Cal-Prop Newsletter for Property Owners and Managers 1

ABOUT CAL-PROP MANAGEMENT, INC.Cal-Prop Investments and Management has provided high quality service to real estateowners and investors in the premier rental areas of San Diego since 1987. Cal-Prop is a full service source that focuses on providing the results owners and investors desire.Our services include: property management, sales, tenant placing, construction and maintenance, grounds and free consulting. Please explore this issue and feel free to call for back issues or obtain back issues on-line at www.cal-prop.com.

M A N A G E M E N T I N C

PROPERTY OWNERPROPERTY OWNERSummer 2005Summer 2005

N E W S L E T T E R F O R P R O P E R T Y O W N E R S A N D M A N A G E R SN E W S L E T T E R F O R P R O P E R T Y O W N E R S A N D M A N A G E R S

Pacific Beach • Mission Beach • Ocean Beach • La Jolla • Clairemont • Mission Hills • Hillcrest to KensingtonPacific Beach • Mission Beach • Ocean Beach • La Jolla • Clairemont • Mission Hills • Hillcrest to Kensington

While stockbrokers grow ontrees, and real estateagents seem to fall out

of them to help you buy or sell aproperty, locating the right personwith whom to conduct long-termreal estate investment planning, particularly when one owns just oneinvestment property, is not so easy. Cal-Prop Investments andManagement fills that need with ourAsset Management Program, whichhas been crafted specifically with theneeds of smaller investors in mind.

As our relationships with our clientsgrew, strategizing together for thelong-term prosperity of our investorsnaturally flowered into a formalized,personalized asset management system that we believe to be the mostcomprehensive and trustworthy system in the field. Read on to learn more.

Dr. XTwo years ago, Dr. X read our annualnewsletter and came to the Cal-Propoffice in Pacific Beach to discuss hisconcerns. He had three properties inthe area, and had been with the samemanager for about twelve years. Thephilosophy of this management com-pany was to do as little as possible interms of maintenance of the property,

QUALITY PROPERTY MANAGEMENTINCLUDING FREE ASSET MANAGEMENTJust Cause Eviction

Ordinance in San Diego

On March 30, 2004, the San Diego CityCouncil voted in favor of adopting a “JustCause” Eviction Ordinance. The ordinancetakes effect on April 29, 2004 and willimpact all terminations initiated on or afterthat date.

How the Ordinance WorksThis ordinance applies ONLY to tenantswho have lived in a rental unit for more than two years. The ordinance isretroactive, meaning owners must providea specific “cause,” as allowed by the ordi-nance, when terminating tenancies ofthose residents who have lived in their

LEGAL UPDATE

Continued on page x

INSIDE THIS ISSUEAsset Management . . . . . . . . . . . . .1

Legal Update . . . . . . . . . . . . . . . . . .1

Vacancy Report . . . . . . . . . . . . . . . .2

Market Trend . . . . . . . . . . . . . . . . . .2

Housing Shortage . . . . . . . . . . . . . . .3

Travel Tip . . . . . . . . . . . . . . . . . . . .3

Rental Report . . . . . . . . . . . . . . . . .4

Condominium Conversion . . . . . . . . .4

New Tax Law . . . . . . . . . . . . . . . . . .5

Property For Sale . . . . . . . . . . . . . . .6

10 Reasons to Invest in San Diego . .8

Joint Venture . . . . . . . . . . . . . . . . . .8

Crossword Puzzle . . . . . . . . . . . . . . .9

Ask the Maintenance Man . . . . . . . .12

M A N A G E M E N T I N C

4406 Bayard Street • San Diego, CA 92102Phone (858) 483-3534 • Fax (858) 270-4066

e-mail: rickt@cal-prop.com

“It’s not all peaches and cream, although I’ll admit it is mostly peaches and cream.”

Continued on page 10

© The New Yorker Collection 1980 Mischa Richter from cartoonbank.com. All Rights Reserved.

and to not keep apace with rent values, with the idea that these strategies would minimize move-outs. It worked for a while. But whenDr. X, came into our office he said hewanted to take a comprehensive lookat his properties and possibly take anew direction. Dr. X and I performeda walkthrough inspection of all threeof his properties. Property A was awell located 8-unit near Mission Bay,in very poor condition and with lowrents. Property B was also well-located,a 9-unit with very spacious floor plans

2 Cal-Prop Newsletter for Property Owners and Managers

VACANCY REPORT

Units Vacancy % of Units Turning Over

Reporting MARCH APRIL MAY MARCH APRIL MAY

1 708 2.69% 2.25% 2.60% 2.96% 2.25% 2.82%

2 169 3.37% 5.08% 3.74% 3.55% 4.14% 5.26%

3 133 3.07% 2.18% 2.03% 0.78% 2.34% 4.68%

4 97 1.47% 3.71% 1.16% 4.12% 2.06% 2.95%

5 141 6.53% 5.62% 3.78% 3.57% 2.70% 5.40%

6 24 2.38% 2.16% 1.00% 4.76% 4.76 0

* 1. Pacific Beach, Mission Beach, Ocean Beach, La Jolla; 2. Mission Hills, Hillcrest, Bankers Hill, University Heights, Kensington3. Clairemont, Mission Valley, Bay Park, Point Loma, Old Town; 4. North Park, College, South Park, Golden Hill, Paradise Hills5. La Mesa, Serra Mesa, San Carlos, El Cajon, Spring Valley, Casa De Oro; 6. North County, Scripps Ranch, Encinitas, Chula Vista, Mira Mesa

AREA*

Market Trends

M arket Trends is a quick overviewof the trends and changes to theSan Diego apartment market.

