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A. ORGANIZATIONAL STRUCTURE
What is a limited liability company, and what are its advantages versus other entity types with respect to your program?
Each investment program is formed and operated under the organizational structure of an LLC. The LLC is a blend of the best characteristics of corporations, partnerships and sole proprietorships. It is a separate legal entity like a corporation, but is treated as a partnership for income tax purposes and therefore carries with it the "flow through" benefit that corporations do not enjoy.
The LLC is a relatively new entity type in the United States that has existed for many years abroad. It wasn't until 1988 that the IRS changed its position allowing an LLC to have a partnership tax classification, along with the exemption of personal liability that exists with the corporate structure.
In this ownership structure, the investors or owners are called members and the members can be virtually any type of entity including individuals (residents or foreigners), corporations, other limited liability companies, trusts, pension plans, and IRAs.
Each LLC is governed by an operating agreement that is carefully drafted by the LLC's legal counsel and approved by its members. One or more managers are appointed to carry out the activities of the LLC. The LLC is not a tax-paying entity. Profits or losses of the LLC flow directly through to its members and are reported on their individual income tax returns.
B. FINANCIAL REPORTING
How often are financial statements provided to investors?
Quarterly financial statements for each program are issued to each member generally within forty-five (45) calendar days following the close of each calendar quarter. Following the close of the fourth quarter each year, we intentionally defer sending out the year-end financial statements until the related income tax schedules are available from our independent CPA firm. However, we make every effort to provide the year-end Form K-1 tax information and financial statements to members at least thirty (30) calendar days prior to the individual tax filing date of April 15th.
C. CASH DISTRIBUTIONS
How often are cash distributions made to investors?
Whenever possible, we try to effect cash distributions from a property's rental operations that are consistent with pro forma schedules provided to members at a program's inception. It should be noted, however, that these schedules reflect estimates of projected performance, and while we continuously try to meet or outperform these estimates, this may not always be achieved, especially in the short term.
Our cash management approach generally limits distributions to the amount of net cash flow generated by a property's rental operations including debt service and capital additions. If cash distributions are reduced or suspended for one or more quarters, it should not be interpreted to mean that the property involved would provide an overall return less than originally projected. Rather, it may simply be prudent to temporarily reduce or suspend distributions for various reasons. Conversely, if surplus funds become available, for instance, as a result of the refinancing the mortgage debt encumbering a property, cash distributions in that year may be made in excess of our initial projections. The initial cash distribution to investors is normally made after the first full quarter of the property's operations.
In most instances, the quarterly cash distributions will be provided together with the related financial statements. However, should issuance of the financial statements be delayed beyond the 30-day period described in the preceding Section B, the distributions may be issued separately from the financial statements.
D. HISTORICAL RESULTS
How have your programs fared with respect to annual profit returns?
A review of our Closed Program Summary covering projects aquired in Arizona, confirms that in general investors have experienced average annual profit returns of 60% or more on invested capital. (Note: It should be noted that past program results do not necessarily provide an accurate indicator of future program operations or expected results.)
For the period 2004 through 2007, S-J completed transactions totalling approximately one billion dollars. In many cases, the prices per unit were among the highest sale prices ever recorded in their respective markets. In addition, the resale capitalization rates (the ratio between net operating income and sales price) were well below market averages. All of the aforementioned transactions involved properties in which cash distributions were suspended and/or reduced at multiple times throughout their respective periods of operation.
E. TAXATION
Please describe the taxation features of an LLC.
Although an LLC does not pay federal income taxes, it must prepare a separate tax return each year and file it with the IRS. The LLC files a partnership return under Subchapter K of the Internal Revenue Code. The LLC's income or loss is passed through to the members who must recognize their allocated portion on their personal tax returns subject to their individual tax rates. The depreciation write-off feature of depreciable real estate largely serves to "shelter" from income tax, the cash distributions that are anticipated to be made to members during the early years of a program. In addition, state income taxes may apply to programs with property ownership outside the state of Washington. A schedule outlining the projected taxable income or loss resulting from property rental operations is prepared and distributed to investors at a program's inception.
F. DESIGNATION OF OWNERSHIP INTEREST
Why is it important to specify vesting of my ownership units?
The manner in which investors elect to take ownership of their membership units does have significant estate planning implications. For example, many investors simply show the names of both husband and wife, or just one of the individuals on their Subscription Agreements. In some instances, the intent is for 100% of a spouse's interest in the LLC to go to the surviving spouse upon the death of the deceased spouse. However, unless this is provided for in the will of the decedent, or perhaps by a separate agreement, the desired result is not necessarily accomplished under Washington State community property law.
Since the ownership designation has such legal significance, it is recommended that investors consult with an attorney specializing in estate planning before designating the manner in which their ownership interests in the LLC will be held. This is particularly important for couples with larger or complicated estates that could be subject to estate taxes.
G. ACCREDITED INVESTOR
What is an Accredited Investor, and how do they relate to your program?
Our real estate investment programs incorporate a number of unique features that contribute to the overall superior return on investment. One important aspect of this is the "Private Placement" structure of our offerings. Utilizing this approach minimizes the organizational costs and expenses associated with our programs.
In order to control costs and retain the advantages related to the private placement structure, membership units are offered and sold only to investors who are "Accredited Investors" as defined in Rule 501 of Regulation D.
Among other factors associated with our private placement structure, we do not offer to sell, or solicit offers to buy, membership interests in our real estate programs, except under the requirements of applicable securities laws, including disclosure relating to each specific real estate investment program.
H. CONTACT INFORMATION
Who do I contact to obtain additional information?
Corporate Office:
Michael J. Sauter, Chief Executive Officer
S-J Management LLC
601 Union Street, Suite 4500
Seattle, WA 98101
Phone: (206) 262-9545
Website: www.sjmanagement.com
Email: msauter@sjm.biz
Legal Counsel:
David M. Otto, Managing Partner
The Otto Law Group PLLC
601 Union Street, Suite 4500
Seattle, WA 98101
Phone: (206) 262-9545 Fax: (206) 262-9513
Email: dotto@ottolaw.com | 
