale or refinancing can be accomplished at a time or on such terms and conditions as will permit us to repay the outstanding principal amount of any indebtedness. Financial market conditions in the future may affect the availability and cost of real estate loans, making real estate financing difficult or costly to obtain. In the event we are unable to sell or refinance that property prior to the anticipated repayment date of any indebtedness, we may be required to obtain the necessary funds through additional borrowings, if available. If additional funds are not available from any source, we may be subject to the risk of losing that property through foreclosure.

We may be unable to sell a property at any particular time.   In general, we intend to sell, exchange or otherwise dispose of the properties when we, in our sole discretion, determine such action to be in our best interests. Our shareholders should not, however, expect a sale within any specified period of time, as properties could be sold sooner because they are not performing or because we believe the maximum value can be obtained with a sale prior to the end of the anticipated holding period. Likewise, a sale may not be feasible until later than anticipated.

Some of our retail properties may depend upon a single tenant for all of their rental income.   We expect that a single tenant will occupy some of our retail properties. The success of these properties will be materially dependent on the financial stability of such tenants. Lease payment defaults by tenants could cause us to reduce the amount of dividends we pay. A default of a tenant on its lease payments to us would cause us to lose the revenue from the property and force us to find an alternative source of revenue to meet any mortgage payment and prevent a foreclosure if the property is subject to a mortgage. In the event of a default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and reletting the property. If a lease is terminated, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss.

Some of our properties may be suitable for only one use.   We expect that some of our retail properties will be designed for use by a particular tenant or business. If a lease on such a property terminates and the tenant does not renew, or if the tenant defaults on its lease, the property might not be marketable without substantial capital improvements. Improvements could require the use of cash that we would otherwise distribute to our shareholders. Also, our sale of the property without improvements would likely result in a lower sales price.

We may obtain only limited warranties when we purchase a property.   The seller of a property will often sell such property in its "as is" condition on a "where is" basis and "with all faults," without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property as well as the loss of rental income from that property.

Our ability to operate a property may be limited by contract. Some of our properties will most likely be contiguous to other parcels of real property, comprising part of the same shopping center development. In connection therewith, there will likely exist significant covenants, conditions and restrictions, known as "CC&Rs," relating to such property and any improvements on that property, and granting easements relating to that property. The CC&Rs will restrict the operation of that property. Moreover, the operation and management of the contiguous properties may impact such property. Compliance with CC&Rs may adversely affect our operating costs and reduce the amount of funds that we have available to pay dividends.

Shorter lease terms tend to increase our maintenance costs. Our apartment leases are typically month-to-month. In our experience, shorter leases lead to more frequent tenant turnover which tends to increase our leasing and maintenance costs as compared to those we incur with longer leases. While we attempt to account for these anticipated higher costs in the amount of tenant deposits and rental rates we require, we are not always able to do so within a given tenant market.

A property that incurs a vacancy could be difficult to sell or re-lease.   We expect our properties to periodically incur vacancies by reason of lease expirations, terminations or tenant defaults. If a tenant vacates a property, we may be unable either to re-lease the property for the rent due under the prior lease or to re-lease the property without incurring additional expenditures relating to the property. In addition, we could experience delays in enforcing our rights against the defaulting tenant and collecting rents and, in some cases, real estate taxes and insurance costs due from that tenant. If the vacancy continues for a long period of time, we may suffer reduced revenues resulting in less cash dividends to be distributed to shareholders. In addition, the resale value of the property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.

In order to re-lease a property, substantial renovations or remodeling could be required. The cost of construction in connection with any renovations or remodeling undertaken at a property and the time it takes to complete such renovations may be affected by factors beyond our control, including, but not limited to, the following: labor difficulties resulting in the interruption or slow-down of construction; energy shortages; material and labor shortages; increases in price due to inflation; adverse weather conditions; subcontractor defaults and delays; changes in federal, state or local laws; ordinances or regulations; and acts of God, which may result in uninsured losses.

Also, we could incur additional delays and costs if we are required to engage substitute or additional contractors to complete any renovations in the event of delays or cost overruns.

If we experience cost overruns resulting from delays or other causes in any construction, we may have to seek additional debt financing. Further, delays in the completion of any construction will cause a delay in our receipt of revenues from that property and could adversely affect our ability to attain revenue projections and meet our debt service obligations. Payment of cost overruns could impair the operational profitability of that property. Our inability to complete any construction on economically feasible terms could result in termination of construction and could significantly harm our business.

We may have to extend credit to buyers of our properties. In order to sell a property, we may lend the buyer all or a portion of the purchase price by allowing the buyer to pay with its promissory note. Generally, the note would be secured by a junior lien on the property behind the primary mortgage lender. However, in circumstances we deem appropriate, we may accept an unsecured note, which may or may not be guaranteed by a principal of the buyer or a third party. Providing financing of all or a portion of the purchase price to the buyer will increase the risks that we may not receive full payment for the property sold.

We may not have funding for future tenant improvements.   When a tenant at one of our commercial properties does not renew its lease or otherwise vacates its space in one of our buildings, it is likely that, in order to attract one or more new tenants, we will be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. We may depend on institutional lenders and/or tenants to finance our tenant improvements and tenant refurbishments in order to attract new tenants. We do not anticipate that we will maintain significant working capital reserves for these purposes. We therefore cannot assure our shareholders that we will have any sources of funding available to us for such purposes in the future.

Uninsured losses may adversely affect returns to our shareholders.   Management will attempt to ensure that all of our properties are insured to cover casualty losses. However, in certain areas, insurance coverage for certain types of losses, generally losses of a catastrophic nature such as earthquakes, floods, terrorism and wars, is either unavailable or cannot be obtained at a reasonable cost. In addition, we have no source of funding to repair or reconstruct the damaged property, and we cannot assure our shareholders that any such sources of funding will be available to us for such purposes in the future.

Our policy is to obtain insurance coverage for each of our properties covering loss from liability, fire and casualty in the amounts and under the terms we deem sufficient to insure our losses. Under tenant leases on our commercial and retail properties, we require our tenants to obtain insurance for our properties to cover casual losses and general liability in amounts and under terms customarily obtained for similar properties in the area. However, in certain areas, certain types of losses, generally losses of a catastrophic nature such as earthquakes, floods, terrorism and wars is either unavailable or cannot be obtained at a reasonable cost. For example, in most earthquake-prone areas, we do not expect to obtain earthquake insurance because it is either not available or available at what we decide is too high of a cost.  Also since the 9-11 attack, tenants may not obtain terrorism insurance in some urban areas. In the event we are unable or decide not to obtain such catastrophic coverage for a property and damage or destruction of the property occurs by reason of an uninsured disastrous event, we could lose a portion of our investment in the property.

In addition, we could lose a significant portion of our anticipated rental income from a property if it suffers damage. Our leases generally allow the tenant to terminate the lease if the lease premises is partially or completely damaged or destroyed by fire or other casualty unless the premises is restored to the extent of insurance proceeds we receive. These leases will also permit the tenants to partially or completely abate rental payments during the time needed to rebuild or restore the damage premises. Loss of rental income under these circumstances would require us to obtain additional funds to meet our expenses. We generally have insurance for rental loss to cover at least some losses from ongoing operations in the event of partial or total destruction of a property.

Our compliance with various legal requirements of real estate ownership may involve significant costs. Our properties are subject to various local, state and federal regulatory requirements, including those addressing zoning, environmental, land use, access for the handicapped and air and water quality. Compliance with these additional legal requirements could adversely affect our operating income and our ability to pay dividends. Also, the value of a property may be adversely affected by legislative, regulatory, administrative and enforcement actions at the local, state and national levels in a variety of areas, including environmental controls.

Environmental laws also may impose restrictions on the manner in which properties may be used or businesses may be operated, and these restrictions may require expenditures. Such laws may be amended so as to require compliance with stringent standards which could require us to make unexpected expenditures, some of which could be substantial. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties.

Our competition for properties could impact our profitability. In acquiring properties, we experience substantial competition from other investors, including other REITs and real estate investment programs. Many of our competitors have greater resources than we do and, in many cases, are able to acquire greater resources, including personnel and facilities with acquisition efforts. Because of this competition, we cannot assure our shareholders that we would be able to always acquire a property we deem most desirable or that we would be able to acquire properties on favorable terms. Our inability to acquire our most desirable properties on desired terms could adversely affect our financial condition, our operations and our ability to pay dividends.

The bankruptcy or insolvency of one of our major tenants would adversely impact our operations and our ability to pay dividends.   The bankruptcy or insolvency of a significant tenant or a number of smaller tenants would have an adverse impact on our income and our ability to pay dividends. Generally, under bankruptcy law, a tenant has the option of continuing or terminating any unexpired lease. If the tenant continues its current lease, the tenant must cure all defaults under the lease and provide adequate assurance of its future performance under the lease. If the tenant terminates the lease, we will lose future rent under the lease and our claim for past due amounts owing under the lease (absent collateral securing the claim) will be treated as a general unsecured claim and may be subject to certain limitations. General unsecured claims are the last claims paid in a bankruptcy and, therefore, funds may not be available to pay such claims.

We could incur uninsured losses which could adversely impact the value of one or more of our properties. We will endeavor to have each of our properties insured against casualty loss. However, there are types of losses, generally catastrophic in nature, which are uninsurable, are not economically insurable or are only insurable subject to limitations. Examples of such catastrophic events include acts of war or terrorism, earthquakes, floods, hurricanes and pollution or environmental matters.

We may not have adequate insurance coverage in the event we or our buildings suffer casualty losses. If we do not have the adequate insurance coverage, the value of our assets will be reduced as the result of, and to the extent of, the uninsured loss. Additionally, we may not have access to capital resources to repair or reconstruct any uninsured damaged property.

Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. In connection with the acquisition and ownership of our properties, we may be potentially liable for such costs. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, or of remediating any contaminated property could materially adversely affect our business, our assets and/or our results of operations, and, consequently, amounts available for distribution to our shareholders.