Just a short few years ago you thought youowned apartments only to find out youowned condominiums in the making. Thetrends and the market are on the move andit is wise to keep up at least in terms ofknowledge. Some topics in the news or onthe move:

Bubble, TheSan Diego is always listed along withBoston, the Bay Area, the LA Basin andHonolulu as one of the leading indicatorsand/or areas most likely to be experienc-ing a bubble in terms of real estate prices.I rarely see an article on “The Bubble”that speaks with any type of economicbackbone about what drives real estateprices other than interest rates.Population in a given geographic area,the income the population receives andjobs, drives real estate prices on thedemand side. Zoning and the quantity ofnew housing drives prices on the supplyside. Merging these factors would giveyou an appropriate measure of housingvalue. I have not seen these done. It maybe too complicated to measure. For certainthe “affordability index” is a garbage statistic. I believe prices are reasonablegiven the financing climate, but thatnew housing is keeping up with thedemand. If the Fed were to change thefinancing climate with either increased

interest rates or changed lending rulesthis could change.

Remember in the last real estate recessionit began in the Fall of 1989 and pricespeaked in the fall of 1991 and fell about5% per year for 5 years. Prices in realestate do not fall in one day like the stockmarket.

Condominium ConversionThe amount of apartments converted andsoon to be converted is so large the marketmay have a hard time digesting the supply.Converted condo prices will adjust toeliminate the backlog, but long term if youhave a building with two bedrooms ormore it will always be ripe for conversion.See the condominium conversion articleelsewhere in this newsletter.

DevelopmentMany owners with developable propertyare selling out because they have agingphysical structures. This market is agreat time to move out of your property ifit can be developed. See the article onJoint Ventures in this newsletter if youwant to capture some of the equity due tothe development potential.

DowntownThis is the doom and gloom section ofthe newsletter. Overbuilding within thissub-market is happening and inevitable.Do not buy a downtown condo forinvestment unless you are prepared for along-term hold. How the oversupplywithin this sub-market will affect

the overall market for real estate andrentals is difficult to determine. I predictsignificant price declines for this sub-market starting in 2007.

Interest ratesThe country and the world are awash incapital. In the US there is over $7 trilliondollars in liquid assets. When you addthe large amount the European babyboomers and the Asian countries are saving this means interest rates will be low for another ten years at least. Because of low inflation when theeconomy slows it now brings interestrates down. Adjustable rate mortgageshave outperformed fixed rates since theywere introduced in the early eighties.

New ResidentsSince we manage over 1000 units in SanDiego including the beach areas we tendto see the influx of young people fromother states. This influx seems to havepicked up again. Although many newresidents do not stay more than a year ortwo we are becoming a hot choice amongthe young who bring money, energy and skills.

Third HomesWhereas owning a second home used toestablish one as a person of means or onethat had “made it”. The current trendamong many of the wealthy is now thethird home trend. Many of these are invacation locations or just cities that are

Continued on page 3

Cal-Prop Newsletter for Property Owners and Managers 3

I don’t think the fact that San Diego hasan affordable housing crisis is a secretto anyone. The attempts to resolve

it are debated from City Council to individual tasks forces throughout theCounty. Everyone agrees that housinghas gotten too expensive not just for thevery poor but reaching to our teachers,our health care workers, pretty much to any of our much needed serviceindustries. I’m not just talking about theaffordability to buy your own home,which may never happen in this area formany people, but being able to find anaffordable, comfortable rental propertyis also becoming challenging. In light ofthis wouldn’t it make sense to do every-thing possible to encourage people whohave rental properties or people who areconsidering renting out their first homesome incentive to retain those proper-ties. Of course it would! So why is itsome members of the San Diego CityCouncil seem intent on making lawsthat would discourage naïve first timelandlords from keeping these properties.Several of the Council members havealready said that they are in favor of

Rent Control and have introduced thefirst steps towards this ridiculous travestyof property owner’s rights.

Effective April 29,2004 Council voted inthe first foot in the door to Rent Controlwhen they approved the Just CauseEviction ordinance. Some of the Councilmembers upon their own admission did-n’t really understand what it was allabout, apparently never owning a rentalor being involved in the process of rentalmanagement. Under these circumstancesthey should have become more informedbut personal legal problems seemed tointerfere with this.

