Presidio Property Trust, Inc. - Annual Report: 2009 (Form 10-K)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(mark one)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF 1934

For the fiscal year ended December 31, 2009

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 000-53673

NETREIT

(Exact name of registrant as specified in its charter)

California		33-0841255
(State of other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)
1282 Pacific Oaks Place Escondido, CA		92029-2900
(Address of principal executive offices)		(Zip code)

(760) 471-8536
(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Series A, no par value
(Title of class)

Indicate by check mark whether the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o Yes þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the last 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. o Yes þ No

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

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 þ
			(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

At March 19, 2010, registrant had issued and outstanding 10,477,362 shares of its common stock, no par value.

DOCUMENTS INCORPORATED BY REFERENCE

Part III, Items 10, 11, 12, 13 and 14 incorporate by reference certain specific portions of the definitive Proxy Statement for NetREIT’s Annual Meeting currently scheduled to be held on May 21, 2010, to be filed pursuant to Regulation 14A. Only those portions of the proxy statement which are specifically incorporated by reference herein shall constitute a part of this annual report.

 

 

TABLE OF CONTENTS

PART I
Item 1 Business			1
Item 1A Risk Factors			7
Item 2 Properties			23
Item 3 Legal Proceedings			39
Item 4 [Removed and Reserved]			39
PART II
Item 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities			40
Item 6 Selected Financial Data			43
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations			43
Item 7A Quantitative and Qualitative Disclosures about Market Risk			63
Item 8 Financial Statements and Supplementary Data			63
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			63
Item 9A(T) Controls and Procedures			63
Item 9B Other matters			64
PART III
Item 10 Directors, Executive Officers and Corporate Governance			65
Item 11 Executive Compensation			65
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters			66
Item 13 Certain Relationships and Related Transactions, and Director Independence			66
Item 14 Principal Accounting Fees and Services			66
PART IV
Item 15 Exhibits and Financial Statement Schedules			67
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
AND INDUSTRY DATA

This Form 10-K 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 Form 10-K. 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 Form 10-K, including those set forth in the “Risk Factors” section of the Form 10-K;
	•		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 and pay dividends on our shares;
	•		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 Form 10-K 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 Form 10-K, 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 Form 10-K. We do not undertake any obligation to update any forward-looking statements or other information contained in this Form 10-K, 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 Form 10-K 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 Form 10-K and elsewhere in this Form 10-K. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

Information regarding market and industry statistics contained in this Form 10-K 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 Form 10-K. 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 Form 10-K 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 in 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 of directors (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, self-storage, retail and multi-unit residential real estate located primarily in the western United States. From January 2005 through December 2009, our property portfolio increased from two properties to sixteen properties. Our properties include one apartment complex, four self-storage facilities, three retail centers, seven office complexes and a single purpose retail property. No single tenant accounts for more than 10% of our rental income and the businesses of our respective tenants are generally diversified. Our equity capitalization has increased from approximately $660,857 at December 31, 2004 to more than $65.8 million at December 31, 2009 and total assets increased during that period from $4.4 million to approximately $100.0 million at December 31, 2009.

The Company is a General Partner in three limited partnerships and a Managing Member in one limited liability company with ownership in real estate income producing properties. The Company also holds one property as a tenant in common with another investor. In addition, the Company is a limited partner in two partnerships that purchase and leaseback model homes from developers.

In March 2010, the Company acquired the name, employee’s and rights to the use of the name and to do business as Dubose Model Homes USA (“DMHU”). DMHU has a successful history of buying and leasing back model homes from developers.

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 and our Chief Financial Officer, Kenneth W. Elsberry are responsible for managing our day-to-day affairs. We contract with CHG Properties for the management of substantially all 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 seven directors comprising our board. Six of our seven directors are independent of 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.

Our Property Manager

CHG Properties manages our properties under a Restated and Amended Property Management Agreement, dated September 3, 2008, between us and CHG Properties (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”). Mr. Heilbron and Mr. Elsberry are minority shareholders of CI Holding. Also, Mr. Heilbron serves as Chairman of its board of directors and President of CHG Properties, and Mr. Elsberry serves as its CFO and Secretary and as a member of its board of directors.

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

Our Contracts with CHG Properties

The Property Management Agreement. CHG Properties provides property management services to us under the terms of the Property Management Agreement. Under the Property Management Agreement, CHG Properties provides 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. In addition, we are required to compensate CHG Properties in the event it provides services other than those specified in the Property Management Agreement and to reimburse CHG Properties for its costs, other than its general, administrative and overhead costs, in providing services under the Property Management 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 CHG Properties.