We may, as owner of a property, under various local, state and federal laws be required to remedy environmental contamination of one of our properties. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of any hazardous substances. We may be liable for the costs of removing or remediating contamination. The presence of, or the failure to properly remediate, hazardous substances may adversely affect the ability of tenants to operate, may subject us to liability to third parties, and may adversely affect our ability to sell or rent such property or borrow money using such property as collateral. Moreover, persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removing or remediating such substances. If we are deemed to have arranged for the disposal or treatment of hazardous or toxic substances, we may be liable for removal or remediation costs, as well as other related costs, including governmental fees and injuries to persons, property and natural resources.

Also, we could incur costs to comply with comprehensive regulatory programs governing underground storage tanks used in a convenience store-tenant's gasoline operations. Compliance with existing and future environmental laws regulating underground storage tanks may require significant capital expenditures, and the remediation costs and other costs required to clean up or treat contaminated sites could be substantial.

We cannot be sure that future laws or regulations will not impose an unanticipated material environmental liability on any of the properties that we purchase or that the tenants of the properties will not affect the environmental condition of the properties. The costs of complying with these environmental laws for our properties may adversely affect our operating costs and the value of the properties. In order to comply with the various environmental laws, we plan to obtain satisfactory Phase I environmental site assessments or have a set amount of environmental insurance in place for all of the properties that we purchase.

Recent increase in costs of credit and stagnation of real estate prices could lead to economic slowdown and possibly a recession. Continued stagnation in the real estate market and stagnation or declines of other economic conditions often lead to overall economic slowdowns and possibly, recessions. Periods of economic slowdown or recession are typically accompanied by declines in real estate sales in general. These conditions in turn can result in increases in mortgage loan delinquencies and foreclosures and declines in real estate prices and values. Any material decline in real estate values would, among other things, increase the loan-to-value ratio of any properties on which we have mortgage financing and any real estate loans we own. A significant period of increased delinquencies, foreclosures or depressions in real estate prices would likely materially and adversely affect our ability to finance our real estate investments.

Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war may affect the markets in which we operate, our operations and our profitability. Terrorist attacks will negatively affect our operations and the value of our Shares. Terrorist attacks or armed conflicts may directly impact the value of our properties through damage, destruction, loss or increased security costs. We own and may acquire additional office properties, generally in major metropolitan or suburban areas. Insurable risks associated with potential acts of terrorism against office and other properties in major metropolitan areas could sharply increase the premiums we pay for coverage against property and casualty claims. Moreover, mortgage lenders in some cases have begun to insist that specific coverage against terrorism be purchased by commercial owners as a condition for providing loans. We may not be able to obtain insurance against the risk of terrorism because it may not be available or may not be available on terms that are economically feasible. We will seek to obtain terrorism insurance, but the terrorism insurance that we obtain may not be sufficient to cover loss for damages to our properties as a result of terrorist attacks. Also, certain losses resulting from these types of events are uninsurable and others may not be covered by our terrorism insurance. Terrorism insurance may not be available at a reasonable price or at all.

The war in Iraq and other hostilities and uncertainties in the Middle East could have a further impact on our tenants. The consequences of any armed conflict are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or the value of our Shares.

Any of these events could result in increased volatility in, or damage to, the United States and worldwide financial markets and economy. They also could result in a continuation of the current economic uncertainty in the United States or abroad. Our revenues will be dependent upon payment of rent by tenants, which may be particularly vulnerable to uncertainty in the local economy. Adverse economic conditions could affect the ability of our tenants to pay rent, which could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to our shareholders.

Methods we use to own our properties. We generally hold our investments in real property in the form of a 100% fee title interest. However, we may also purchase partial interest in property, either directly with others as co-owners (a co-tenancy interest) or indirectly through an intermediary entity such as a joint venture, partnership or limited liability company.  As discussed below, we may hold some of our properties indirectly through limited partnerships under a DOWNREIT structure. Also, we may on occasion purchase an interest in a long-term leasehold estate (for example, a ground lease). We may also enter sale-leaseback financing transactions whereby we purchase a property and lease it back to the seller for lease payments to cover our financing costs and where the seller has the right to repurchase the property at an agreed upon price.

If we invest in a DOWNREIT partnership as a general partner we would be responsible for all liabilities of such partnership.   In a DOWNREIT structure, as well as some joint ventures or other investments we may make, we will employ a limited partnership as the holder of our real estate investment. We will likely acquire all or a portion of our interest in such partnership as a general partner. As a general partner, we could be liable for all the liabilities of such partnership. Additionally, we may also be required to take our interests in other investments as a general partner as in the case of our initial investment. As a general partner, we would be potentially liable for all such liabilities, even if we don't have rights of management or control over the operation of the partnership as another of the general partners may have. Therefore, we may be held responsible for all of the liabilities of an entity in which we do not have full management rights or control, and our liability may far exceed the amount or value of investment we initially made or then had in the partnership. We would like to acquire up to $100 million or more of our properties in DOWNREIT partnerships.

In a sale-leaseback transaction, we are at risk that our seller/lessee will default if its tenants default.   On occasion, we may lease an investment property back to the seller for a certain period of time or until we obtain stated rental income objectives. When the seller/lessee subleases space to its tenants, the seller/lessee's ability to meet any mortgage payments and its rental obligations to us will be subject to its subtenants' ability to pay their rent to the seller/lessee on a timely basis. A default by the seller/lessee or other premature termination of its leaseback agreement with us and our subsequent inability to release the property will likely cause us to suffer losses and adversely affect our financial condition and ability to pay dividends.

Uncertain market conditions and the broad discretion of management relating to the future disposition of properties could adversely affect the return on our Shares. We generally will hold the various real properties in which we invest until such time as management determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that such objectives will not be met. Otherwise, our management, subject to approval of our board, may exercise its discretion as to whether and when to sell a property, and we will have no obligation to sell properties at any particular time. We cannot predict with any certainty the various market conditions affecting real estate investments which will exist at any particular time in the future. Due to the uncertainty of market conditions which may affect the future disposition of our properties, we cannot assure our shareholders that we will be able to sell our properties at a profit in the future. Accordingly, the extent to which our shareholders will receive cash distributions and realize potential appreciation on our real estate investments will be dependent upon fluctuating market conditions.

Risks Relating to Debt Financing

The more leverage we use, the higher our operational risks will be. The more we borrow, the higher our fixed debt payment obligations will be and the risk that we will not be able to timely pay these obligations will be greater in the event we experience a decrease in rental or other revenues or an increase in our other costs.

If we fail to make our debt payments, we could lose our investment in a property.   Loans obtained to fund property acquisitions will generally be secured by mortgages on our properties. If we are unable to make our debt payments as required, a lender could foreclose on the property or properties securing its debt. This could cause us to lose part or all of our investment which in turn could cause the value of the Shares and the dividends payable to shareholders to be reduced.

Lenders may require us to enter into restrictive covenants relating to our operations.   In connection with obtaining certain financing, a lender could impose restrictions on us which affect our ability to incur additional debt and our distribution and operating policies. Generally, our lenders will require us to give them covenants which limit our ability to further mortgage the property, to discontinue insurance coverage, or impose other limitations.

If we enter into financing arrangements involving balloon payment obligations, it may adversely affect our ability to pay dividends.   Some of our financing arrangements may require us to make a lump-sum or "balloon" payment at maturity. We may finance more properties in this manner. Our ability to make a balloon payment at maturity is uncertain and will depend upon our ability to obtain additional financing or our ability to sell the property. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. The effect of a refinancing or sale could affect the rate of return to shareholders and the projected time of disposition of our assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT.

Our risks of losing property through a mortgage loan default will be greater where the property is cross-collateralized. In circumstances we deem appropriate, we may cross-collateralize two or more of our properties to secure a single loan or group of related loans, such as where we purchase a group of unimproved properties from a single seller or where we obtain a credit facility for general application from an institutional lender. Cross-collateralizing typically occurs where the lender requires a single loan to finance the group of properties, rather than allocating the larger loan to separate loans, each secured by a single property. We thus could default on payment of the single larger loan, even though we could pay one or more of the single loans secured by individual properties if each property was subject to a separate loan and mortgage. Our default under a cross-collateralized obligation could cause the loss of all of the properties securing the loan. In a typical financing arrangement, each property could secure a separate loan and our default under one loan generally could result only in our loss of the property securing the loan.

Due-on-sale clauses in our mortgages may prevent us from taking advantage of interest rate changes. Lenders typically require a due-on-sale clause in their mortgage loan agreements whereby, in the event of the sale of the property, the lender may call the mortgage due and payable. As a practical matter, a due-on-sale clause would require the property to be refinanced and the mortgage repaid in the event we sell the property or require us to pay a premium to the lender to waive the due-on-sale clause. If prevailing interest rates are higher than those charged on a property's mortgage, and its mortgage did not have a due-on-sale clause, we could be able to obtain a higher sales price to reflect the lower mortgage costs we could pass on to the buyer.

Risks Associated with Making or Investing in Mortgage Loans

Our investment in mortgage loans secured by real estate would increase our overall investment risks. Our bylaws and policies allow us to make or invest in mortgage loans. For example, we may loan money secured by a senior or junior lien on real property and in the event we sell a property, we can choose to finance a substantial portion of the sales price by a loan secured by the property.

We do not have substantial experience in making or investing in mortgage loans. We currently have mortgage loan investments. Our management has limited experience in making or investing in mortgage loans. The probability of our successfully investing in mortgage loans would be greatly enhanced by expertise in and experience with mortgage loan underwriting.

Mortgage loans may be impacted by unfavorable real estate market conditions, which could decrease the value of our mortgage investments. Our mortgage loan investments, if any, will be at risk of default caused by many conditions beyond our control, including local and other economic conditions affecting real estate values and interest rate levels. Also, we will not be able to assure that the values of the property securing our mortgage loan (the "mortgaged property") will not decrease from those at the times the mortgage loans were originated. If the values of the mortgaged property drop, our risk will increase and the values of our mortgage loan investments may decrease.

Mortgage loans may be subject to interest rate fluctuations that could reduce our returns as compared to market interest rates. If a mortgage loan investment bears a fixed rate for a long term and interest rates rise, the mortgage loan could yield a return lower than then-current market rates. On the other hand, should interest rates fall, we would be adversely affected if our borrower prepays the mortgage loan because we may not be able to reinvest the proceeds in mortgage loans bearing the previously higher interest rate.

Returns on mortgage loans may be limited by regulations. Any of our mortgage loan investments will be subject to regulation by federal, state and/or local authorities and subject to various laws and judicial and administrative decisions. If we invest in mortgage loans in several jurisdictions, it could reduce the amount of income we would otherwise receive.