Some tenants mistakenly believe RentControl is the answer to affordable hous-ing. They believe that once the “greedy”landlords are curbed and not given theliberty to raise rents at will, there will bemore reasonably priced properties. Thishas been proven completely wrong inareas that already have Rent Control.

Some of the most expensive rental mar-kets in the United States are products ofRent Control. New York City, SanFrancisco, and Berkeley have some of the

highest rents in thecountry. Berkeley, a college town wherethe students bandedtogether years ago toacquire rent control inthe 70’s has some ofthe same students,now highly paid professionals, living inthe student voted rentcontrolled propertiesbecause those units,due to Rent Control,are still such a deal.Who’s greedy now?Where do the currentpoor students go? Newto the community theyneed to search forunits close to the college that are afford-able but because ofrent control the same

people from 30 years ago are still living in them.

This is just one example of the danger incontrolling the market. The housing market,like any market, controls itself accordingto the law of supply and demand. We needmore affordable housing but Rent Controlis not the answer. Making it easier forproperty owners to deal with tenants is.Lessening the time it takes to do an evic-tion, weakening some of the supposed“habitability” issues, going back to a 30Day Notice as opposed to the 60 DayNotice, and especially getting rid of theJust Cause Eviction Ordinance are a few ofthe ways a property owner may be enticedinto owning income units again. If fewerowners were scared away by Californiaand particularly San Diego’s pro-tenantlaws, it would be certain that more rentalproperties would come available. Withmore owners electing to become landlordsand more units on the market rents wouldbe allowed to naturally level out andbecome more affordable.

Rent Control is not only dangerous anddisruptive but it is UN-American.Property owners have rights too. Let’smake sure they are also protected.

THE SAN DIEGO HOUSING SHORTAGE & SILENT MARCH TOWARDS LOCAL RENT CONTROL By Tani Means

Tani Means is single-family rental specialist for Cal-Prop Managementhaving owned her own property man-agement business from 1986 until itwas sold in 2000 with an emphasis onsingle-family units and the specialrequirements of the less seasonedinvestor. She is highly involved in theGovernment Affairs Committee ofThe San Diego Association of Realtorsand an avid proponent of the rights ofproperty owners.

Travel Tips: The Pontalba ApartmentsOne of the best real estate touring trips (consult withyour accountant about the deductibility) is NewOrleans. It is easy to steer clear of the rowdies andNew Orleans is home of the Pontalba Apartments.Built in the 1840’s by the Baroness MichaelaAlmonaster de Pontalba there are twin structures thatflank both sides of Jackson Square. They are now amixed-use building and are reputed to be the oldestapartments in America. Also, the Garden district is oneof the great real estate walking tours.

4 Cal-Prop Newsletter for Property Owners and Managers

RENTAL REPORT BY COMMUNITY

Apartment Condo HouseDwelling Type

AREA* BR/BA

1*

2*

3*

4*

5*

6*

S/1 1/1 2/1 2/2 3/2-3 1/1 2/1-2 3/2-3 2/1-2 3-4/2-4

RANGE 450-975 750-1375 950-1825 1450-2200 1295-2000 900-1775 850-2475 1750-3990 1225-2200 1650-4075

AVG 768 965 1330 1675 1975 1111 1649 2102 1603 2110

RANGE 675-775 655-1150 725-1220 1000-1395 1395-1595 • 1050-1995 • 875-1395 •

AVG 746 805 1013 1185 1495 • 1202 • 1135 •

RANGE 480-635 465-1250 800-1200 995-2200 • 765-1095 800-1495 1250-1325 1500-1650 1200-2395

AVG 580 864 1067 1168 • 871 1142 1287 1590 1824

RANGE 585-635 675-900 895-925 800-950 1025-1495 995-1295 850-1225 1500 995-1295 •

AVG 610 850 910 925 1225 875 1080 1500 1192 •

RANGE 600-625 725-900 775-900 900-995 1085 1125 1095-1390 • 800-1295 950-2100

AVG 662 790 850 992 1095 1125 1242 • 1028 1665

RANGE • • • • • 1200-1600 1150-1875 1615-1750 1475-1550 1500-2495

AVG • • • • • 1400 1375 1682 1512 1910

W hatever happened to theapartment market? Theplain old apartment market

has morphed in the CondominiumConversion market. As we all know theprice of homes and real estate has sky-rocketed since 2000. Everyone hastheir favorite fish story about the property they almost bought, but thatone got away. It was almost alwaysoverpriced. Can the small to smallportfolio investor profit from the current condominium conversion market? If an investor is looking to sellout the answer is definitely yes.

You can reap a price for your propertywith gross multiples between 12 and 20 times gross depending upon yourlocation. These multiples are right nowat all time records.

A second way to benefit is by putting onthe condominium papers yourself. I canhelp you accomplish this quite easily. Ifyou complete the paperwork you can

reap an addition profit over and abovewhat you would sell for because theproperty is ready for a converter tobegin construction rather than waitingthe 14-18 months. The converter doesnot have to tie up their capital and canbegin construction immediately which iswhy the seller can obtain an additionalpremium. As the owner you could also convert, upgrade and sell your own units.