Under the Property Management Agreement, CHG Properties hires, directs and establishes policies for 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 is not 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 also directs the purchase of equipment and supplies and supervises 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 the submission of approved vendor invoices to us for payment. CHG Properties also reviews and pays approved vendor invoices, monitors the payment of rents by tenants, and monitors 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 is entered and maintained on a computer data bank located in CHG Properties’ office. CHG Properties is 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: CHG Properties 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 obtaining any consent from 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 would 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 the California Corporations Code permit us to do so without obtaining approval of our shareholders. We presently do not intend to seek 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, whose costs will be borne by CHG Properties, 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. 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. 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 extraordinary items.

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. We have no intention to exercise our option to acquire CHG Properties’ property management business at this time.

Federal Income Tax REIT Requirements

Starting in our 2000 tax year, we 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 we will qualify as a REIT if we achieve certain of our 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 because our income will be taxed at the corporate level and 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 shareholders will be taxed on dividends they receive from us, 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.”

Regulation

Various environmental laws govern certain aspects of the ongoing operation of our properties. Such environmental laws include those regulating the existence of asbestos-containing materials in buildings, management of surfaces with lead-based paint (and notices to residents about the lead-based paint) and waste-management activities. The failure to comply with such requirements could subject us to a government enforcement action and/or claims for damages by a private party.

To date, compliance with federal, state and local environmental protection regulations has not had a material effect on our capital expenditures, earnings or competitive position. All proposed acquisitions are inspected prior to acquisition. The inspections are conducted by qualified environmental consultants, and we review the issued report prior to the purchase of any property. Nevertheless, it is possible that our environmental assessments will not reveal all environmental liabilities, or that some material environmental liabilities exist of which we are unaware. In some cases, we may be required to abandon otherwise economically attractive acquisitions because the costs of removal or control of hazardous materials have been prohibitive or we have been unwilling to accept the potential risks involved. We do not believe we will be required to engage in any large-scale abatement at any of our properties. We believe that through professional environmental inspections and testing for asbestos, lead paint and other hazardous materials, coupled with a relatively conservative posture toward accepting known environmental risk, we can minimize our exposure to potential liability associated with environmental hazards.

Federal legislation requires owners and landlords of residential housing constructed prior to 1978 to disclose to potential residents or purchasers of the communities any known lead paint hazards and imposes treble damages for failure to provide such notification. In addition, lead based paint in any of the communities may result in lead poisoning in children residing in that community if chips or particles of such lead based paint are ingested, and we may be held liable under state laws for any such injuries caused by ingestion of lead based paint by children living at the communities.

We are unaware of any environmental hazards at any of our properties that individually or in the aggregate may have a material adverse impact on our operations or financial position. We have not been notified by any governmental authority, and we are not otherwise aware, of any material non-compliance, liability, or claim relating to environmental liabilities in connection with any of our properties. We do not believe that the cost of continued compliance with applicable environmental laws and regulations will have a material adverse effect on us or our financial condition or results of operations. Future environmental laws, regulations, or ordinances, however, may require additional remediation of existing conditions that are not currently actionable. Also, if more stringent requirements are imposed on us in the future, the costs of compliance could have a material adverse effect on us and our financial condition.

Competitive Factors

We compete with a number of other real estate investors, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire. The concentration of our properties in Southern California and Colorado makes us especially susceptible to local market conditions in these areas. For instance, our self-storage properties are located in Southern California markets containing numerous other self-storage properties. Competition with these other properties will impact the operating results of our self-storage properties, which depends materially on our ability to timely lease vacant self storage units, to actively manage unit rental rates, and our tenants’ ability to make required rental payments.

To be successful, we must be able to continue to respond quickly and effectively to changes in local and regional economic conditions by adjusting rental rates of our properties as appropriate. If we are unable to respond quickly and effectively, our financial condition, results of operations, cash flow and ability to satisfy our debt service obligations and to pay dividends to you may be adversely affected.

Our Offices and Employees

Our offices are situated in approximately 12,134 square feet of space in our Pacific Oaks Plaza located at 1282 Pacific Oaks Place in Escondido, California.