Delays in liquidating a defaulted mortgage loan could reduce our investment returns. If one of our mortgage loans goes into default, we may not be able to quickly foreclose and sell the mortgaged property. Any delay could reduce the value of our investment in the defaulted mortgage loan. An action to foreclose on a mortgaged property is regulated by state statutes and rules and subject to many other delays and expenses. In the event of a default by our borrower, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgage property or to obtain proceeds sufficient to repay all amounts due to us on the mortgage loan.

Foreclosures create additional ownership risks that could adversely impact our returns on mortgage investments. If we acquire a mortgaged property by foreclosure following default under a mortgage loan, we will have the economic and liability risks as the owner.

Risks Relating to Our Management's Conflicts of Interest

We face certain conflicts of interest with respect to our operations. We will rely on our senior management for our day-to-day operations. Messrs. Heilbron and Elsberry are also officers and directors of our property manager, CHG Properties, and certain affiliated entities. As such, our officers and directors may experience conflicts of interest in allocating management time and resources between us and CHG Properties or its affiliates possibly including other real estate investment programs. They may also be subject to conflicts of interest in making investment decisions on properties for us as opposed to other entities that may have similar investment objectives. For example, they may have different incentives in determining when to sell properties with respect to which it is entitled to fees and compensation and such determinations may not be in our best interest. Our shareholders must depend on our independent directors, who presently constitute four of our five directors, to oversee, monitor and resolve any such conflicts on our behalf.

There is competition for the time and services of our senior management, and our property manager and its affiliates may not dedicate all of the time necessary to manage our business. We rely on Messrs. Heilbron and Elsberry for our daily operations. They and certain of our administrative personnel are also officers, directors and/or personnel of our property manager and/or its affiliates. As such, they have conflicts in allocating their management time, services and functions among us, our property manager and its affiliates, possibly including other real estate investment programs or other business ventures that they may organize or serve. Those personnel could take actions that are more favorable to other entities than to us. Our shareholders must depend on our independent directors to oversee, monitor and resolve any such conflicts on our behalf.

The amounts of compensation to be paid to our management, our property manager and possibly their affiliates cannot be predicted.   Because our board of directors may vary the amount of fees that we will pay to our property manager and possibly their affiliates in the future and to a large extent these fees are based on the level of our business activity, it is not possible to predict the amounts of compensation that we will be required to pay these entities. In addition, because our senior management are given broad discretion to determine when to consummate a transaction, we rely on these key persons to dictate the level of our business activity. Fees paid to our affiliates will reduce funds available for payment of dividends. Our shareholders must rely on the judgment of our independent directors whose majority vote is necessary to approve such affiliate compensation. Because we cannot predict the amount of fees due to these affiliates, we cannot predict how precisely such fees will impact such payments.

Our rights, and the rights of our shareholders, to recover claims against our officers and directors are limited. California law provides that a director has no liability in that capacity if he performs his duties in good faith, in a manner he reasonably believes to be in our best interest and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our articles of incorporation authorize us to obligate our Company, and our bylaws require us, to indemnify our directors, officers, employees and agents to the maximum extent permitted under California law, and the property management agreement requires us to indemnify our property manager and its affiliates for actions taken by them in good faith and without negligence or misconduct. Additionally, our articles of incorporation limit the liability of our directors and officers to us and our shareholders for monetary damages to the maximum extent permitted under California law. As a result, our shareholders and we may have more limited rights against our directors, officers, employees and agents, and our property manager and its affiliates, than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and our agents in some cases.

Risks Relating to Federal Income Taxes

Because of recently enacted tax legislation, REIT investments are comparatively less attractive than investments in other corporations. The tax rate applicable to qualifying corporate dividends received by individuals prior to 2009 has been reduced to a maximum rate of 15.0% by recent income tax legislation. However, this tax rate is generally not applicable to dividends paid by a REIT, unless those dividends represent earnings on which the REIT itself has been taxed. Consequently, dividends (other than capital gain dividends) we pay to individual investors generally will be subject to the tax rates that are otherwise applicable to ordinary income that currently are as high as 35.0%. This legislation may make an investment in our Shares comparatively less attractive relative to an investment in the securities of other corporate entities that pay dividends and that are not formed as REITs.

Failure to qualify as a REIT could adversely affect our operations and our ability to make distributions.   If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to shareholders because of the additional tax liability. In addition, distributions to shareholders would no longer qualify for the distributions paid deduction and we would no longer be required to make distributions. We might be required to borrow funds or liquidate some investments in order to pay the applicable tax. Qualification as a REIT is subject to the satisfaction of tax requirements and various factual matters and circumstances which are not entirely within our control. New legislation, regulations, administrative interpretations or court decisions could change the tax laws with respect to qualification as a REIT or the federal income tax consequences of being a REIT. Legislative or regulatory action could adversely affect investors. In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of the federal income tax laws applicable to investments similar to an investment in Shares. The Taxpayer Relief Act of 1997 and the Internal Revenue Service Restructuring and Reform Act enacted in 1998 contain numerous provisions affecting the real estate industry, generally, and the taxation of REITs, specifically. Changes are likely to continue to occur in the future, and we cannot assure our shareholders that any such changes will not adversely affect the taxation of a shareholder. Any such changes could have an adverse effect on an investment in Shares or on the market value or the resale potential of our properties. Our shareholders are urged to consult with their own tax advisor with respect to the impact of recent legislation on their investment in our Shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our Shares.

To maintain our REIT status, we may be forced to borrow funds on a short-term basis during unfavorable market conditions. In order to continue to qualify as a REIT, we generally must distribute to our stockholders at least 90% of our Real Estate Investment Trust Taxable Income ("REIT Taxable Income") each year, excluding capital gains, and we will be subject to regular corporate income taxes to the extent that we distribute less than 100.0% of our net taxable income each year. In addition, we will be subject to a 4.0% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85.0% of our ordinary income, 95.0% of our capital gain net income and 100.0% of our undistributed income from prior years. In order to maintain our REIT status and avoid the payment of income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements even if the then prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments.

Dividends we pay on our Securities to tax-exempt investors could be classified as unrelated business taxable income. Neither dividends nor capital gain distributions with respect to our common stock nor gain from the sale of our common stock will in general constitute unrelated business taxable income to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:

•	part of the income and gain recognized by certain qualified employee pension trusts with respect to our Shares may be treated as unrelated business taxable income if:
	−	our stock is predominately held by qualified employee pension trusts;
	−	we are required to rely on a special look-through rule for purposes of meeting one of the REIT stock ownership tests; and
	−	we are not operated in such a manner as to otherwise avoid treatment of such income or gain as unrelated business taxable income;
•	part of the income and gain recognized by a tax-exempt investor with respect to our Shares would constitute unrelated business taxable income if such investor incurs debt in order to acquire the common stock; and
•	part or all of the income or gain recognized with respect to our Shares by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans that are exempt from federal income taxation under Sections 501(c)(7), (9), (17) or (20) of the Internal Revenue Code may be treated as unrelated business taxable income.

We still may be required to pay federal or state taxes. Even if we qualify and maintain our status as a REIT, we may be subject to federal income taxes or state taxes. For example, if we have net income from a "prohibited transaction," such income will be subject to a 100.0% tax. We may not be able to make sufficient distributions to avoid the 4.0% excise tax that generally applies to income retained by a REIT. We may also decide to retain proceeds we realize from the sale or other disposition of our property and pay income tax on gain recognized on the sale. In that event, we could elect to treat our stockholders as if they earned that gain and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would derive no benefit from their deemed payment of such tax. We may also be subject to state and local taxes on our income or property, either directly, at the level of the operating partnership, or at the level of the other companies through which we indirectly own our assets.

Foreign shareholders selling their Securities may be subject to FIRPTA tax. Generally, a foreign person disposing of a U.S. real property interest, including securities of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to a tax, known as FIRPTA tax, on the gain recognized on the disposition. This FIRPTA tax does not apply, however, to the disposition of stock in a REIT if the REIT is "domestically controlled." A REIT is "domestically controlled" if less than 50.0% of the REIT's stock, by value, has been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT's existence.

We cannot assure our shareholders that we will qualify as a "domestically controlled" REIT. If we were to fail to so qualify, gain realized by foreign investors on a sale of our Shares would be subject to FIRPTA tax, unless our Shares were traded on an established securities market and the foreign investor did not at any time during a specified testing period directly or indirectly own more than 5.0% of the value of our outstanding common stock.

Retirement Plan Risks

There are special considerations that apply to pension or profit sharing trusts or IRAs investing in Shares. Investors who are investing the assets of a pension, profit sharing, 401(k), Keogh or other qualified retirement plan or the assets of an IRA in our Shares should satisfy themselves that:

•	their investment is consistent with their fiduciary obligations under ERISA and the Internal Revenue Code;
•	their investment is made in accordance with the documents and instruments governing their Retirement Plan or IRA, including their plan's investment policy;
•	their investment satisfies the prudence and diversification requirements of Sections  404(a)(1)(B) and 404(a)(1)(C) of ERISA;
•	their investment will not impair the liquidity of the plan;
•	their investment will not produce "unrelated business taxable income" for the plan or IRA;
•	they will be able to value the assets of the plan annually in accordance with ERISA requirements; and
•	their investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.

ITEM 2.

FINANCIAL INFORMATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion relates to our financial statements and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.  Statements contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not historical facts may be forward-looking statements.  Such statements are subject to certain risks and uncertainties, which could cause actual results to materially differ from those projected.  Some of the information presented is forward-looking in nature, including information concerning projected future occupancy rates, rental rate increases, project development timing and investment amounts.  Although the information is based our current expectations, actual results could vary from expectations, actual results could vary from expectations stated in this report.  Numerous factors will affect our actual results, some of which are beyond our control.  These include the timing and strength of national and regional economic growth, the strength of commercial and residential markets, competitive market conditions, fluctuations in availability and cost of construction materials and labor resulting from the effects of worldwide demand, future interest rate levels and capital market conditions.  You are cautioned not to place undue reliance on this information, which speaks only as of the date of this report.  We assume no obligation to update publicly any forward-looking information, whether as a result of new information, future events or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws to disclose material information.  For a discussion of important risks related to our business, and an investment in our securities, including risks that could cause actual results and events to differ materially from results and events referred to in the forward-looking information.

