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To: S-J Management LLC Investors
From: S-J Management Executive Officers
Date: September 16, 2009
The purpose of the memorandum is to provide you with an update of the status of the properties currently held by S-J Management ("S-J") investors (collectively the "Properties"). As you are aware, the current debt structure on the Properties has been an issue for some time and management has been working with the lenders on the Properties in attempts to resolve these problems and preserve investor equity.
In the past months, S-J's officers have continued to work towards restructuring the debt on the Properties. The issue surrounding a successful restructure remains the ability to raise new equity sources that are willing to come into the S-J deals, while agreeing to leave some equity in these deals for the original S-J investors.
However, at this point, S-J believes that it has made substantial progress towards accomplishing the goal of finding new equity, while providing some protection for the original investors. Recently, S-J has reached agreement with Trillium Residential LLC ("Trillium"), an Arizona company who specializes in restructures and who is extremely familiar with the submarkets in which the S-J Properties are located.
S-J believes that the benefits of working with Trillium will significantly improve the chances that the Properties can be successfully restructured. First, Trillium is located in Arizona and works almost exclusively in the Arizona submarkets. Second, Trillium is experienced in all forms of restructure projects, including bankruptcy, and the Trillium engagement includes a provision whereby Trillium agrees to pay the costs of any bankruptcies that it believes to be necessary to accomplish a restructure. Finally, the Trillium team is committed to negotiating restructures that include the original S-J investors in the Properties.
Ultimately, the task of successfully restructuring the S-J Properties remains very difficult. The highly leveraged nature of the Properties requires new equity and a debt structure that the lenders are comfortable with. We are hopeful that Trillium will be able to effectively negotiate successful restructures and that some S-J equity still remains in these Properties.
September 16, 2009
Re: Restructure Efforts on S-J affiliated properties
Dear S-J Investor,
In the past few months many of you have requested updates from me as to how the restructure efforts on the S-J affiliated properties is going. While each property is different, there are some factors in the marketplace that have applied to all commercial properties in the markets in which S-J affiliated properties are located.
One of those factors is the manner in which the lenders with whom we have been dealing have handled restructuring efforts in the last year. One of those lenders, Lehman, has obviously been greatly affected by its bankruptcy and has proved difficult to negotiate with.
An example of some of what we have encountered in the past year is evidenced in the attached article appearing in the Wall Street Journal on September 15, 2009. As the article sets forth, some U.S. Banks have been unwilling to engage in restructures due to concerns in writing down debt.
All in all, I believe the article is pretty informative in what has been going on in the past year and sheds some light into the confusion that has arisen in the restructuring arena. It further illustrates several other companies that are similar positions to S-J and its affiliated properties.
We are still pursuing the restructure of the S-J related properties with all of our resources. We believe that the lenders are beginning to formulate a strategy as to how they want to handle these matters and that in the future our discussions will result in more concrete answers from these lenders as to whether they are willing to engage in serious negotiations or not. In either scenario we will at least be afforded more substantive information about what the lenders are willing to do. As we receive that information we will pass it on to you, the investor.
If you have any questions, please feel free to contact me, David Otto, or Steve De La Vergne at any time, (206) 262-9545. Thank you.
Sincerely,
Michael Sauter
August 20, 2008
TO: All Investors
SUBJECT: Status of Capital
As each of you know, the U.S. real estate market as a whole, and particularly each of the sub-markets in which we own assets, continues to be affected by a severe economic downturn. As a result, some of the investment vehicles for which S-J serves as manager are now entering a stage in which it will be difficult to continue to meet the financial obligations on the notes. Unfortunately, S-J, and myself personally, have already fully exhausted lines of credit to carry these assets further and we are unable to continue to independently fund operations at this time. The capital situation for a few of these assets is serious, and requires your immediate attention.
Despite the economic downturn that the real estate market has suffered, there are some very important factors for each of you to keep in mind:
* None of our projects have sustained any real value loss. Although there have only been limited transactions this year - seven, of which four were carryovers from last year - there does not appear to have been a significant change in the prices. In fact, a recent appraisal that was done on one of the assets in our portfolio shows appreciation.