As of March 15, 2010, we employed 39 full time and 8 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 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 our 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 the lien made in connection with such mortgage loan, 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 our independent directors) determine substantial justification exists because of the presence of other underwriting criteria;
	•		Invest in mortgage loans unless:

	•		a title insurance policy or policy commitment insures the priority of the mortgage;
	•		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 affiliates 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 our independent directors.

	•		Invest in unimproved real property or in mortgage loans secured by liens on unimproved real property, if the total of such investments exceeds 10% of our invested assets;
	•		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; and
	•		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 our independent directors and disclosed to shareholders in our next quarterly or annual report filed after the date of such determination, 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, which may not be available on favorable terms or at all.

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 our directors (including a majority of our 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 person, in his individual capacity, is affiliated unless that transaction is approved by our board and a majority vote of the shareholders (e.g. the Property Management Agreement with CHG Properties).
	•		Any investment in a joint venture or partnership with such person unless a majority of the board (including a majority of Our independent directors), excluding any director who is interested in the transaction, approves 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;
	•		Options or warrants to purchase shares at an exercise price less than the fair market value of such securities on the date of grant and for consideration (which may include services) that in the judgment of our independent directors, has a market value less than the value of such option or warrant on the date of issuance;
	•		Assessable or non-voting equity securities;
	•		Shares on a deferred payment basis or similar arrangement.

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, which could cause us to lose our status as a REIT. Our achievement of our investment objectives and our ability to pay regular dividends is dependent upon our continued acquisition of suitable property investments, our selection of tenants, and our obtaining satisfactory financing arrangements in connection with such investments. We cannot be sure that our management will be successful in obtaining suitable investments on financially attractive terms or that, if we make investments, our objectives will be achieved. Due to current economic conditions, we have had difficulty finding suitable investments. 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. Holding the proceeds of our offerings in such short-term investments will prevent us from making the investments necessary to allow us to generate operating income to pay dividends. As a result, we will need to raise additional capital to continue to pay dividends until such time as suitable property investments become available. In the event that we are unable to find suitable investments or obtain additional capital in future financings, our ability to pay dividends to our shareholders would be adversely affected and we may lose our qualification as a REIT.

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 shareholders 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 deduction for dividends paid and excluding income from capital gains. As a result, we must rely on outside sources to fund our capital 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. If we are not able to raise capital for our acquisition or development of properties, it could have a material adverse effect on our prospects and growth.

We may be prevented from paying dividends by legal requirements which could impair our ability to qualify as a REIT. Under the California Corporations Code, our directors may be personally liable for our payment of any distributions, including dividends, 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 and may no longer qualify as a REIT.

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 and the loss of such personnel could impair our ability to achieve our business objectives. 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 evaluating and consummating 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, subject to the requirement that we make certain distributions to maintain our REIT qualification, 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 which could prevent us from entering into a transaction that would be beneficial to our business and shareholders. Provisions of our bylaws require shareholders owning at least 66 ²/₃% of our shares approve certain business combinations. For the purposes of these provisions, a “business combination” means (i) a major consolidation between the Company and a shareholder, or corporate shareholder who is acting in concert, who holds of record, and/or beneficially, 10% or more of our outstanding common stock (an “Interested Shareholder”) and/or its affiliates; (ii) any sale, lease, exchange, mortgage, pledge or transfer of assets to an Interested Shareholder and/or its affiliates having an aggregate full value of at least $1,000,000; and (iii) any reclassification or reorganization, the affect of which would be to increase the proportion of outstanding shares of any class of our equity securities convertible into a class of equity securities owned by an Interested Shareholder and/or its affiliates; and (iv) the adoption of any plan for liquidation or dissolution, proposed by or on behalf of an Interested Shareholder or its affiliates. Under the California Corporations Code, business combinations are required to be approved by a Majority Vote of our shareholders. The 66 ²/₃% shareholder approval will not apply if, at the time the business combination is consummated or at any time during the prior twelve months Interested Shareholders own a majority of our outstanding equity stock and the business combination has been unanimously approved by our independent and disinterested directors. 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.

The limitation 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 stock. This restriction may discourage a change in control of our voting stock and may deter individuals or entities from making tender offers for our shares, which offers might be financially attractive to shareholders.