OVERVIEW AND BACKGROUND

We operate as a self-administered real estate investment trust (“REIT”) headquartered in San Diego County, California.  During the last two years we have been in a fast growth stage having increased capital by 1219% and our investment portfolio by 1080%.

At December 31, 2007, we owned 2 office building properties, 2 retail strip centers, 1 single user retail store, 1 residential apartment building, 2 self storage properties and one mortgage loan.  Our properties are located primarily in Southern California and Colorado.  We are actively communicating with real estate brokers and other third parties to locate properties for potential acquisitions in an effort to build our portfolio.

Most of our office and retail properties we currently own are leased to a variety of tenants ranging from small businesses to large public companies, many of which do not have publicly rated debt.  We have in the past entered into, and intend in the future to enter into, purchase agreements for real estate having net leases that require the tenant to pay all of the operating expense (Net, Net, Net Leases) or pay increases in operating expenses over specific base years.  Most of our leases are for terms of 3 to 5 years with annual rental increases built into the leases.  Our residential and self storage properties that we currently own are rented pursuant to a rental agreement that is for no longer than 6 months.  We depend on advertisements, flyers, web sites, etc. to secure new tenants to fill any vacancies.

CRITICAL ACCOUNTING POLICIES

The presentation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period.  Certain accounting policies are considered to be critical accounting policies, as they require management to make assumptions about matters that are highly uncertain at the time the estimate is made, and changes in the accounting estimate are reasonably likely to occur from period to period.  Management believes the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our financial statements.  For a summary of all of our significant accounting policies, see footnote 2 to our financial statements included elsewhere in this report.

Property Acquisitions.   The Company accounts for its acquisitions of real estate in accordance with Statement of Financial Standards (”SFAS”) No.141, “Business Combinations” which requires the purchase price of acquired properties be allocated to the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, long-term debt and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, the value of unamortized lease origination costs and the value of tenant relationships, based in each case on their fair values.

Amounts allocated to land and to buildings and improvements, tenant improvements are derived on recent tax assessments after deduction of any intangibles determined by management for above-market and below-market leases, the value of in-place leases, the value of unamortized lease origination costs and the value of tenant relationships.

The amount allocated to acquire in-place leases is determined based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased.  The amount allocated to acquired in-place leases is included in deferred leasing costs and acquisition related intangible assets in the balance sheet and amortized over the remaining non-cancelable term of the respective leases.

The value allocable to the above or below market component of an acquired in-place lease is determined based upon the present value (using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of rents that would be paid using fair market rates over the remaining term of the lease.  The amounts allocated to above or below market leases are included in other assets or acquisition-related liabilities in the balance sheet and are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the respective leases.  As of December 31, 2007 and 2006, the Company did not have any deferred rent for above or below market leases.

The total amount of remaining intangible assets acquired, which consists of unamortized lease origination costs, in-place leases and customer relationship intangible values, are allocated based on managements’ evaluation of the of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant.  Characteristics considered by management in allocating these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.

The value of in-place leases and unamortized lease origination costs are amortized to expense over the remaining term of the respective leases, which range from two to four years.  The value of customer relationship intangibles, which is the benefit to the Company resulting from the likelihood of an existing tenant renewing its lease, are amortized over the remaining term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.  At December 31, 2007, total lease intangibles consisted of lease origination costs of $170,003 net of accumulated amortization of $31,479.

Revenue Recognition.   The Company recognizes revenue from rent, tenant reimbursements, and other revenue once all of the following criteria are met in accordance with SEC Staff Accounting Bulletin Topic 13, “Revenue Recognition”:

•	persuasive evidence of an arrangement exists;
•	delivery has occurred or services have been rendered;
•	the amount is fixed or determinable; and
•	the collectability of the amount is reasonably assured.

In accordance with SFAS No. 13, “Accounting for Leases” (“SFAS 13”), as amended and interpreted, minimum annual rental revenue is recognized in rental revenues on a straight-line basis over the term of the related lease.

Certain of the Company’s leases currently contain rental increases at specified intervals, and generally accepted accounting principles require the Company to record an asset, and include in revenues, deferred rent receivable that will be received if the tenant makes all rent payments required through the expiration of the initial term of the lease.  Deferred rent receivable in the accompanying balance sheets includes the cumulative difference between rental revenue recorded on a straight-line basis and rents received from the tenants in accordance with the lease terms.  Accordingly, the Company determines, in its judgment, to what extent the deferred rent receivable applicable to each specific tenant is collectible.  The Company reviews material deferred rent receivable, as it relates to straight-line rents, on a quarterly basis and takes into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located.  In the event that the collectability of deferred rent with respect to any given tenant is in doubt, the Company records an increase in the allowance for uncollectible accounts or records a direct write-off of the specific rent receivable.  No such reserves have been recorded as of December 31, 2007 or 2006.

Tenant Receivables.   The Company periodically evaluates the collectability of amounts due from tenants and maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under lease agreements.  In addition, the Company maintains an allowance for deferred rent receivable that arises from straight-lining of rents.  The Company exercises judgment in establishing these allowances and considers payment history and current credit status of its tenants in developing these estimates.  There were no allowances at December 31, 2007 or 2006.

Impairment.   The Company accounts for the impairment of real estate in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, which requires that the Company review the carrying value of each property to determine if circumstances that indicate impairment in the carrying value of the investment exist or that depreciation periods should be modified.  If circumstances support the possibility of impairment, the Company prepares a projection of the undiscounted future cash flows, without interest charges, of the specific property and determines if the investment in such property is recoverable. If impairment is indicated, the carrying value of the property would be written down to its estimated fair value based on the Company’s best estimate of the property’s discounted future cash flows.  There have been no impairments recognized on the Company’s real estate assets at December 31, 2007 and 2006.

Provision for Loan Losses.   The accounting policies require that the Company maintain an allowance for estimated credit losses with respect to mortgage loans it has made based upon its evaluation and knowledge of its inherent risks associated with its private lending assets.  Management reflects provisions for loan losses based upon its assessment of general market conditions, its internal risk management policies and credit risk rating system, industry loss experience, its assessment of the likelihood of delinquencies or defaults, and the value of the collateral underlying its investments.  Actual losses, if any, could ultimately differ from these estimates.  There have been no provisions for loan losses at December 31, 2007 and 2006.

THE FOLLOWING IS A COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

Our results of operations for the year ended December 31, 2007 are not indicative of those expected in future periods as we expect that rental income, interest income from real estate loans receivable, interest expense, rental operating expense, general and administrative expense and depreciation and amortization  will significantly increase in future periods as a result of the assets acquired during 2007 for an entire period and as a result of anticipated future acquisitions of real estate investments.

RECENT EVENTS HAVING SIGNIFICANT EFFECT ON RESULTS OF OPERATIONS COMPARISONS

Acquisitions

Prior to January 1, 2006 we only had two properties; a 39 unit Apartment property in Cheyenne, Wyoming purchased in 1999 and a 26,912 square foot office building in San Marcos, California purchased in 2000.

During the year ended December 31, 2006, we purchased a 114,000 square foot office building in Aurora, Colorado (June 28, 2006) and a 3000 square foot retail property in Escondido, California (September 8, 2006).

During the year ended December 31, 2007, we purchased a 115,000 square foot office building complex consisting of three buildings on three separate parcels, in Colorado Springs, Colorado (March 21, 2007), a 6,000 square foot strip center in Denver, Colorado (October 31, 2007), a 55,000 square foot strip center in Highland, California (September 21, 2007), a 61,000 square foot Self Storage property in Highland, California (November 19, 2007) and a 150,000 square foot self storage in Hesperia, California (December 10, 2007).

As of December 31, 2007, the Company portfolio of operating properties was comprised of two office buildings (“Office Properties”) which encompassed approximately 229 thousand rentable square feet, three retail centers or stores (“Retail Properties”) which encompassed approximately 64 thousand rentable square feet, one 39 unit residential apartment (“Residential Properties”) and two self storage facilities (“Self Storage Properties”) which encompassed approximately 210,000 rentable square feet.

Financing

On February 15, 2005 we commenced a private placement offering of $50 million of our unit of common stock and warrants or Series AA Preferred Stock. The Unit was priced at $20.00 per unit and the Series AA Preferred Stock was priced at $25.00 per share.  The Unit consisted of 2 shares of our common stock and one warrant to purchase one share of our common stock at $12.00 for a period ending March 31, 2010.  A total of 433,204 of warrants were issued in this offering.  Each share of Series AA Preferred Stock (i) is non-voting, except under certain circumstances as provided in the Articles of Incorporation; (ii) is entitled to annual cash dividends of 7% which are cumulative and payable quarterly; (iii) ranks senior, as to the payment of dividends and distributions of assets upon liquidation, to common stock or any other series of preferred stock that is not senior to or on parity with the Series AA Preferred Stock; (iv) is entitled to receive $25.00 plus accrued dividends upon liquidation; (v) may be redeemed by the Company prior to the mandatory conversion date at a price of $25.00 plus accrued dividends, (vi) may be converted into two shares of common stock at the option of the holder prior to the mandatory conversion date, and (vii) shall be converted into two shares of common stock on the fourth Friday of December 2015.  The conversion price is subject to certain anti dilution adjustments.  A total of 50,200 shares of the Series AA Preferred Stock were issued in this offering.

In October, 2006 this offering was terminated and we commenced a new offering of $200 million of our common stock at $10.00 per share.  Net proceeds from these offerings, after commissions, due diligence fees, and syndication expenses, were approximately $11.1 million in 2006 and $15.6 in 2007.  The net proceeds were primarily used to acquire the properties and build the infrastructure.  During the year 2007 the net cash used in investing activities net of proceeds from mortgage notes payable was $15.6 million.

During 2007 we purchased three properties for $30.7 million that we financed $19.1 million, 62% of the purchase price, with various institutions.  The remaining two properties that we purchased for $7.0 million were cash purchases.

We anticipate an increase in capital of approximately $30 to $50 million from an ongoing private placement offering during 2008.  The net proceeds of the offering will be available to acquire more real estate properties.    In addition, we anticipate that we will finance some of the new real estate by borrowing a portion of the purchase price from financial institutions.