*Collectively, the entities that are in our portfolio consist of what is considered to be the finest Class A multi-family portfolios in each of Phoenix and Tucson.
* We have several potential Exit Strategies: (i) sell the entire portfolio to a REIT or large institution; (ii) sell assets, not necessarily as a portfolio, but in groups of two or more; (iii) sell assets individually; or (iv) sell the assets to converters, assuming the condominium markets picks up again.
* Every project was bought well below current replacement costs.
Let me re-emphasize that the current situation is entirely market driven and in no way reflects the quality of these assets. Unfortunately, this market has forced us to radically change our hold strategy from, what was previously typical for our programs, a one to two year holding period to a three to five year holding period. These assets are top line in each of the markets in which they are situated.
I know many of you are surprised by the requests for capital that have been circulated over the past few months. We were caught off-guard by how the market downturn would affect our lenders' ability and willingness to extend us new capital or extend the maturity terms of debt previously provided. Frankly, there was no way for us to have better anticipated this reality.
That notwithstanding, we need your help. If we fail to raise the capital that we have requested, we simply do not have an alternative short-term ability to keep the assets afloat. As each of you know, some of the assets are better positioned to weather the storm than others, but for each of the assets for which we have already issued a capital call, we need funds now. We continue to strongly believe that the market will turn in the next 12 - 24 months and, collectively, we can push through this economic storm.
Based on our investigation, our forecast and asset strategy for the markets in which we hold assets is as follows:
* Rental Market shall remain status quo for the next 12 months.
* We plan to remain aggressive on rents but not to the detriment of physical occupancy.
* Raise rents and decrease concessions step by step so that we are able to determine what the market can bear before occupancy is impacted negatively.
* Keep expenses down but not compromise the physical product or the customer service.
* Anticipate buy-sell transactions to begin happening within the next 9 months, but we anticipate the majority will be properties with default loans or about to go there.
* Fourth Quarter 2009 we anticipate that we will see more transactions beginning on stabilized properties.
* Second Quarter 2010, we anticipate a general return to a normal market.
* Assets will be selling based on present physical occupancy plus future value as opposed to current value, which is not much different than how properties are being valued at present, but we believe the future value presented will be closer to reality.
* Finally, we believe that Class A and Class B+ properties will be the first to enjoy the improvement in market and the first real sales (i.e. not because of defaults on loans).
As always, please let us know if you have any questions or if we can provide additional information regarding any investment property.
Very truly yours,
Michael J. Sauter, CEO
April 11, 2008
To: Investors
Subject: Market Strategies
Each of you has invested in at least one of our programs, and most of you have invested in several of our programs. As each of you know, the current instability in the capital markets is forcing us to reassess our initial strategic plan respecting each of our programs. Although each program is unique, we are exploring several generally applicable strategies of which we wanted to make you aware:
First, we have already extended the planned holding period for most of our programs. The extension results in additional capital needs to pay for various costs and expense that either did not exist or would have been deferred in a short-term hold period. At present, I personally have taken on a $4.5MM line of credit to cover certain shortfalls that we anticipate in the near term future. Although my desire is to avoid looking to our investors for an additional capital contribution, if the issues in the credit markets last longer than currently anticipated, we will need to re-evaluate this option. Thus far, I am proud to note that only one of our programs this year has necessitated an additional capital call.
Second, we are currently testing the market to determine the level of interest in a portfolio sale of our various program assets in the Phoenix and Tucson markets. In fact, we received a portfolio offer within the last few days from an institutional buyer, but plan to reject it do to structuring considerations. From a strategic perspective, we believe there will be much greater interest in a bundled portfolio ? rather than selling the assets on a piecemeal basis ? in today?s market. Although we do not anticipate a significant profit under this strategy, this would allow us to free up the capital invested in the programs to re-invest in other opportunities that should pay better returns. In fact, we have already been able to identify several possible opportunities.