Cal-Prop will facilitate this process foryou so that you can maximize your prof-it. Cal-Prop would do all of the generalcontracting and sale of the units andthere are no other fees involved. A ruleof thumb is that you would profit$50,000 to $85,000 per unit after allcosts are accounted for. Although someof the condominium converters in SanDiego send out material that hintsvaguely that you could not utilize a IRS1031 tax deferred exchange if you convert your own units.

Please do not take the advice of someone that wants to buy your property.Call Rick Thornton for a free consulta-tion on how you can profit.

CONDOMINIUM CONVERSIONSHow it affects you and how you can profit

* 1. Pacific Beach, Mission Beach, Ocean Beach, La Jolla; 2. Mission Hills, Hillcrest, Bankers Hill, University Heights, Kensington3. Clairemont, Mission Valley, Bay Park, Point Loma, Old Town; 4. North Park, College, South Park, Golden Hill, Paradise Hills5. La Mesa, Serra Mesa, San Carlos, El Cajon, Spring Valley, Casa De Oro; 6. North County, Scripps Ranch, Encinitas, Chula Vista, Mira Mesa

© The New Yorker Collection 1999 Michael Maslin from cartoonbank.com. All Rights Reserved.

“I came , I saw, I subdivided.”

Cal-Prop Newsletter for Property Owners and Managers 5

NEW TAX LAW LIMITS YOUR ABILITY TO TRANSFER A RENTAL INTO A PRIMARY RESIDENCE

IRC Section 1031 allows an investor to defer capital gain taxes (and depreciation recapture) upon the sale

of a property “held for productive use ina trade or business or investment” if theinvestor reinvests exchange equity intoanother investment property. IRC section 121 allows for capital gain taxexclusion upon the sale of a personalresidence of up to $250,000 if a taxpayeris single, and $500,000 if a taxpayer ismarried, if the residence has beenowned and used by the taxpayer as hisprinciple residence for an aggregate oftwo of the preceding five years.

In the past several years, savvy taxpayershave been using both tax code sectionstogether by selling and buying a rentalhouse through a 1031 tax deferredexchange, later converting the replacementproperty rental house into a principleresidence, and then two years later, sellingthe house and excluding all of the gainunder IRC section 121. Obviously theTreasury Department has perceived thistax planning strategy as a loophole, andtherefore a provision to restrict this prac-tice was recently passed into law.

The American Jobs Creation Act of 2004,otherwise known as HR4520 was signedinto law by President Bush on October22, 2004. The law does basically what its name implies: passes a series of provisions that jumpstart job growth andpositively impact U.S. business.Included in the HR4520 is a provisionthat mandates a five year holding periodrequirement before a rental house previ-ously used as a replacement propertymay be sold under IRC section 121.Under this provision, a taxpayer whoexchanges into a rental house under IRCSection 1031 and then later converts thereplacement property into a principleresidence, is not allowed to exclude gainunder the principle residence exclusionrules of IRC §121 unless the sale occursat least five years from the date of itsacquisition through the exchange.

The provisions for the new law are effective for personal residence salesoccurring on or after October 22, 2004,so taxpayers who previously acquired

their current residence through a taxdeferred exchange within the past threeyears will have to wait at least anothertwo years before selling the home andexcluding gain under IRC section 121,assuming the taxpayer meets the two outof five year occupancy test. For example,taxpayers who are now living in a housethey acquired through an exchange twoyears ago will now have to wait anotherthree years before selling the houseunder IRC Section 121.

In accordance with the 1997 Taxpayer’sRelief Act, it should also not be forgottenthat the depreciation recapture taxes willstill be owed for the portion of time thehouse was used as a rental property afterMay 6, 1997. For example, if a taxpayeracquired a house through an exchangefive years ago, rented the house for threeyears, and has now lived in it the last two

years, gain may be excluded under IRCSection 121, but taxes will still be owedon the total amount of depreciation takenor allowable for those three years thehouse was held as a rental.

In light of HR 4520, and the continuingdepreciation recapture tax rule, taxpayerswho plan to convert a rental into a principle residence should be prepared tohold the new property a minimum of fiveyears from the date of acquisitionthrough the exchange, and should allocate money for the taxes they willowe on the depreciation they take whilethe house is a rental property. With properplanning and tax advice everyone wins.

For the full text of Conference CommitteeReport on H.R. 4520, you can visit:http://waysandmeans.house.gov/media/pdf/hr4520/hr4520confreptlegtext.pdf.

Six Reasons to 1031 Exchange Up in This Market

1If you have a land value property you can sell to a developer and tradeinto apartments in good areas and reap better cash flow, re-leverage andincrease depreciation.

2 If you own a single-family home that is paid off or nearly paid off youcan exchange up into apartments in good areas and reap better cashflow, re-leverage and increase depreciation.