Mortgage loan receivables

On March 20, 2007, the Company originated its first mortgage loan in the amount of $500,000 collateralized by a second deed of trust on land under development as a retirement home in Escondido, California.  This mortgage loan accrued interest at 15% per year.  The mortgage loan unpaid principal and accrued interest is due and payable on March 19, 2008.  The loan has been extended to June 19, 2008. At December 31, 2007 the principal and accrued interest was $413,368.

On October 1, 2007, the Company originated another mortgage loan in the amount of $935,000 collateralized by a first deed of trust on the land under development as a retirement home in Escondido, California.  This mortgage loan accrued interest at 11.5% per year and the unpaid principal balance and accrued interest is due and payable on September 30, 2008.  At December 31, 2007 the principal and accrued interest was $962,748.

On November 19, 2007, the Company originated another mortgage loan in the amount of $500,000 collateralized by a third deed of trust on the land under development as a retirement home in Escondido, California.  This mortgage loan accrues interest at 15% per year.  The mortgage loan unpaid principal and accrued interest is due and payable on September 30, 2008 co-terminus with the loan secured by the second deed of trust.  At December 31, 2007, the principal and unpaid interest was $512,709.

Properties Sold

In June 2007, we sold a 48.601% interest in the 7-Eleven property in Escondido, California for $685,275, for a gain on sale of $4,475.

In October 2007, we sold the Rancho Santa Fe Professional office building in San Marcos, California for $5,650,000 resulting in a gain on the sale of $2,886,130.  The net proceeds from this sale were exchanged, pursuant to Section 1031, for the purchase of Regatta Square in Denver, Colorado and Palm Self Storage in Highland, California, therefore, there was no income tax incurred on the gain.

Revenues

Rental revenue from continuing operations was $2,863,836 for 2007 versus $706,964 for 2006, an increase of $2,156,872, or 305%.  Rental revenue in 2005 was $207,209.  The increase in rental revenue in 2007 compared to 2006 is primarily attributable to:

·	The five properties acquired by NetREIT in 2007, which generated $1,699,550 of rent revenue in 2007.

·	The two properties acquired in 2006 which generated $945,742 in 2007 compared to $495,006, an increase of $450,736.

·	Same property rents generated on one property during the entire year of 2007 and 2006 increased by $6,586.

Rental revenues are expected to continue to increase in future periods, as compared to historical periods, as a result of owning the assets acquired during 2007 for an entire year and future acquisitions of real estate assets.  Four of the properties acquired in 2007 were purchased in the fourth quarter of 2007.  On annualized basis the rental revenues of these four properties will increase revenues by approximately $800,000, a 27% increase.  We currently have two properties under contract to purchase that would increase annual rental revenues by approximately $1,700,000.  Revenue in 2008 will depend upon the completion of the acquisitions that we expected to be in June and July 2008.  Our purchase of this property is contingent upon obtaining satisfactory financing and our approval of title and the property's physical condition.

Interest income from mortgage loans was a new activity in 2007.  Interest income from real estate receivables is expected to increase in future periods, as compared to 2007, as a result of owning assets acquired during 2007 for an entire year.   We do not anticipate a significant increase in this area in 2008.

Rental Operating Expenses

Rental operating expense from continuing operations was $1,485,490 for 2007 versus $454,476 for 2006 and increase of $1,031,014, an increase of $227%.  The increase in operating expense in 2007 compared to 2006 is primarily attributable to the same reasons that rental revenue increased.   However, the operating expense as a percentage rental income was 52% for 2007 versus 64% in 2006, an improvement of 18%.  The increase in number of properties and diversification of type of properties has resulted in the lower operating expense percentage.  Rental operating expenses are expected to continue to increase in future periods, as compared to historical periods, as a result of owning the assets acquired during 2007 for an entire year and future acquisitions or real estate assets.

Interest Expense

Interest expense increased by $699,616 during the year 2007 compared to 2006 due to the higher average outstanding borrowings.  At December 31, 2007 we had mortgage loans on four of the properties with total borrowings of $22,420,316 while at December 31, 2006 we only had a mortgage loan on one property for $3,573,443.  We paid off the loan of $4,371,460 on the Hesperia, California property in January 2008. We anticipate interest expense to increase as a result of the increase in loans during 2007 for an entire year and the interest expense on future acquisitions.  We will borrow funds to acquire both of the properties we currently have under contract.

The following is a summary of our interest expense on loans, including the interest and amortization of deferred financing costs reported in the discontinued operations on the statement of operations:

 

At April 1, 2008, the weighted average interest rate on our mortgage loans of $17,991,624 was 6.01%

Interest Coverage Ratio

Our interest coverage ratio for 2007 was 1.58 times and for 2006 was 1.09 times.  Interest coverage ratio is calculated as: the interest coverage mount (as calculated in the following table) divided by interest expense, including interest recorded to discontinued operations.  We consider interest coverage ratio to be an appropriate supplemental measure of a company’s ability to meet its interest expense obligations.  Our calculations of interest coverage ratio may be different from the calculation use by other companies and, therefore, comparability may be limited.  This information should not be considered as an alternative to any GAAP liquidity measures.

The following is a reconciliation of net cash provided by operating activities on our statement of cash flow to our interest coverage amount:

Interest expense includes interest expense recorded to “income from discontinued operations” in our statement of operations.

Fixed Charge Coverage Ratio

Our fixed charge coverage ratio for 2007 was 1.42 times and for 2006 was .78 times.  Fixed charge coverage ratio is calculated in exactly the same manner as interest coverage ratio, except that preferred stock dividends are also added to the denominator.  We consider fixed charge coverage ratio to be an appropriate supplemental measure of a company’s ability to make its interest and preferred stock dividend payments.

General and Administrative Expenses

General and administrative expenses increased by $285,956 to $794,659 during the year 2007 compared to $508,703 in 2006.  In 2007, general and administrative expenses as a percentage of total revenue were 27% as compared to 72% in 2006.  In comparing our general and administrative expenses with other REITs you should take into consideration that we are a self administered REIT. Accordingly all of our expenses related to acquisitions, due diligence performed by our officers and employees is charged as general and administrative expense as incurred rather than being capitalized as part of the cost of real acquired.   The increase in general and administrative expenses during 2007 and 2006 was a result of the increase in our capital and the size of our real estate portfolio during those years.  The primary increase was in employee and director compensation costs.  During the year 2007 employee and director compensation was $472,722 compared to $227,639 in 2006.  The number of employees at December 31, 2007 and 2006 was 14 and 5, respectively.  We anticipate an increase in staff and compensation costs as our capital and portfolio continue to increase, however we anticipate that these costs as a percentage of total revenue will continue to decline.

Net Income Available to Common Stockholders

Net income available to common stockholders was $2,525,277 in 2007, as compared to a net loss of $(398,121) in 2006.  The calculation in determining net income (loss) available to common stockholders includes gains from sales of properties.  The amount of gains varies from period to period based on the timing of property sales and can significantly impact net income available to common stockholders.

During 2007, the gain recognized from the sales of investment properties was $2,886,131 as compared to no gains during 2006.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Equivalents

At December 31, 2007, we had approximately $4.9 million in cash and cash equivalents compared to $5.8 million at December 31, 2006. We expect to obtain additional mortgages collateralized by some or all of our real property in the future.  We anticipate continuing issuing additional equity securities in order to obtain additional capital.  We expect the funds from operations, additional mortgages and securities offerings will provide us with sufficient capital to make additional investments and to fund our continuing operations for the foreseeable future.

Investing Activities

Net cash used in investing activities during the year ended December 31, 2007 was approximately $34.6 million, which consisted of the purchase of 5 properties and improvements totaling $38.2 million and mortgage receivables of $1.9 million offset by the proceeds of sale of real estate of $6.0 million, as compared to net cash used in investing activities during the year ended December 31, 2006 of approximately $7.7 million which consisted of the purchase of 2 properties totaling $7.5 million.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2007 was approximately $33.3 million, which primarily consisted of $19.1 million proceeds received from the long-term financing of three of our properties and $15.6 million net proceeds from issuance of common stock offset by $.2 million of principal repayments on mortgages note payables and dividend payments of $1.1 million.  Net cash provided by financing activities for the year ended December 31, 2006 was approximately $12.2 million, which consisted of the proceeds received from the long-term financing of 1 property totaling $3.6 million, the net proceeds from the offering of our common stock totaling $11.1 million and preferred stock partially offset by the repayment of 2 mortgage notes payable of $2.4 million and dividend payments to our stockholders of $.3 million.

Operating Activities

Net cash provided by operating activities during the year ended December 31, 2007 was approximately $457,000 compared to net cash provided by operating activities of approximately $132,000 for the year December 31, 2006.  The increase in cash provided by operating activities was due to the properties acquired in 2007 that resulted in an increase in income before depreciation and amortization and gain on sale of real estate of approximately $630,000 compared to the year 2006, however this increase was offset by increases in net working capital (changes in operating assets and liabilities) of approximately $305,000.  Net working capital increase was primarily for prepaid expenses and lease commission that increased by approximately $246,000.  We anticipate that the funds from operating activities will increase during 2008 due to a full year of operations of those properties acquired during 2007 and future property acquisitions.

Future Capital Needs

During 2008 and beyond, we expect to complete additional acquisitions of real estate.  We intend to fund our contractual obligations and acquire additional properties in 2008 by borrowing a portion of purchase price and collateralizing the mortgages with the acquired properties or from the net proceeds of issuing additional equity securities.  We may also use these funds for general corporate needs.  If we are unable to make any required debt payments on any borrowings we make in the future, our lenders could foreclose on the properties collateralizing their loans, which could cause us to lose part or all of our investments in such properties.  In addition, we need sufficient capital to fund our dividends in order to meet these obligations.

Contractual Obligations

The following table provides information with respect to the maturities and scheduled principal repayments of our secured debt and interest payments on our fixed-rate debt at December 31, 2007 and provides information about the minimum commitments due in connection with our ground lease obligation and purchase commitment at December 31, 2007. Our secured debt agreements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements.  Non-compliance with one or more of the covenants or restrictions could result in the full or partial principle balance of such debt becoming immediately due and payable.  We were in compliance with all our debt covenants and restrictions at December 31, 2007.