Third, we will continue to consider whether refinancing one or more of the projects, evaluated on a case-by-case basis, will better allow us to ride out the credit crunch. Most of our short-term loans are tied to LIBOR (LIBOR + 300bp, which is the current equivalent of 5.7%), which is a drop from about 8.5% - 9%, depending on the project, from the rate at time of purchase. So long as LIBOR remains relatively low (and most commentators seem to think LIBOR will remain fairly low for the remainder of 2008), we should not have a need to refinance in the short term.
Finally, we may simply hold on to the assets and wait out the storm. Of course, there are several variables that may affect this strategy -- and this strategy may also necessitate additional capital calls, refinancing and exploring new short and or long-term debt.
As always, we will continue to keep investors apprised along the way on our strategy choices. This continues to be the most challenging market I?ve personally ever experienced. If you have any questions, please call me, or Steve De La Vergne at (206) 365-7900, and we would be happy to discuss this matter with you.
Michael J. Sauter, Chief Executive Officer
April 1, 2008
To: Montana Apartments Associates L.L.C. Investors
Subject: Status Update on Sale of Montana Apartments
As you probably recall, the sales transaction for the Montana Apartments was recently scheduled to close on March 31, 2008. Unfortunately, due to ongoing constriction in the capital markets which has made real estate financing all but unattainable, the buyer was unable to close. Based on conversations we have had with escrow officers, brokers and lenders that work in the Phoenix market, we understand that, thus far in 2008, only one multi-family asset deal has successfully closed. And, although we are confident that the current state of the capital markets will start to loosen before the end of the year, in the meantime, we are in a waiting game.
With respect to our current buyer, we believe the buyer is sincere in its desire to close on this deal. In fact, based on buyer?s representations and our research, we understand the buyer has already spent in excess of $750,000 in due diligence costs and fees on this deal. However, as if to underline the problems in the capital markets, the buyer has advised that each of two lenders from whom they had received a loan commitment walked away from the deal at the 11th hour.
At this time, neither the buyer, nor we, knows when this deal will close. We are continuing to evaluate whether or not to hang with this particular buyer or terminate the deal and hope to know more within the next month. We certainly appreciate your patience as we jointly ride the current market out.
Sincerely yours,
Michael J. Sauter, Chief Executive Officer
March 11, 2008
To: Investor Members - Toscana Associates L.L.C.
Subject: Termination of Toscana Purchase and Sale Agreement
We wanted to let you know that the Purchase and Sale transaction for the La Serena at Toscana Apartments (the "Toscana Property") that was approved in December was recently terminated. As you know, we were pursuing the Property through a joint venture with Wachovia Development Corporation ("Wachovia"). Unfortunately, Wachovia was unable to provide the necessary information necessary for us to acquire approval from HUD with respect to the HUD loan that is currently a lien on the Toscana Property.
On a more positive note, we are pleased to announce our intent to form a new investment program for the acquisition of a multifamily property (the "Legacy Property") located at 351 East Civic Center Drive, Gilbert, Arizona commonly known as Legacy Village at Gilbert Towne Center. The required equity for the acquisition of the Legacy Property is estimated to be approximately $5,000,000.
As with all of our programs, this program will also involve formation of a new limited liability company (the "Company"). The Company will acquire, directly or indirectly depending on lender requirements, a 100% fee simple interest in the Legacy Property. The Property is a 147-unit luxury community located at 351 East Civic Center Drive -- which is near the intersection E. Warner Road and S. Gilbert Road; two main arterials in the Gilbert, Arizona suburb of metropolitan Phoenix.
The acquisition price of the Legacy Property, at approximately $115,000 per unit, compares favorably to our proposed purchase price for the terminated purchase of the Toscana Property which was priced at approximately $125,000 per unit. The region continues to be considered a high barrier to entry market with a severe shortage of zoned multifamily land, arduous environmental regulations and a lengthy permitting process.