3 If you own apartments with significant equity you can trade into commercial buildings that are much less management intensive.

4 If you own any property you can trade up to position yourself for thenext great run up in rents and values. It is not certain when this willhappen, but you will be in position if you act now.

5 Sell your apartments with significant equity to condominium convertersfor top dollar and buy into out of state cash flow.

6 Sell your apartments with significant equity to condominium converters for top dollar and buy into a TIC (Tenant in Common)property. These are large partnerships that are management free withvery good cash flow.

6 Cal-Prop Newsletter for Property Owners and Managers

1818-32 Hornblend • Pacific Beach

$750,000 to $850,000

t Eight new condominiums

t Finished winter of 2005

t Garages

t Armstrong design & construction

t Upgrades and high quality

t Great central location

8965 Switzer • Spring Valley

$2,385,000

t Close to schools

t All two-bedroom units

t Can condo convert

t 36 parking

t Huge lot

818-32 Chalcedony St • Pacific Beach

$4,250,000

t One block to beach

t Can Condo convert

t 12 garages

t 150x125 lot

t 10 two bedrooms

t Best PB location

7656 Normal Ave • La Mesa

$1,095,000

t 5 Units

t 1700 sq ft 4/2 House

t Newer bldg in back

t 14,800 sq ft lot

t Two units 3/2 w/ frplc

t Two units 2/2

(858) 483-3534M A N A G E M E N T I N CI N V E S T M E N T S I N C

Cal-Prop Newsletter for Property Owners and Managers 7

1516 Missouri St • Pacific Beach

$649,000

t Three bedroom 2.5 bath

t North PB quiet, central

t Townhouse

t Tandem parking

t New carpet, appliances

t Sharp, low hoa

3225 Monair • Clairemont

$389,000

t Two bedroom 1.5 bath

t Classic Clairemont location

t Flat

t Parking space

t Very clean

t Great complex: pool, tennis

745 Dover & 746 Devon Ct Mission Beach

$1,200,000 to $1,600,000

t South Mission Beach

t New Construction

t Incredible floor plans

t Easy stroll to beach/bay

t Upgrades & high quality

t Available winter 2006

4069 Lamont St • Crown Point

$649,000

t Three bedroom 2.5 bath

t North PB quiet, central

t Townhouse

t Tandem parking

t New carpet, appliances

t Sharp, low HOA

(858) 483-3534M A N A G E M E N T I N CI N V E S T M E N T S I N C

8 Cal-Prop Newsletter for Property Owners and Managers

Joint Venture

Highest and best use is one ofthe time-honored principalsof real estate. With the signif-

icant rise in values in San Diego overthe last decade many owner andinvestors of real estate find that theyown property in which the fullpotential of their property lies inbuilding, renovating, upgrading or condominium conversions. Thequestion then becomes how can theowner benefit from this equity orprofit potential.

Most investors do not have the specific expertise necessary to tapthis wellspring of potential. Oftenthey could do it, but the learningcurve costs of a project would significantly decrease the net gain.

Cal-Prop has developed contacts orabilities that the investor can leverageto assist them in any of these areas.For renovating we are licensed gener-al contractors and have competedfive major and a dozen cosmetic renovations over the past two years.We are also in the process of complet-ing three condominium conversionsfor our current clients. If your property has the potential for fulldevelopment we have formed astrategic alliance with the numberone builder in Pacific Beach and haveeight projects under way. Our strategicpartner completes both the designingand the building, which is extremelyeffective, because instead of twosources: architect and contractor youare dealing with one entity.

Please contact Rick Thornton, if youwant to explore the benefits of a jointventure.

Joint Venture Partners Needed

I have a strong design/build partnerthat is looking for investors with$500k to $1m plus to invest in highly profitable new construction.If you are this type of client please contact Rick Thornton at858-483-3534 Ext 13.

1 Next generation industries such as biotechnology, wireless andconsumer electronics all have astrong presence in San DiegoCounty and the young school ofUSCD (founded in 1960) plus theother campuses of SDSU, USC,Point Loma Naz, etc are a greatasset and focal point of thisfuture economic growth. Techemployment is in biosciences,telecommunications, defense,computers and electronics, softwareand environmental technology.

2 At least 10% of our economy isdriven by economic activity inNorthern Baja. This makes the SanDiego region a much larger forcewhen you add in the populationand economy of northern Baja.This is a long-term advantage toSan Diego. Power plants and LNG(Liquefied Natural Gas) can beapproved and built in Mexico,which will significantly help ourenergy needs.

3 The Port of San Diego: Sooner orlater the LA basin ports willbecome too busy and San Diegowill tap this underutilized asset.Sooner or later Miramar or anothersite will become San Diego’s airport opening up Lindbergh forredevelopment ending LindberghField’s reign as the most convenient large airport in theworld, but giving San Diego aworld-class airport.