(1)  Principal payments include a short term loan of $4,371,460 at an interest rate of 9.5% that was assumed in connection of the acquisition of our Hesperia self storage property in December 2007.  This loan was paid in full in January 2008 from funds on hand at December 31, 2007.

 

(2) Lease obligations represent the ground lease payments due on our Highland, California property.  The lease expires in 2062.

 

(3) Purchase commitments represent two properties that we have contracts to purchase.  We anticipate using funds from proceeds of sale of common stock since December 31, 2007 of approximately $6,200,000 and proceeds from mortgage loans for the remainder of the purchase price.

Capital Commitments

We currently project that we could spend an additional $500,000 to $800,000 in capital improvements, tenant improvements, and leasing costs for properties within our stabilized portfolio during 2008, depending on leasing activity.  Capital expenditures may fluctuate in any given period subject to the nature, extent and timing of improvements required to maintain our properties, the term of the leases, the type of leases, he involvement of external leasing agents and overall market conditions.  We have impounds with lending institutions of $500,000, included in Restricted Cash, reserved for these tenant improvement, capital expenditures and leasing costs.

Other Liquidity Needs

We are required to distribute 90% of our REIT taxable income (excluding capital gains) on an annual basis in order to qualify as a REIT for federal income tax purposes.  Accordingly, we intend to continue to make, but have not contractually bound ourselves to make, regular quarterly distributions to common stockholders and preferred stockholders from cash flow from operating activities.  All such distributions are at the discretion of the Board of Directors.  We may be required to use borrowings, if necessary, to meet REIT distribution requirements and maintain our REIT status.  We have historically distributed amounts in excess of the taxable income resulting in a return of capital to our stockholders, and currently have the ability to not increase our distributions to meet our REIT requirement for 2008.  We consider market factors and our historical and anticipated performance in addition to REIT requirements in determining our distribution levels.  On January 31, 2008, we paid a regular quarterly cash dividend of $0.147 per common share to stockholders of record on December 31, 2007.  This dividend is equivalent to an annual rate of $0.588 per share.  In addition, we are required to make quarterly distributions to our Series AA Preferred stockholders, which totaled $87,850 of preferred dividends for 2007.

We believe that we will have sufficient capital resources to satisfy our liquidity needs over the next twelve-month period.  We expect to meet our short-term liquidity needs, which may include principal repayments of our debt obligations, capital expenditures, distributions to common and preferred stockholders, and short-term acquisitions through retained cash flow from operations, proceeds from the proceeds from disposition of non-strategic assets.

We expect to meet our long-term liquidity requirements, which will include additional properties through additional issuance of common stock, long-term secured borrowings.  We do not intend to reserve funds to retire existing debt upon maturity.  We presently expect to refinance such debt at maturity or retire such debt through the issuance of common stock as market conditions permit.

Off-Balance Sheet Arrangements

As of December 31, 2007, we do not have any off-balance sheet arrangements or obligations, including contingent obligations.

Capital Expenditures, Tenant Improvements and Leasing Costs

Capital expenditures may fluctuate in any given period subject to the nature, extent, and timing of improvements required to be made to the Properties.  We anticipate spending more on gross capital expenditures during 2008 compared to 2007 due to rising construction costs and the anticipated increase in acquisitions in 2008.

Tenant improvements and leasing costs may also fluctuate in any given year depending upon factors such as the property, the term of the lease, the type of lease, the involvement of external leasing agents and overall market conditions.

Non-GAAP Supplemental Financial Measure: Funds From Operations (“FFO”)

Management believes that FFO is a useful supplemental measure of our operating performance.  We define FFO as net income or loss available to common stockholders computed in accordance with GAAP, plus depreciation and amortization of real estate assets (excluding amortization of deferred financing costs and depreciation of non-real estate assets) reduced by gains and losses from sales of depreciable operating property if the proceeds are available for distribution to shareholders and extraordinary items, as defined by GAAP.  Other REITs may use different methodologies for calculating FFO, and accordingly, our FFO may not be comparable to other REITs.

Because FFO excludes depreciation and amortization, gains and losses from property dispositions that are available for distribution to shareholders and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses and interest costs, providing a perspective not immediately apparent from net income.  In addition, management believes that FFO provides useful information to the investment community about our financial performance when compared to other REITs since FFO is generally recognized as the industry standard for reporting the operations of REITs.

However, FFO should not be viewed as an alternative measure of our operating performance since it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties which are significant economic costs and could materially impact our results from operations.

The following table presents our Funds from Operations, for the years ended December 31, 2007 and 2006:

 

Inflation

Since the majority of our leases require tenants to pay most operating expenses, including real estate taxes, utilities, insurance, and increases in common area maintenance expenses, we do not believe our exposure to increases in costs and operating expenses resulting from inflation would be material.

Recent Issued Accounting Standards.   In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).   SFAS 157 defines fair value and establishes a framework for measuring fair value under U. S. generally accepted accounting principles (“GAAP”).  The key changes to current practice are (1) the definition of fair value, which focuses on an exit price rather than an entry price; (2) the methods used to measure fair value, such as emphasis that fair value is a market-based measurement, not an entity-specific measurement, as well as the inclusion of an adjustment for risk, restrictions, and credit standing and (3) the expanded disclosures about fair value measurements, SFAS 157 does not require any new fair value measurements.  SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company adopted SFAS 157 on January 1, 2008.  The Company does not believe the adoption of SFAS 157 will have a significant impact on the Company’s financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).   SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurements attributes for similar types of assets and liabilities.  SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007.  The Company does not plan to apply the fair value option to any specific assets or liabilities.

In November 2007, the FASB issued Emerging Issues Task Force (“EITF”) Issue No. 07-06, “Accounting for Sale of Real Estate Subject to the Requirements of SFAS 66 When the Agreement Includes a Buy-Sell Clause” (“EITF 07-06”) .   A buy-sell clause is a contractual term that gives both investors of a jointly-owned entity the ability to offer to buy the other investor’s interest.  EITF 07-06 applies to sales of real estate to an entity if the entity is both partially owned by the seller of the real estate and subject to an arrangement between the seller and the other investor containing a buy-sell clause.  The EITF concluded the existence of a buy-sell clause does not represent a prohibited form of continuing involvement that would preclude partial sale and profit recognition pursuant to SFAS 66.  The EITF cautioned the buy-sell clause could represent such a prohibition if the terms of the buy-sell clause and other facts and circumstances of the arrangement suggest:

·	the buyer cannot act independently of the seller or

·	the seller is economically compelled or contractually required to reacquire the other investor’s interest in the jointly owned entity.

EITF 07-06 is effective for new arrangements in fiscal years beginning after December 15, 2007, and interim periods within those fiscal years.  The FASB does permit early adoption of EITF 07-06.  The Company is currently evaluating the impact that EITF 07-6 will have on its financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“ SFAS 141R”),   which replaces FASB Statement No. 141, “Business Combinations”   (“SFAS 141”).  SFAS 141R expands the definition of a business combination and requires the fair value of the purchase price of an acquisition, including the issuance of equity securities, to be determined on the acquisition date.  SFAS 141R also requires that all assets, liabilities, contingent considerations, and contingencies of an acquired business be recorded at fair value at the acquisition dater.  In addition, SFAS 141R requires that acquisition costs generally be expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense.  SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Early adoption is prohibited.  The Company is currently evaluating the impact that SFAS 141R will have on its future financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidating Financial Statements—an amendment of ARB No. 51”   (“SFAS 160”).  SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated.  In addition, SFAS 160 provides reporting requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontolling owners.  SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The Company does not believe the adoption of SFAS 160 will have a significant impact on the Company’s financial position or results of operations.

 

The Company’s reportable segments consist of the four types of commercial real estate properties for which the Company’s decision-makers internally evaluate operating performance and financial results:  Residential Properties, Office Properties, Retail Properties and Self Storage Properties.  The Company also has certain corporate level activities including accounting, finance, legal administration and management information systems which are not considered separate operating segments.

The Company evaluates the performance of its segments based upon net operating income.  Net operating income is defined as operating revenues (rental income, tenant reimbursements and other property income) less property and related expenses (property expenses, real estate taxes, ground leases and provisions for bad debts) and excludes other non-property income and expenses, interest expense, depreciation and amortization, and general and administrative expenses. There is no intersegment activity.

 

The following tables reconcile the Company’s segment activity to its combined results of operations for the years ended December 31, 2007 and 2006.

Office properties activity increase was due to a full year of operations in 2007 of the office building in Aurora, Colorado compared to a half year of operations in 2006 plus nine months results of operations of the office buildings in Colorado Springs, Colorado in 2007.

Retail properties consisted of the results of the 7-Eleven property in Escondido, California in 2006.  The year of 2007 also included the results of the two retail centers that were purchased during the last quarter of 2007 in Highland, California and Denver, Colorado.

*	"Purchase Price" includes our acquisition related costs and expenses for the property.
**	"GLA" means Gross Leasable Area.
(1)	An apartment building leased to tenants on a month-to-month basis.
(2)	An office building leased to tenants on a semi-gross basis.
(3)	Under single user lease to 7-Eleven, Inc. This property is owned by a DOWNREIT Partnership for which we serve as general partner and in which we own a 51.4% equity interest.
(4)	Consists of 3 separate properties. Information is for all 3 buildings in Complex.
(5)	Strip Centers.
(6)	Two story built in 1982 renovated – 2002, 2 one stories built 1999

 

(1)	Consists of 3 separate properties. Information is for all 3 buildings in Complex.

 

 

The following table provides certain information with respect to the leases of those tenants that occupy 10% or more of the rentable square footage in each of our properties as of December 31, 2007.

 

(1)	Includes the 3 separate properties comprising Garden Gateway Plaza.

 

(1)	Mortgage is cross-collateralized by the three properties comprising the Garden Gateway Plaza. Mortgage has release clause for each property.
(2)	Mortgage was paid in full in January 2008.

Casa Grande Apartments

This is a 39-unit apartment complex, including related improvements, on approximately 1.2 acres. The property is located in Cheyenne, Wyoming. The complex contains a total of twenty (20) two-bedroom apartments, and nineteen (19) single-bedroom apartments. The enclosed living areas aggregate approximately 29,250 square feet. The property was constructed in 1973.