We intend to circulate an offering memorandum and subscription package shortly to ascertain interest in the new program. Your preliminary indication of participation is contingent upon and subject to your subsequent review of all organizational program documents. These program documents include a Subscription Agreement, Accredited Investor Certificate, the Company's Limited Liability Company Agreement and the Property Management Agreement between the Company and S-J Management LLC or such other property management company as may be deemed appropriate. Nothing contained in this letter should be considered an offer or solicitation to purchase an ownership interest in the Company.
Should you have any questions regarding the termination of the Toscana Property transaction or our new program related to the Legacy Property, please contact us. Thanks for your consideration.
Very truly yours,
Michael J. Sauter, CEO
March 3, 2008
To: Investor Members - Montana Apartments Associates L.L.C.
Subject: Sale of Montana Apartments - Delay in Closing Date
Further to our memorandum of February 1, 2008, the situation in the capital markets is continuing to create issues for our buyer of The Montana Apartments ? with us just having learned that their lender will not be able to fund the closing until the end of March.
As I am certain most of you recall, our Purchase and Sale Agreement for the sale of The Montana Apartments most recently called for a closing date of February 28, 2008. Unfortunately, the Buyer informed us yesterday morning that its lender would be unable to meet that date for funding. We are currently negotiating an extension with the Buyer.
As before, we feel this additional extension is appropriate because we believe the purchase price to be paid by the Buyer and the timing of the sale represents the best situation for you, as investors, to receive back your investment with a respectable return on capital. We will keep you apprised of any additional developments ? but are now looking forward to closing this transaction on March 31, 2008.
Sincerely yours,
MONTANA APARTMENTS MANAGER, INC.
Michael J. Sauter, President
February 14, 2008
To: Investors
Subject: New Loan Program - Additional Terms
After speaking with some of you already who are interested in making loans to S-J Management LLC, I'd like to add and clarify a couple of things:
The initial loan term chosen by a lender may be either six months or twelve months, at the lender's election.
If S-J Management elects to pay the note sooner than its stated maturity date, then it will give the lender at least thirty (30) days' notice of its intent to do so, so that the lender may locate an alternate investment for such funds, if desired.
The note can also be structured with a "call" provision, so that the lender may require it to be repaid upon thirty (30) days' written notice to S-J Management, LLC.
Thank you for your interest in this program. Please let me know if you have any additional questions or if there are any other terms on which you'd like clarification.
Sincerely,
Michael J. Sauter, Chief Executive Officer
February 13, 2008
To: Investors
Subject: New Loan Program
As we have done in connection with some of our property acquisition programs in the past, S-J Management LLC is seeking to obtain short term loans from investors in an amount totaling $10 million. Each loan will have an initial term of twelve months, and interest will be payable at 7.5%. For comparison purposes, The Commerce Bank is currently paying only 1.5% on money market and savings deposits in amounts over $100,000 (its highest bracket for deposits). Making a loan to S-J Management is, therefore, certainly an option for putting to use funds that would otherwise be on deposit at a financial institution and earning only minimal interest. Each loan will be evidenced by a promissory note payable by S-J Management LLC, and I will personally guaranty the payment of each note, as evidenced by a separate guaranty. As lender, you may elect whether to receive interest payments monthly, quarterly or annually, and also whether, at the expiration of the initial term, you want to be paid in full or in part or to extend the maturity date of the note for a further six to twelve months. If S-J Management does, however, elect to pay the note sooner than its stated maturity date, no prepayment penalty will be payable.
The money raised from these loans will be used as working capital for S-J Management LLC, so that it has the flexibility to make funds available either in connection with existing programs or as opportunities for new investments are presented.
The Limited Liability Company Agreement of S-J Management permits the company to obtain loans, and all corporate action necessary to authorize the company to borrow the money will be duly taken and provided at any lender's request.
If you are willing to make a loan to S-J Management LLC on the terms stated above, please indicate in the space provided below the amount of such loan and the complete name of the individuals or entity that will be making the loan, and return this letter to us in the envelope provided. We will then prepare appropriate documents evidencing the loan, provide those to you, and make arrangements with you for the delivery of funds.