4 Population growth. San Diego isstill the least crowded major city ofthe three large metropolitan areas

in California; The Bay area and theLos Angeles basin being the others.Although, we would love to keep itat its current size growth isinevitable since it is still so livable.

5 No military base closings in themost recent BRAC realignment.Defense is the second largestindustry in San Diego and mili-tary spending will not shrink forat least a decade due to the newthreats around the globe.

6 San Diego is among the safestcities in the country. San Diegoviolent crime dropped nearly 18percent in the first quarter of2005 despite having one of thesmallest big-city police forces inthe nation with about 1.6 officers per 1000 residents.

7 Home ownership rates areincreasing. Home ownershippercentages have reached recordhighs in San Diego to about 65%mostly due to the condominiumconversion phenomenon.

8 San Diego has an incrediblediverse and flexible economyincluding military, tourism,international trade and high tech.

9 Office space vacancies are drop-ping to 10%. This portends jobs,which portends a strong market.Drive around and one notices alot of buildings that will bestocked with employees seem tobe being built in San Diego.

10 The climate. This past winterexcepted.

Top Ten Reasons to Invest in San Diego

(858) 483-3534www.cal-prop.com

M A N A G E M E N T I N CI N V E S T M E N T S I N C

Cal-Prop Newsletter for Property Owners and Managers 9

1

2

3 4

5

6

7 8

9 10 11

12

13 14

15

16 17 18

Down1. what's fair2. highest and best4. deferred5. expression of gratitude7. not the head of the school8. three most important

things (one word)10. state of curiosity11. $25 million in 2004 sales

by this realtor12. borrowing15. every property needs

more18. net income

Across3. its simple5. third party6. tenant in common9. like getting old

13. condominium14. features16. hardest part of owning

real estate17. time to open

CAL-PROP CROSSWORD PUZZLE

For puzzle answers, go to www.cal-prop.com/answers

different from the person’s home city.The second home and the third homephenomenon are affecting San Diego.Many of the new construction absorptionis by second and third homebuyers.

TIC’s (Tenant in Common)Up until recently the most common wayto purchase large properties with a num-ber of individuals was through a REIT or

Real Estate Investment Trusts. Thesevehicles have a number of drawbacks andlimitations such they must push out acertain percentage of their cash flow andSecurities Law binds them. RecentlyTIC’s or Tenant In Common propertieshave become popular. Typically, aninvestor with a minimum of $100,000 to$1,000,000 to invest joins together withother similar investors and purchases

large properties that are often consideredA or trophy properties. The advantagesare the return on equity and the totalelimination of active management. Thedrawbacks are liquidity, the managementgroup takes large percentages of the profit, exit strategy and buying into markets with which you have limitedknowledge. TIC’s can be a good vehiclefor the right investor.

MARKET TRENDS Continued from page 2

Please check out Cal-Prop's new updated web site:

• Our real-time rental list with photos • Newsletter archive with newsletters going back to1999

www.cal-prop.com

10 Cal-Prop Newsletter for Property Owners and Managers

and lots of parking within eight blocksof the ocean. But it was in extremelypoor condition and had not low butextremely low rents. Property C was inteardown condition and again hadextremely low rents.

This portfolio represented a great deal ofunrealized potential. Dr. X. asked for myrecommendations, which were as fol-lows: Property A had to be rehabilitatedimmediately, and I outlined both —light and full-rehabilitation scenarios.Property B needed minimal rehab but araise in rents as part of a five-year planto hold and increase the value of theproperty. Property C was a teardown,but again represented enormous oppor-tunity under three possible scenarios.In one, the owner could contract with adesigner-builder to construct a newproperty. Two, he could undertake ajoint venture with a designer-builder. Inoption C, he could sell to a developerand complete a 1031 exchange for anewer property.

Dr. X looked at the options and decidedupon the following strategy: majorrehab on Property A, a light rehab withmaximum rent increases for Property Band the sale of property C with comple-tion of a 1031 Tax-Deferred Exchange.The result of these moves was astound-ing. The major rehab on Property Ayielded an increase in net income from$12,000 per year to $42,000 per year aswell as a beautifully rehabilitated build-ing that added value to the entire neigh-borhood. The yearly income of PropertyB soared from a net of $16,000 per yearto $32,000 per year and from then onbenefited from the decreased liabilitythat an up-to-date and well-maintainedbuilding brings. Property C doubled itsnet income from $5,000 to $10,000 peryear and with these proceeds Dr. X wasable to purchase two high-quality, well-located buildings, which in turnincreased his personal income very sub-stantially.

Ms PMs P has three properties with 4 unitseach in Pacific Beach that she had pur-chased through Cal-Prop in 1991. All

three were tremendous locations. Shehad weathered the storms of the mid-nineties’ market and she was about toretire with significant equity. She need-ed some cash to pay into a long-heldretirement plan, which would increaseher retirement income stream. The year

was 2004 and interest rates were verylow. Her variable loans had a 7% floor.Together Ms P and I reviewed all of theoptions, including selling and payingtaxes; selling and carrying paper; con-verting to condominiums; doing a refi-nance; and finally doing a re-financingand repositioning of the property intoluxury apartments. In the end, Ms Pchose the last option. We refinanced,pulled enough equity to perform a buy-up on her retirement plan, and complet-ed a full remodel of the units for$350,000. As a result, her net cash flowon the units skyrocketed from $25,000per year to $60,000 per year.