Cheyenne, which is located in the southeast corner of the state, has a population of approximately 55,000. The property is located at 921 E. 17 th Street, which is in the city's downtown area in an established residential neighborhood next to Holiday Park, the city's largest public park. The neighborhood is comprised of approximately 70% single family residences, 10% multi-family housing, 15% commercial uses and 5% industrial uses.

We lease the property to tenants on a month-to-month basis. The roof of the property was replaced in 1996. We plan no major renovations to the property within the next 36 months. The property is currently 97% occupied. Current rental rates are $480 for single bedroom units and a range from $515 to $575 for 2-bedroom units. The property competes for tenants with comparable multi-unit properties and single family residences in its area. We believe the property is comparable or superior to other multi-unit properties in the area considering its location and close proximity to Holiday Park, one of the more desirable areas of the city. We maintain casualty and liability insurance on the property which we believe provides adequate coverage against losses by reason of casualty or personal liability.

The complex is constructed of wood frame with stucco exterior and wood facing and trim. The complex includes paved parking for approximately sixty cars (1.5 places per apartment unit). The grounds of the building contain approximately 20,000 square feet of open area, which is fully landscaped with concrete walks throughout the site.  The property was constructed in 1973.

We acquired this property on April 1, 1999 from Wyoming Casa Grande, a California limited partnership ("Wyoming Casa Grande" or the "Partnership") in exchange for 36,830 of our common Shares and 39,852 shares of our Series A Preferred Stock.

For federal income tax purposes, the property has a depreciable basis of $363,247, the cost of which we will recover on a thirty year, straight line basis.  We anticipate 2008 property taxes will be approximately $10,800.

The Company sold 55.381% interest in Casa Grande on March 3, 2008 for $1,104,535.

Escondido 7-Eleven

On September 8, 2006, we acquired a stand alone-single use retail property located at 850 West Mission Road, Escondido, California. This property, which we refer to as the "Escondido 7-Eleven Property," consists of a 3,000 sq. ft. retail building situated on an approximately 12,000 sq. ft. corner lot. It is located at the corner of West Mission Road and Rock Springs Road in a mixed commercial, light industrial and residential area. The property consists of a one-story, brick and wood constructed building with a cement stucco exterior and an asphalt-paved parking lot.

The building is currently under lease to 7-Eleven, Inc. and is operated as a convenience store. The lease provides for minimum monthly rent of $4,505. The lease, which was originally terminable on December 31, 2008, has been extended to December 31, 2018 with minimum monthly rent of $9,000 during the first 5 years and $10,350 during the second 5 years. The lease is not subject to any renewal options. The lease is a NNN-lease. That is, the tenant is responsible for all major expenses of maintaining the property, including property taxes, insurance and maintenance costs.

Effective June 28, 2007, we sold a 48.6% undivided interest in the Escondido 7-Eleven property to the Allen Trust DTD 7-9-1999 (the "Trust"). We sold the 48.6% interest in the property for $680,425, which equals our pro rata cost for the property, including most of our acquisition costs and expenses. As a condition to the transaction, the parties, among other things, agreed to engage CHG Properties, Inc. to manage the property. We structured this transaction to satisfy the requirements of a tax deferred exchange under Section 1031 of the IRC. We do not believe that we will recognize taxable gain or loss as a result of this transaction.

In April 2008, we and the Trust contributed this property to a California limited partnership for which we serve as general partner and own a 51.4% equity interest. In connection with the formation of the Partnership, we gave the Trust the right to exchange its interest in the Partnership for shares of our common stock.

Havana/Parker Complex

On June 28, 2006, we purchased the Havana/Parker Complex which consists of 7 attached three story office buildings located in Aurora, Colorado. This property, which is operated under the name "Havana/Parker Complex", is located at the intersection of Parker Road and Havana Street which is one of the busiest intersections in Aurora. The property consists of approximately 114,000 square feet and is approximately 65% occupied. The property is surrounded by newer Class A buildings. Our buildings are an alternative to the higher priced buildings in the area. We purchased the building for $5.829 million and invested approximately an additional $324,000 in renovating the property to attract quality and larger tenants. We borrowed $3.6 million at the time of purchase. The appraiser set a replacement value of $13.4 million on the property.

Joshua's Self-Storage

On December 10, 2007, the Company acquired a 789 unit/149,650 square foot self storage property in Hesperia, California for $8 million including transaction costs, and the purchase was funded by assumption of an existing borrowing of $4,376,174 and the remainder was funded with the Company's funds on hand. The existing borrowing assumed was paid off in full in January 2008. We refer to this property as the "Joshua's Self-Storage".

The property was constructed in 2003 and 2005 and is comprised of four single level storage buildings, a three bedroom residence building, and a six bay self-serve coin operated car wash facility located on approximately 9.5 acres of land. The property consists of approximately 804 self-storage units and 72 recreational vehicle (RV) rental spaces. The property is currently approximately 75% occupied.

Garden Gateway Plaza

On March 21, 2007, we acquired Garden Gateway Plaza for $15.1 million, including transaction costs. This property consists of three individual buildings situated on three separate properties within a multi-property campus.  Included is a multi-tenant two-story office/flex building and two single-story office/flex buildings.  The property is comprised of 115,179 sq. ft. on 12.0 acres.

The key attributes to this acquisition are:

·	Minimal leasing retrofit costs due to high-quality suite designs

 

·	Standard office and bay sizes

 

·	Strong high-quality tenant demand

 

·	Strong market location and access

 

·	Pricing is well below replacement cost

 

·	Current rental rates below market rates.

The property has 13 tenants and is approximately 85% leased. The major tenants include FedEx/Kinko's, St. Paul Travelers, Waddell and Reed and Stifel, Nicolaus & Co., Fairchild Semiconductors, Marvell Technology.

Palm Self-Storage

On November 19, 2007, we completed our purchase of a self-storage property located at 1775 N. Palm Avenue in Highland, California. This property, which we refer to as the "Palm Self-Storage Property", is comprised of ten single story buildings and one two-story building, totaling approximately 50,250 square feet, located on approximately 2.81 acres of land. The buildings comprise 463 self-storage rental units and 29 recreational vehicle (RV) rental spaces. The buildings are of framed stucco and modular construction completed in 2003. The property is currently approximately 92% occupied.  This property was acquired in a cash transaction for $4.85 million.

Regatta Square

On October 31, 2007, we completed our purchase of the Regatta Square, a neighborhood retail center located at 727 Colorado Boulevard, Denver, Colorado. The purchase price was $2.180 million including transaction costs, all payable in cash. This property, which we refer to as the "Regatta Square Property", is comprised of approximately 6100 square feet of gross leasable space situated on 0.4 acres of land. The property is currently 100% occupied.

World Plaza

On September 21, 2007, we completed our purchase of the World Plaza Retail Center, a multi-tenant neighborhood retail center located in Highland, California. We refer to this property as the "World Plaza Property." The property consists of approximately 49,800 sq. ft. of net rentable area situated on approximately 4.48 acres used pursuant to a Ground Lease. We purchased the property for $7.650 million, including transaction costs. We purchased the property from World Plaza, LLC, a Delaware limited liability company. The purchase price of $7.641 million was with cash and by assumption of an existing loan in the amount of $3.731 million secured by a first deed of trust on the Ground Lease. The Ground Lease requires current annual rentals of $20,040 and expires on June 31, 2062. The Ground lease includes an option to purchase the property at the price of $181,710 in 2062. This property is currently 98% occupied.

The property was constructed in 1974. The major tenants on the property include the County of San Bernardino, San Bernardino Police Department, Inland Empire Deliverance Center, and Citizens Business Bank.

Pending Property Acquisitions

Executive Office Park. On April 17, 2008, we entered into a contract to purchase the Executive Office Park property located in Colorado Springs, Colorado. The purchase price is $10,200,000, which we will pay in cash and with new financing of $7,650,000. The purchase escrow is scheduled to close on July 15, 2008. Our purchase of this property is contingent upon obtaining satisfactory financing and our approval of title and the property's physical condition.

This property is comprised of 65,000 square feet of gross rentable space situated on 4.57 acres. The property has four 2-story office buildings, two of which were completed in 2000 and the other two in 2001.  The property is located at 1271, 1277, 1283 and 1295 Kelly Johnson Boulevard near the I-25 Interchange and immediately adjacent to the Chapel Hills Regional Mall. The property is currently more than 95% leased. Major tenants include Kellar Williams Realty and Security Title Company.

Waterman Plaza.   On April 2, 2008, we entered into a contract to purchase the Waterman Plaza mixed use building located in San Bernardino, California. The purchase price is $7,350,000, all of which will be paid in cash and with new financing of $3,350,000. The purchase escrow is scheduled to close in June, 2008. Our purchase of this property is contingent upon the Seller's completion of certain improvements, obtaining satisfactory financing, and our approval of title and the property's physical condition.

At closing, this property will consist of one 21,800 sq. ft. building situated on approximately 2.7 acres of land. The property will also include plans for an additional 2,500 sq. ft. drive-through building suitable for a fast food tenant. Major tenants include Goodwill Industries and Subway. Our purchase of the property is contingent upon the owner's guarantee of monthly rentals of $2.50 per square foot on this vacant space for 12 months and a guarantee of $5,833.33 per month and on the new improvements for a period of up to 12 months.

Our Real Estate Loan Investments

On March 20, 2007, we made a loan of up to $500,000 to Nightingale Escondido Real Estate L.P. ("Nightingale"). This loan is secured by a junior lien on two (2) parcels of property totaling approximately 3.47 acres located at 1802 North Centre City Parkway in Escondido, California. The loan is personally guaranteed by Mr. Cesar G. Tangonan, who is an affiliate of the General Partner of the Borrower. The loan is junior to a first deed of trust in the amount of $910,000.  The loan bears interest at the rate of fifteen percent (15%) per annum. The loan is due on its first anniversary date unless exceeded for an additional ninety (90) days at election of the Borrower. Under the terms of the loan agreement, we will retain a principal amount of the loan equal to interest payments on the loan. Principal and interest are payable on the maturity date. The Borrower intends to develop the property into an approximately 75,000 sq. ft. 174-bed assisted living facility.