Our common stock is subordinate to our Preferred Stock in rights to distributions. Our Series AA Preferred Stock is entitled to receive cumulative dividends of 7% per annum before we may pay distributions to our common stock, and has the right to receive distributions upon a liquidation, dissolution or winding up equal to its liquidation value of $25.00 per share (plus any accrued and unpaid dividends thereon) before we may pay distributions upon our liquidation, dissolution or winding up to our common shares. Thus, we may pay smaller distributions on the common stock than we otherwise could, but for the prior right to distributions of our Series AA Preferred Stock.

Possible acquisition of our affiliated property manager’s business could result in significant dilution to our shareholders. 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. 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. 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 number of which could be substantial. 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. A majority vote of our directors not otherwise interested in the transaction and by a majority of our independent directors must approve the exercise of this right.

Possible future transactions with our executive management or their affiliates could create a conflict of interest for our executive management. 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 Investment Company Act of 1940 (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, our operations could be materially altered or curtailed. 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 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

If we failed to comply with applicable exemption requirements in connection with our private placement offerings we may be forced to offer rescission rights to certain of our shareholders. We have and may continue to sell our shares to investors in reliance on an exemption from registration provided by Section 4(2) and Rule 506 of Regulation D under the Securities Act of 1933 (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 the Securities and Exchange Commission, any state securities law administrator, or a trier of fact in a court or arbitration determines that we issued shares of common stock without 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 and might be required to prepare and file a registration statement for such shares with the Securities and Exchange Commission, which would require significant legal, accounting and other related fees. 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, these multiple offerings could 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.

It will be difficult for our shareholders to sell their common stock because there is currently no public market for the shares and we do not intend to list the shares on a stock exchange. If our shareholders are able to sell their shares, they will likely have to sell them at a substantial discount due to the lack of a public market for our shares.

There is no public market for our common stock, and we do not expect one to develop. We currently have no plans to list our shares on a national securities exchange or over-the-counter market, or to include our shares for quotation on any national securities market. Moreover, our articles of incorporation contains restrictions on the ownership and transfer of our shares including the limitation on the maximum number of shares a single holder may hold, as described above, and these restrictions may inhibit our shareholders’ ability to sell their shares. We do not have a share redemption program, nor do we plan to adopt one in the near future. Any share redemption program we may adopt will be limited in terms of the amount of shares that may be redeemed annually. Our board of directors will be able to limit, suspend or terminate any share redemption program. It will be difficult for our shareholders to sell their shares promptly or at all. If our shareholders are able to sell their shares, they likely will only be able to sell them at a substantial discount from the price they paid. We cannot assure that their shares will ever appreciate in value to equal the price our shareholders paid for their shares. Thus, our shareholders should consider the shares an illiquid and long-term investment, and they must be prepared to hold their shares for an indefinite length of time.

Risks Relating to Real Estate Investments

Unsettled conditions in the financial and equity markets could negatively affect the U.S. and world economies and could adversely affect our business and operations. The recent severe uncertainties, dislocations and disruptions in the U.S. financial markets stemming from the subprime residential mortgage loan collapse have resulted in a tightening or, in some locations, the unavailability of secured real estate financing. The collapse of the subprime mortgage market has directly impacted mortgage securities and asset-backed securities, collateralized debt obligations and derivative securities associated with those markets. These uncertainties have affected the overall U.S. and world credit markets and, indirectly, both the residential and commercial real estate markets. These events will continue to negatively affect other economic sectors, such as retail sales manufacturing and labor. As a result, the U.S. and world economies experienced an economic recession of unpredictable severity and length. Recession effects included decreasing availability of capital and credit financing, job losses, decreases in wholesale and retail sales, manufacturing and service sectors. The effect of recent legislation and governmental action intended to stabilize the U.S. credit markets is unclear at this time.

Current commercial mortgage market trends may affect the terms and conditions of our mortgage financing and make it more difficult for us to obtain mortgage financing and have an adverse effect on our ability to make suitable investments.. In response to illiquidity, disruption and uncertainty in the commercial mortgage markets, lenders with whom we typically deal, such as insurance companies and national state chartered banks, have instituted more stringent underwriting requirements, increased their underwriting costs, and increased their credit spreads as the demand for higher risk premiums continues. Thus, the amount of mortgage financing available has contracted and we expect our future borrowing costs to increase. Higher costs of mortgage financing and restricted levels of borrowing may result in lower yields from our real estate investments, which may reduce our cash flow available for distribution. These restrictions could include restrictions on our ability to make distributions to our shareholders. Because of these trends, we expect the terms and conditions of our mortgage loans will be more onerous and will contain more restrictive terms favorable to the lender, and that these terms and restrictions would reduce our operating flexibility. Unavailability of mortgage financing will directly reduce our ability to purchase additional properties and thus decrease our diversification of real estate ownership. Under these volatile and uncertain circumstances, banks and other financial institutions are reluctant to loan funds to each other, thus tightening the overall liquidity of the mortgage market.