Retired DMr. D has owned his apartments for over20 years. They are in an extremely goodbeach location, but are aging rapidly.Mr. D is retired and wants to cut downhis involvement in oversight and man-agement. Mr. D. has a very attractiveProp 13 property tax payment and ownsthe property free and clear. Based on theproperty’s value in today’s market, thereturn based on current equity is 3.25%.After consulting with Mr. D., Cal-Propassisted Mr. D in selling his buildings toa condominium converter for an

extremely attractive price. He also com-pleted an IRS 1031 Tax-DeferredExchange in a Tenant-in-Common(TIC) property. The TIC yields him andmanagement-free 8% return on hismoney. TIC’s can be found with 7 to 10%return in California and across the coun-try. This is an extremely attractiveoption for increasing one’s wealth, andMr. D., is presently very happy that hetook advantage of the 1031 Tax-Deferred Exchange.

Entrepreneur TEntrepreneur T. owned four apartmentbuildings in Spring Valley, Ocean Beachand City Heights. He had recently pur-chased a vocational school and wantedto use his equity to purchase a hotel in aunique plan to synergize a training sitefor the new school and running of thehotel. Mr. T took advantage of thestrong market and running of the hotel.Mr. T took advantage of the strong mar-ket to sell to condominium convertersand sold two buildings, enacting an IRS1031 Tax-Deferred Exchange.

Small Business Owner RSmall business owner R and his twobrothers received a property in Trustfrom their father that was free and clearand in an outstanding location. He alsoowned a house in Clairemont. The four-unit free and clear was placed underCal-Prop’s management, and the netincome was maximized. The house hadenough equity to provide for a trade-up.A 1031 Tax-Deferred Exchange was uti-lized. Together we traded their propertyup to an even better location with anewer building and for an equivalentcash flow. Additionally the newer build-ing had far fewer maintenance issues inits future. Mr. R was very happy withthe results.

These real life examples provide a goodpicture of what Cal-Prop can do for you,whether you have one property or aportfolio of properties. Please feel free tocontact Rick Thornton at rickt@cal-prop.com or 858-483-3534 ext. 13. Wewill systematically evaluate your needsand goals, and devise a strategy that willwork for you.

ASSET MANAGEMENTContinued from page 1

Dr. X looked at the options and decided upon

the following strategy: major rehab on Property A, a light rehab with maximum

rent increases for Property Band the sale of property C

…The result of these moveswas astounding.

Cal-Prop Newsletter for Property Owners and Managers 11

unit since April of 2002. Under theOrdinance any landlord who attempts toterminate a tenancy shall provide theresident a written notice to quit or ter-minate which recites the specificgrounds as provided by Section 98.0730of the Ordinance.

The requirements of this ordinance donot apply to agency owned or govern-ment subsidized units such as “Section8” tenancies.

The “Causes”Under the new Ordinance, a rentalowner or manager must be able to provide that one of the following ten“just cause” reasons as defined by theOrdinance exists before a tenant will berequired to vacate the premises.

1. Nonpayment of Rent. Rental ownersand managers can serve a Three DayNotice to Pay Rent or Quit in theevent of the tenant’s non-payment of rent.

2. Violation of Obligation of Tenancy. Thetenant has violated a lawful and mate-rial provision of the rental agreement.Rental owners and managers can servea Three Day Notice to PerformCovenant or Quit in the event the tenant is committing a material breach of the rental agreement.

3. Nuisance. The tenant is committing, orpermitting a nuisance on the rentalpremises, or is causing damage to the

rental unit or to the common areas ofthe housing complex, or is creatingunreasonable interference with thesafety and/or enjoyment of any of theother residents of the housing complex.

4. Illegal Use. The tenant is using or permitting the rental unit to be usedfor an illegal purpose.

5. Refusal to Renew Lease. The tenantrefuses to execute a written extensionof a lease after written request by therental owner. The written request bythe owner or manager must be madewithin the time frames required underthe lease or state law and must offerthe tenant a new lease which is simi-lar to the old lease in its duration andits provisions.

6. Refusal to Provide Access. The tenanthas refused to give the rental ownerreasonable access to the rental unit forthe purpose of making repairs orimprovements, or for the purpose ofinspection as permitted or required bythe lease or the law, or by the purposeof showing the rental unit to anyprospective purchaser or mortgagee.A Three Day Notice to PerformCovenants or Quit may be served bythe owner to require the tenant tosupply the owner with reasonabledates and times for entry.