Sincerely,
Michael J. Sauter, Chief Executive Officer
I will make a loan to S-J Management on thre terms set forth above, in the amount of $___________. The lender on the loan will be __________________.
Signature: _________________________.
February 13, 2008
To: Investors
Subject: Southwestern US Markets - 4th Quarter 2007 Results
We just received information from one of the brokers with which we work in the Phoenix area, Hendricks and Partners, on rental and sales data for multi-family properties located in Phoenix, Tucson, Las Vegas and Albuquerque. We wanted to summarize the data and get it to you, in our continuing effort to provide timely information.
Phoenix Market
Fourth quarter 2007 vacancy rates in this market increased to 10.2% over the 7.8% that was the average for 2006. Rental rates increased by 1.6% during 2007, but this was a slowing of growth in this area, as rental rates had increased by 6.2% during 2006.
The sales of apartment projects with over 100 units also slowed, a not unanticipated result of the current state of the capital markets, to 128 sales in the fourth quarter of 2007, compared to 189 a year earlier. The price per square foot and the price per unit did, however, continue to rise. In 4Q2006, the average price per square foot was $102.52, and the average price per unit was $85,321 (these numbers include a range of projects from an "age" perspective -- beginning with 1974 and earlier and ending with those built since 2000; for the newest category of projects, the average price per square foot was $145.85 (up from $132.09 a year earlier) and the average price per unit increased to $137,731 (up from $122,666 a year earlier)). So even though sales slowed, the data still reflects increasing values.
Tucson Market
Fourth quarter 2007 vacancy rates in this market increased to 8.2% over the 7.0% that was the average for 2006. Rental rates increased by 3.9% during 2007, compared to an increase of 5.2% during 2006.
The sales of apartment projects with over 40 units was the data collected for the Tucson market, and here, there were 38 sales in the fourth quarter of 2007, compared to 65 during 2006. As was the case in the Phoenix market, price per square foot and the price per unit continued to rise. In 4Q2006, the average price per square foot was $77.74, and the average price per unit was $58,885 (also for the same range of age of projects). For projects completed since 2000, the average price per square foot was $146.17 (up from $98.73 a year earlier) and the average price per unit increased to $113,980 (up from $104,603 a year earlier). These statistics evidence the more rapid increase in value that has occurred in the Tucson market during the past year.
Las Vegas Market
Fourth quarter 2007 vacancy rates in this market remained quite low, but did show an increase to 6.0% over the 4.0% that was the average for 2006. Rental rate increases also slowed in Las Vegas, increasing by only 2.2% during 2007, compared to an increase of 4.5% during 2006.
The sales of apartment projects with over 100 units in the Las Vegas market showed 38 sales in the fourth quarter of 2007, compared to 52 during the preceding year. The Phoenix/Tucson statistics of increasing value did not, however, prove to be consistently the case in Las Vegas. Price per square foot was essentially flat overall, and in some project age categories it declined. The same was true on a price per unit basis, where the increase was minimal, from $101,082 in 4Q2006 to $104,625 in 4Q2007 over all categories, and an increase of less than $200 in the projects completed since 2000.
Sincerely,
Michael J. Sauter , President
February 11, 2008
To: Investor Members
Subject: The Tucson Market
A couple of weeks ago we summarized a couple of publications that provided a very positive outlook for the Tucson apartment market. While Apartment Talk, a publication by Bob Kaplan of Picor Commercial Real Estate Services also has a positive outlook, that is in the long term rather than the short term.
A confluence of numerous events has taken place, which include condominiums being operated as apartments, an increase in the number of single-family homes available for rent and some recent loss of jobs that are all related to the mortgage lending "meltdown". These, in turn, have caused a couple of things to happen with respect to the market for apartment rentals in the Tucson area (as in most other areas): (1) there has been an increase in vacancy rates from the low of about 5% in the 3rd quarter of 2006, to almost 8% at the end of 2007, as reported in the Metropolitan Tucson Land Use Survey, and this is not anticipated to decrease in the near term; and (2) concessions have increased, as landlords compete for the renters who are in the market. This publication estimates that about 30% of landlords are now offering approximately a half month's free rent for entering into a 12-month lease, which amounts to about a 4% decrease in the income that would otherwise be generated by that lease were the concessions not given.