A decrease in real estate values will negatively affect our ability to refinance our properties and possibly our existing mortgage obligations. A decrease in real estate values will decrease the principal amount of secured loans we can obtain on a specific property and our ability to refinance our existing mortgage loans. In some circumstances, a decrease in the value of our existing property which secures a mortgage loan may require us to prepay or post additional security for that mortgage loan. This would occur where the lender’s initial appraised value of the property decreases below the value required to maintain a loan-to-value ratio specified in the mortgage loan agreement.

We are not required to set aside and maintain specific levels of cash reserves and may have difficulty in the event of increases in existing expenses or unanticipated expenses. We do not anticipate that we will establish a permanent reserve for maintenance and repairs, lease commissions or tenant improvements of real estate properties. 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. 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 which would limit our ability to realize a gain on our investments and decrease the value of our shares. 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 properties may depend upon a single tenant for all of their rental income and the loss of such tenants could have an adverse effect on our operations. We expect that a single tenant will occupy some of our properties. The success of these properties will be materially dependent on the financial stability of such tenants. Lease payment defaults by such tenants could cause us to reduce the amount of dividends we pay. A default of such 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.

We may incur substantial costs in improving some of our properties which are suitable for only one use if such use is no longer possible. We expect that some of our 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 and could suffer losses resulting from significant defects in such properties which are not covered by such warranties. 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 in the event there are significant defects in the property not included within the limited scope and timeframe of such warranties, representations and indemnifications.

Our ability to operate a property may be limited by contract which could prevent us from obtaining the maximum value from such properties. Some of our properties will most likely be contiguous to other parcels of real property, for example, 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. Leases in our multi-family residential properties 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 and could have a material adverse effect on our operations and our ability to pay dividends. 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 slowdown of construction; energy shortages; material and labor shortages; changes in local climate as a result of global warming, 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 and a default by such buyers could have a material adverse effect on our operations and our ability to pay dividends. 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. In addition, in the event that a property is sold in foreclosure and the proceeds are less than the amount of the senior lien, we may not receive any payment of the amounts secured by our junior liens.

We may not have funding for future tenant improvements which would make it difficult for us to lease such properties to new tenants. 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 casualty losses and general liability in amounts and under terms customarily obtained for similar properties in the area. However, in certain areas, insurance to cover some 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, tenants may not be able to 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 some or all of our investment in the property.

In addition, we could lose a significant portion and possibly all 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 are partially or completely damaged or destroyed by fire or other casualty, unless the premises are 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 damaged 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.

Competition for properties could negatively 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. In addition, we may have difficulties enforcing our rights against such tenants as described above.

Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results. Under various federal, state and local environmental laws (including laws that are designed to reduce the potential effects of certain industries on global climate), 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.

Although we have not been notified by any governmental authority, and are not otherwise aware, of any material noncompliance, liability or claim relating to hazardous substances, toxic substances or petroleum products in connection with any properties we currently own or manage, 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 unavailability of certain types of credit financing and stagnation of real estate prices have lead to economic slowdown and a recession. 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.

Compliance with the Americans with Disabilities Act of 1990 and fire, safety, and other regulations may require us to make unintended expenditures that could adversely impact our results of operations. Our properties are generally required to comply with the Americans with Disabilities Act of 1990, or the ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants. The parties to whom we lease properties are obligated by law to comply with the ADA provisions, and we believe that these parties may be obligated to cover costs associated with compliance. If required changes involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the ability of these parties to cover costs could be adversely affected and we could be required to expend our own funds to comply with the provisions of the ADA, which could materially adversely affect our results of operations or financial condition and our ability to pay the principal of and interest on our debt securities and other indebtedness and to make distributions to our shareholders.

We may acquire properties in joint ventures, partnerships or through limited liability companies which could limit our ability to control or liquidate such holdings. 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 also own 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. Such ownership structures allow us to hold a more valuable property with a smaller investment, but also reduce our ability to control such properties. In addition, if our co-owner in such arrangements experiences financial difficulties or is otherwise unable or unwilling to perform on their commitments, we may be forced to find a new partner on less favorable terms or lose our interest in such property if no partner can be found.