7. Owner or Relative Occupancy. Thelandlord, including his/her spouse,parent, grandparent, brother, sister,

child, grandchild (by blood or adop-tion), or a resident manager plans to occupy the unit as their principleresidence. (This “cause” was inadver-tently left out of the initial ordinance;the city attorney has indicated thatthis provision will be added.)

9. Correction of Violations. The rentalowner or manager, after havingobtained all necessary permits fromthe City of San Diego, seeks to recoverpossession of the rental unit for nec-essary repairs or construction. Therental property owner or managermust be prepared to prove that theremoval of the tenant from the rentalunit is reasonably necessary toaccomplish the repair or constructionwork.

10. Withdrawal of Residential RentalStructure from the Rental Market. Ifthe rental owner or manager intendsto withdraw all rental units, in allbuildings or structures on a parcel ofland, from the rental market, thenthe appropriate Notice to Quit maybe served.

Serving the NoticeThe notice served, whether it is a Three-Day, Thirty, or Sixty-Day Notice, muststate the grounds noted above underwhich the rental owner is proceeding. Inan unlawful detainer action, the tenantmay raise as an affirmative defense anyviolation or noncompliance with theprovisions of this Ordinance.

LEGAL UPDATEContinued from page 1

MAINTENANCE MANContinued from page 12

$500. Generally this will eliminatecondensation problems for thiswall.

8 Inspect and repair roofs yearly.Prevent roof leaks that lead towater damage and mold prob-lems. Most roof leak problemsare a confined to a specific area

and can be remedied withouthaving to completely re-roof.

9 Replace bath fans with newfans. Tenants often do not openbath windows to provide venti-lation adequate to avoid mois-ture damage and mold. Bathfans can be found for $20 to

$120 depending on the qualityyou choose to install.

10 Repairing walkways andsteps. Eliminate trip and fallhazards to protect the tenantsand protect the owner fromlegal liabilities.

12 Cal-Prop Newsletter for Property Owners and Managers12 Cal-Prop Newsletter for Property Owners and Managers

Cal-Prop is a full-service sourcefor all your real estate needs.

• Property Management

• Property maintenance (LIC# 756126)

• Sales: Single & Multi-family

• Groundskeeping

• Advice and Consultation

Use one or all services. Call RickThornton at (619) 483-3534 ext 13or e-mail rickt@cal-prop.com

www.cal-prop.com

5 Reasons to Listwith Rick Thornton

• Sell Your Home at Top ValueForget the agent that has sold the most.Find the one that has sold the best.

• Provide a Turnkey SolutionMost properties need some repairs or improvements prior to marketing. Cal-Prop provides one-stop service. We even credit some of the repairs to the commission.

• Sell Investment Property for Top Value

Maximize the rent and your return. Our track record is outstanding.

• Sell Your Condominium for Top Value

Three identical condominiums in PacificBeach sold at the same time. One for295k one for 299k and the one I sold at $305,000. Which owner was bestrepresented?

• Sell Your Home DespiteObstacles

Every real estate transaction has obstacles. Overcoming them is my specialty.

M A N A G E M E N T I N C

4406 Bayard StreetSan Diego, CA 92109

PRESORT STD.U.S. POSTAGE

PAIDMEDIADIRECT.

Top Ten PreventativeMaintenance Tips

Here is a list of inexpensive preventative maintenance tips to utilize in the ongoing careand maintenance of your aging property.

1 Add a mildew retardant product toyour paint when you paint yourbathroom. At $3.30 per gallon of paint this is extremely cost effective.

2 Replace angle stops and supplylines while your unit is availableduring a unit turnover. Each anglestop and stainless steel braided supply line set costs about $13.00and takes about one hour of labor.The failure of these items can leadto water damage, mold problemsand eventual sub-floor replacement.There are new products availablesuch as the quarter turn valvedesign, that are much more durableand reliable. If these items arereplaced it facilitates the efficiencyof future plumbing repairs.

3 Inspect gas furnaces and appliancesyearly. San Diego Gas and Electricprovides free inspections each yearin the fall. This can prevent fires,asphyxiations and other major disasters.

4 Check smoked e t e c t o r sannually. Areplacementbattery costs$2.50 and anew detector costs from $10.00 to$25.00. We typically put in themore expensive model becausethey last about five years. Thecheaper models can need replace-ment every one or two years there-fore the life cycle cost of the moreexpensive unit is less.

5 Install tub drain screens whereverpossible particularly if the tub nolonger has a drain screen. Helps prevent drain stoppages. A rubberdrain screen costs $2.00.

6 Check and install window and sliding door locks. This helps discourage theft and assaults. Thiswas a new law passed a few yearsago so you want to be in compliance.

7 Insulate exterior walls. This is lessexpensive than you think. If youhave moisture problems on a specificwall, it’s usually a north wall; youcan inject insulation for $300 to

ASK THE MAINTENANCE MAN!

Joe TrudeauSenior Maintenance Foreman

Call Rick Thorntonat (619) 483-3534ext 13 or e-mailrickt@cal-prop.com

Continued on page 11