This change in trends and the scarcity of loan funds has also caused a slow-down in the sales of apartment projects, which decreased from 10,913 units and $615 million in transactions in 2006 to 7,451 units and $497 million in 2007.
The current trends may be downward, but the factors for a long-term, very positive outlook remain in place. There is a significant lack of new construction in the apartment sector, construction costs are high, and Tucson is still experiencing good overall job growth and growth in its population, especially in the younger age groups where apartment renters are more prevalent than single-family home purchasers
So, while the short-term forecast may be a bit challenging, we still believe as Mr. Kaplan does, that the Tucson properties represent very good investments -- just over a longer term horizon than mzy previously have been anticipated. Please let us know if you have questions or comments on this or any other market related information.
Sincerely yours,
Michael J. Sauter, President
February 1, 2008
To: Investor Members - Montana Apartments Associates L.L.C.
Subject: Sale of Montana Apartments - Delay in Closing Date
The situation in the capital markets is continuing to create issues for our buyer of The Montana Apartments ? with us just having learned that their lender will not be able to fund the closing until the end of February.
As I am certain most of you recall, our Purchase and Sale Agreement for the sale of The Montana Apartments most recently called for a closing date of January 31, 2008. Unfortunately, the Buyer informed us yesterday morning that its lender would be unable to meet that date for funding. We are currently negotiating an extension with the Buyer which will contain the following conditions: (i) the Buyer will pay all of the carrying costs on our debt with Wachovia for the month of February and (ii) Buyer will provide us a letter addressed to us from their lender confirming their lender's commitment to fund this closing on or before February 28, 2008. We have received a letter from their lenders which was addressed to the Buyer that indicates a willingness to fund the closing on February 28, 2008.
As before, we feel this additional extension is appropriate because we believe the purchase price to be paid by the Buyer and the timing of the sale represents the best situation for you, as investors, to receive back your investment with a respectable return on capital. We will keep you apprised of any additional developments ? but are now looking forward to closing this transaction on February 28, 2008.
Sincerely yours,
MONTANA APARTMENTS MANAGER, INC.
Michael J. Sauter, President
January 15, 2008
To: Investor Members - Montana Apartments Associates L.L.C.
Subject: Sale of Montana Apartments - Delay in Closing Date
The recent situation with the capital markets continues to cause considerable havoc with most lenders, and the lender from which the Buyer of The Montana Apartments has a funding commitment is no exception.
Our Purchase and Sale Agreement (and subsequent extensions) for the sale of The Montana Apartments called most recently for a closing date of January 18, 2008. Once again, the Buyer has informed us that its lender will be unable to meet that date for funding, and has requested a third extension of the closing date to January 31, 2008. We have agreed to that extended date based on evidence from the Buyer's lender that the Buyer will have adequate funds to close on January 31st.
This is the third extension that has been requested by the Buyer and agreed to by the Seller. For the first extension, there was an increase in the purchase price of $75,000, and that amount was paid at the time of extension and has been released to the Seller. For the second extension, there was another increase in price of $100,000. Additionally, we remind you that the earnest money of $300,000 Buyer deposited in escrow was released to the Seller back in December.
We have agreed to these extensions because we believe that the purchase price to be paid by the Buyer, and the timing of the sale, represent the best situation for you, as investors, to receive back your investments plus a respectable return on capital. We will keep you apprised of any additional developments - but are looking forward now to the closing of this transaction on January 31, 2008.
Best regards.
Michael J. Sauter, Chief Executive Officer
January 15, 2008
To: Investors
Subject: The Tucson Market
Several recent publications have provided optimistic forecasts for the Tucson multifamily market during the upcoming year.