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.

In a sale-leaseback transaction, we are at risk that our seller/lessee will default if its tenants default which could impair our operations and limit our ability to pay dividends. 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 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.

Regulatory changes may adversely affect our specific properties and may have adverse results on our operations and returns on our shares. Federal, state and/or local governments may adopt regulatory provisions regarding land use and zoning changes. Also, regulatory changes may permit requirements outside the control of governmental authorities at the local level, including, but not limited to special assessment districts, special zoning codes and restrictions on land development. Also, special use permits could be required. Any of these changes could affect our costs of operating our properties, prices at which we can sell or lease our properties, and our ability to finance or refinance the properties.

Changes in local conditions may adversely affect one or more of our properties. In addition to national and global market conditions, each of our properties will be sensitive to local economic conditions such as population growth rates, employment rates and the local financial markets. The deterioration in any of these local conditions could affect our ability to profitably operate a property and could adversely affect the price and terms of our sale or other disposition of the property.

Each of our properties will be subject to local supply and demand for similar or competing properties which may have an adverse effect on the amount of rent we can charge or the price we would obtain in a liquidation. Each of our properties will be affected by the number and condition of competing properties within its general location, which also will affect the supply and demand for such properties. In general, if the market for a particular type of property is profitable, additional competing properties will be constructed. As a result, the number of competing properties will at some point exceed the demand and competition among the similar properties will increase, making profitable operations of our properties more difficult and depressing the prices at which we would lease, sell or otherwise dispose of the property.

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. At December 31, 2009, we had a total of $27 million of secured financing on our properties. We intend to continue to borrow funds through secured financings to acquire additional properties.

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 our shares and the dividends payable to shareholders to be reduced.

Lenders may require us to enter into restrictive covenants relating to our operations which could impair our ability to pay dividends. 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 or to discontinue insurance coverage which may 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 existing financing arrangements may require us to make a lump-sum or “balloon” payment at maturity. In the future, 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. At December 31, 2009, we had loans that require balloon payments of $3.1 million due in 2012, $8.9 million due in 2014, $3.3 million in 2015 and $2.8 million due in 2016.

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

We do not have experienced loan underwriting personnel which may put us at a disadvantage in analyzing and negotiating mortgage loans and could have an adverse effect on our ability to pay dividends. We have made five mortgage loans to three borrowers totaling approximately $2.8 million with approximately $0.9 million outstanding from two borrowers as of December 31, 2009. We do not actively seek mortgage loan investments, but our management is open to these investment opportunities and we anticipate that we will invest in one or more mortgage loans in the future. We do not maintain any staff of experienced loan underwriting personnel. Our lack of experienced loan underwriting personnel may put us at a disadvantage in analyzing and negotiating mortgage loans and could result in our investment in poorer performing mortgage loans, which investments might have been avoided by a more experienced underwriting staff. 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 and impair our ability to pay dividends. 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 the values at the time 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 CHG Properties 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 five of our seven 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 and significant changes in such compensation could adversely affect our operations and ability to pay dividends. 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 is 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. Our articles of incorporation eliminate the liability of our officers and directors for monetary damages to the fullest extent permissible under California law. 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. Also, our articles of incorporation authorize us, 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. Because of these provisions, we and our shareholders may have more limited rights to monetary damages against our directors and officers than might otherwise be available under common law. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents in any legal actions to collect damages or for other claims against our officers and directors.

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 2011 has been reduced to a maximum rate of 15% 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%. 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. However, as a REIT, we generally would not be subject to federal corporate income taxes on that portion of our ordinary income or capital gain that we distribute currently to our shareholders, and we thus expect to avoid the “double taxation” that other corporations are typically subject to.

Failure to qualify as a REIT could adversely affect our operations and our ability to pay dividends. We intend to continue to operate so as to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). Qualification as a REIT provides significant tax advantages to us and our shareholders. However, in order for us to continue to qualify as a REIT, we must satisfy numerous requirements established under highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless we are entitled to relief under certain statutory provisions, we also will be disqualified from treatment as a REIT for the four taxable years following the year we ceased to qualify as a REIT. Losing our REIT status would reduce our net earnings available for investment or distribution to shareholders because of the additional tax liability. We might be required to borrow funds or liquidate some investments in order to pay the applicable tax. For any year in which we fail to qualify as a REIT, we will not be required to make distributions to our shareholders. Any distributions we do make will not be deductible by us when computing our taxable income, and will generally be taxable to our shareholders as dividends to the extent of our current and accumulated earnings and profits. Subject to certain limitations in the Code, corporate shareholders receiving such distributions may be eligible to claim the dividends received deduction. The tax rate applicable to qualifying corporate dividends received by individuals prior to 2011 has been reduced to a maximum rate of 15%.