Under the terms of the loan agreement, we will advance the loan amount as requested by the Borrower.  The loan agreement provides that at least 85% of the principal amount of the loan must be used solely for the acquisition, design and development, and expenses relating to the property, including payment of fees, property taxes and interest on the first deed of trust and expenses relating to the property, except as we may consent to in writing.

On October 1, 2007, we loaned Nightingale $935,000 collateralized the a first deed of trust on the same land under development.  This mortgage loan accrues interest at 11.5% per year and the unpaid principle balance and accrued interest is due and payable on June 30, 2008.

On November 19, 2007, we loan Nightingale $500,000 colateralized by a third deed of trust on the same land under development.  This mortgage accrues interest at 11.5% per year.  This loan is due on June 30, 2008.

Dispositions of Properties

On October 5, 2007, we sold our office building located at 365 Rancho Santa Fe Road, San Marcos, California (the "RSF Building"). The purchaser paid $5,650,000 in cash for the property. We paid real estate commissions, closing costs and selling costs of $272,000. The building was transferred pursuant to a Section 1031 tax deferred exchange transaction, whereby we have caused the sale proceeds to be used by an independent facilitator to purchase two properties. We purchased the Regatta Square Property and the Palm Self-Storage Property as the exchange properties for this transaction.  As a result of this exchange transaction, we do not anticipate any current recognition of gain from the disposition of the RSF Building.

On March 3, 2008, we sold a 55.381% undivided interest in our residential property in Cheyenne, Wyoming.

OUR INVESTMENT OBJECTIVES, STRATEGIES AND PRACTICES

General

We invest in commercial properties, such as office buildings, and in apartment buildings. Our investment objectives are:

•	to maximize cash dividends on our Shares;
•	to realize growth in the value of our properties upon our ultimate sale of such properties;
•	to realize growth in the value of our Shares; and
•	to preserve our investors' capital contributions.

We may not change our investment objectives, except upon approval of shareholders holding a majority of the Shares.

Decisions relating to the purchase or sale of properties will be made by our management subject to approval by the board of directors.

Our Contrarian Investment Strategy

We may from time to time use a contrarian investment strategy in choosing our properties. Using this strategy, we will seek properties that are out of the current investment mainstream or that have unusual features. For example, we might look for smaller retail properties at a time when the common wisdom for REITs is to invest in large multi-family residential properties or anchored shopping centers. We look to employ a contrarian strategy at times we believe that the herd is often wrong. For this strategy to succeed, we must be tenacious in negotiating our acquisitions and persistent in avoiding the cookie-cutter attitude all too commonplace with real estate investors. By acquiring a property that is contrary to common wisdom, we will have a greater risk that the property will not appreciate in value at a rate commensurate with that of similar properties or the real estate market in general. For example, this might occur either because the market's perceived value of the property does not adjust or correct with future events and/or we are unable to improve or recondition the property to cure its perceived deficiencies. We believe that raising cash at this time allows us to carefully select properties that lose favor in the market during the next real estate industry or segment downturn.

Our Acquisition and Investment Policies

We will acquire commercial office buildings, retail properties and/or multi-unit residential properties.  We prefer to acquire properties which have operating histories but we may purchase one or more newly constructed properties, or properties under construction. We also prefer to acquire commercial and retail properties which are less than ten years old, but have and will continue to acquire older properties under conditions we determine to be advantageous. We endeavor to acquire properties that are leased or pre-leased to one or more tenants having acceptable creditworthiness.

We seek properties that will satisfy our investment objectives of maximizing cash available for distribution as dividends, preserving our capital and realizing growth in value upon the ultimate sale of our properties. However, because a significant factor in the valuation of income-producing real properties is their potential for future income, many properties we acquire will provide both current cash flow and potential growth. To the extent feasible, we try to achieve a diversified portfolio of properties, in terms of location, type of property and industry group of our tenants.

Investment in real estate generally will take the form of fee title. We will acquire such interests either directly or, in circumstances we deem appropriate, we may acquire real estate indirectly through an intermediary entity, such as a DOWNREIT partnership, or other partnership or joint venture. We will not enter into any such arrangement where a member of our management or their affiliate is a participant or where any such person receives compensation from the intermediary. In addition, we may purchase properties and lease them back to the sellers of such properties. While we will use our best efforts to structure any such sale-leaseback transaction such that the lease will be characterized as a "true lease" so that we will be treated as the owner of the property for federal income tax purposes, we cannot assure our shareholders that the Internal Revenue Service will not challenge such characterization. In the event that any such sale-leaseback transaction is recharacterized as a financing transaction for federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed.

Although we are not limited as to the geographic area where we may conduct our operations, we look first to acquire properties located in the Rocky Mountain States and states to the west.

In making investment decisions for us, management will consider relevant real estate property and financial factors, including the location of the property, its suitability for any development contemplated or in progress, its income-producing capacity, the prospects for long-range appreciation, its liquidity and income tax considerations.  In this regard, management will have substantial discretion with respect to the selection of specific investments.

Our obligation to close the purchase of any investment will generally be conditioned upon the delivery and verification of certain documents from the seller or developer, including, where we deem appropriate:

•	plans and specifications;
•	environmental reports;
•	surveys;
•	evidence of marketable title subject to such liens and encumbrances as are acceptable to our management;
•	financial statements covering recent options of properties having operating histories; and
•	title and liability insurance policies.

We will not close the purchase of a property unless we obtain a Phase I environmental report from the seller, acceptable to our mortgage lender or we are otherwise satisfied with the environmental status of the property.

We may also enter into arrangements with the seller or developer of a property whereby the seller or developer agrees that if during a stated period the property does not generate a specified cash flow, the seller or developer will pay us cash in an amount necessary to reach the specified cash flow level, subject in some cases to negotiated dollar limitations.

In determining whether to purchase a particular property, we may, in accordance with customary practices, obtain an option on such property. The amount paid for an option, if any, is normally surrendered if the property is not purchased and is normally credited against the purchase price if the property is purchased.

In purchasing, leasing and developing real estate properties, we will be subject to risks generally incident to the ownership of real estate, including:

•	changes in general economic or local conditions;
•	changes in supply of or demand for similar or competing properties in an area;
•	changes in interest rates and availability of permanent mortgage funds which may render the sale of a property difficult or unattractive;
•	changes in tax, real estate, environmental and zoning laws;
•	periods of high interest rates and tight money supply which may make the sale of properties more difficult;
•	tenant turnover; and
•	general overbuilding or excess supply in the market area.

Our Leasing Strategy and Tenant Requirements

The terms and conditions of any lease we enter into with our tenants may vary substantially, depending on the prevailing local rental market in which the property is located. However, we expect that a majority of our leases will be what is generally referred to as "gross" or "semi-gross" leases. A "gross" lease provides that the tenant will not be required to pay or reimburse us for any real estate taxes, sales and use taxes, special assessments, utilities, insurance and building repairs, or any other building operation and management costs, in addition to making its lease payments. A "semi-gross" lease provides that the tenant will be required to pay or reimburse us for some of these expenses, generally certain utilities, operation and maintenance expenses. We rent apartments on a month-to-month basis. We generally require that the tenant pay a security deposit.

We do not employ rigid standards for determining the creditworthiness of potential tenants of our properties. Instead, our management considers a number of objective and subjective factors such as credit history, how long the tenant has been in business, the nature of the tenant's business and the tenant's relationships with the community. While authorized to enter into leases with any type of tenant, we anticipate that a majority of our tenants will be individuals and closely held or smaller publicly held U.S. corporations or other entities. We have not set net worth or other standards for our tenants.

Our management generally attempts to limit or avoid speculative purchases by purchasing buildings which are at least 80% leased.

We anticipate that tenant improvements required to be funded by the landlord in connection with our properties will be funded from our working capital reserves. However, at such time a tenant at one of our commercial properties does not renew its lease or otherwise vacates its space in one of our buildings, it is likely that, in order to attract new tenants, we will be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. Maintenance of our apartment buildings is our responsibility and we plan to pay these costs from tenant securities deposits, as appropriate, and from working capital reserves. Since we may not always maintain sufficient working capital reserves, we may not have access to funds required in the future for tenant improvements and tenant refurbishments in order to attract new tenants to lease vacated space.

Insurance on Our Properties Insurance on Our Properties

We maintain damage and liability insurance on each of our properties. In addition, we require our tenants to maintain renter/lessee insurance on the portion of our properties they rent/lease. We believe each of these properties is adequately covered by insurance and is suitable for its intended purpose. However, we are typically not able to obtain earthquake insurance at a reasonable cost. Also, we may not be able either to obtain certain desirable types of insurance coverage, such as terrorism insurance, or to obtain such coverage at a reasonable cost in the future. Our inability or decision not to acquire insurance may inhibit our ability to finance or refinance debt secured by our properties. Additionally, we could default under debt or other agreements if the cost and/or availability of certain types of insurance makes it impractical or impossible to comply with covenants relating to the insurance we are required to maintain under such agreements. In such instances, we may be required to self-insure against certain losses or seek other forms of financial assurance.

Depreciation of Properties Depreciation of Properties

The cost of each of the properties will be depreciated on a straight-line basis over the estimated useful lives of the buildings and improvements ranging up to 40 and 15 years, respectively.

Co-Ownership of Properties

We may acquire properties as sole owner or in direct or indirect co-ownership with others. Co-ownership of properties allows us to acquire interests in a greater number of properties with the same resources than if we acquired properties only in sole ownership. We may jointly own properties directly, as tenants-in-common with others, or indirectly through co-ventures (joint ventures or partnerships) with others. Where we own properties as co-tenants with others, we will enter into an agreement with the co-tenants for the operation and maintenance of the property, and we will also endeavor to have the co-owners engage CHG Properties to manage the property. To date, we co-own two of our properties under this structure.

We may acquire one or more properties in joint ownership with others, including affiliates of management. We will invest in co-ventures with others only if:

•	our interest in the co-venture profits and losses is proportionate to our investment;
•	our share of the co-venture operating costs, including administrative costs, is proportionate to our investment;
•	such investment is not as a limited partner and our voice in co-venture management is proportionate to our investment;
•	the investment is not subject to a promotional compensatory interest (subordinate or otherwise) of a promoter or sponsor; and
•	the investment in the co-venture otherwise meets our investment objectives and the restrictions contained in the bylaws.