The January 2008 Global Real Estate Monitor, a newsletter produced by the National Real Estate Investor Magazine for commercial real estate investors, reports that the Tucson apartment market is one of the top five, if not the number one, investment market in the country showing high growth potential for multifamily investors. This publication?s evaluation of numerous secondary markets reflects that demand for multifamily housing in Tucson has significantly outpaced new supply, and projects that only 233 units will be added during the upcoming year. In the last eight months, the median home price has jumped 21.4%, shutting out many would-be homeowners and increasing rentals. The authors anticipate that the trends that have been in effect since the first quarter of 2003 (improving occupancy, rental growth, lack of substantial new product, increased profitability for owners, strong investor demand and increasing property values) will continue.
Likewise, the Marcus & Millichap 2008 Annual Report indicates that Tucson is one of the fastest growing small Metropolitan Statistical Areas in the country. In 2008, employment is expected to increase 1.7%, adding approximately 6,600 new jobs. This edition estimates that 350 new apartments units are expected to come on-line, vacancies are expected to decline to 5.3%, and rents are expected to increase approximately 3.7% in the forthcoming year. With the local single-family housing market experiencing some weakness, investors may find upside potential in Class A assets, where current asking rents are well below the average monthly mortgage payments for local condos and single family homes.
From every perspective, investments in the Tucson multifamily market are expected to remain very strong. As always, we appreciate your investments and confidence in our programs and will work hard on our properties to make the preceding projections become reality.
Best regards.
Michael J. Sauter, Chief Executive Officer
December 27, 2007
To: Investors
Subject: The 2007 Credit Crunch - And Looking Forward to 2008
The last few months of 2007 and the downturn that has occurred in the financial markets have certainly presented us with some challenges. Even though the origin of the current situation was the sub-prime residential mortgage market, the quest for higher returns by lenders and the investments they made in pools of these mortgages has permeated all aspects of the capital markets, making obtaining financing on other properties, including multi family properties, more difficult. Some financial vehicles that were previously available in an upward trending market are no longer available, and lenders are being more cautious with respect to valuation of properties and the amount of equity required by owners. They are concentrating much more on cash flow, and making certain that properties are in a position to support the debt against them and cover all operating expenses, rather than banking on increased value from the future sale of a property. Communications with our lenders have indicated there will be "more pain" going forward, as financing will not be as easy to put together in the short term, thereby putting downward pressure on pricing.
We are concentrating, therefore, on dealing with the assets we currently have and developing a game plan for each of them going forward. This means a couple of things for us: (1) with respect to those assets on which we currently have short term or higher than market rate debt, we need to pursue the refinance those properties; (2) with respect to those assets that are underperforming and not covering cash flow requirements, we need to either sell those and realize the appreciation that has taken place to date or extricate ourselves from a situation that may require a future infusion of capital, depending on the specific property; and (3) with respect to all properties, we need to focus efforts on management and maximize both occupancy and cash flow, so as to create the most value possible. Regarding this last item, we have just recently brought the management of almost all of our projects back in house, and will be placing a great amount of emphasis and accountability on this area.
With the refinance of those assets that we intend to hold for some time with "more traditional" financing, the sale of other assets and the anticipated improvement of operations, we hope to be able to continue to identify situations where other owners may need to sell, and perhaps put ourselves in a position to make an opportunistic acquisition. While acquisitions may currently be on the "back burner," we also want to make sure that we don't lose sight of the right set of circumstances that presents itself, to be a buyer in a down market that may be ripe with upside if we have the adequate resources available to take advantage of such a situation.
We thank each of you for the feedback and comments you've provided to us -- please know that we take all of these into account in making decisions that affect your investments. We hope that your holidays have been blessed and enjoyable times with family and friends, and even given the challenges we foresee, we are looking forward to 2008 and the opportunities with which we'll be presented.
Happy New Year!
Michael J. Sauter
December 20, 2007
To: Investor Members - Montana Apartments Associates L.L.C.
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