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. Any such changes could have an adverse effect on an investment in our 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 status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares.

In order to maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions which could impair our long term operations. In order to maintain our REIT status or 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. To qualify as a REIT we must distribute to our shareholders dividends (other than capital gain dividends) in an amount at least equal to (i) the sum of (A) 90% of our “REIT taxable income” (computed without regard to the dividends paid deduction and our “net capital gain”) and (B) 90% of the after-tax net income (if any) from foreclosure property, minus (ii) the sum of certain items of non-cash income (including, among other things, cancellation of indebtedness income and original issue discount income). In general, the distributions can be paid during the taxable year to which they relate. We may also satisfy the distribution requirements with respect to a particular year provided we (1) declare a sufficient dividend before timely filing our tax return for that year and (2) pay the dividend within the 12-month period following the close of the year, and on or before the date of the first regular dividend payment after such declaration. To the extent we fail to distribute our net capital gain, and to the extent we distribute at least 90%, but less than 100%, of our “REIT taxable income” (as adjusted) we will be subject to tax at the regular corporate capital gains rates (with respect to the undistributed net capital gain) and at the regular corporate ordinary income tax rates (with respect to the undistributed REIT taxable income). Furthermore, if we fail to distribute during each calendar year at least the sum of (i) 85% of the REIT ordinary income for such year, (ii) 95% of our REIT capital gain income for such year and (iii) any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the excess of such amounts over the amounts actually distributed.

We may need short-term debt or long-term debt or proceeds from asset sales, creation of joint ventures or sales of common stock to fund required distributions as a result of 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. The inability of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short-term debt and long-term debt or sell equity securities in order to fund distributions required to maintain our REIT status.

Qualified plans investing in our shares will be taxed on our distributions to the extent that they are unrelated business taxable income. Tax-exempt entities such as employee pension benefit trusts and individual retirement accounts generally are exempt from federal income taxation. Such entities are subject to taxation, however, on any unrelated business taxable income (“UBTI”) as defined in the Code. Although passive income is generally exempt, in general, income from property that is debt financed will result in UBTI. Our payment of distributions to a tax-exempt employee pension benefit trust or other domestic tax-exempt shareholder generally will not constitute UBTI to such shareholder unless such shareholder has borrowed to acquire or carry its shares.

Even if we qualify and maintain our REIT status, we still may be required to pay federal, state, or local taxes which could have an adverse effect on our operations. 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% tax. In general, “prohibited transactions” are sales or other dispositions of property (other than foreclosure property) that we hold primarily for sale to customers in the ordinary course of business. Additionally, we may not be able to make sufficient distributions to avoid the 4% 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 shareholders as if they earned that gain and paid the tax on it directly. However, shareholders 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 or at the level of other companies through which we indirectly own our assets.

Non-U.S. shareholders selling their Securities may be subject to withholding or other tax. A sale of our shares by a non-U.S. shareholder will generally not be subject to U.S. federal income taxation unless our shares constitute a “United States real property interest” within the meaning of the Foreign Investment in Real Property Tax Act of 1980, as amended (“FIRPTA”). A United States real property interest includes securities of a U.S. corporation whose assets consist principally of United States real property interests. Our shares will not constitute a United States real property interest if we are a “domestically controlled REIT.” A “domestically controlled REIT” is a REIT that at all times during a specified testing period has less than 50% in value of its shares held directly or indirectly by non-U.S. shareholders. We currently anticipate that we will be a domestically controlled REIT. Therefore, sales of our shares should not be subject to taxation under FIRPTA. However, we do expect to sell our shares to non-U.S. shareholders and we cannot assure you that we will continue to be a domestically controlled REIT. If we were not a domestically controlled REIT, whether a non-U.S. shareholder’s sale of our shares would be subject to tax under FIRPTA as a sale of a United States real property interest would depend on whether our shares were “regularly traded” on an established securities market and on the size of the selling shareholder’s interest in us. Our shares currently are not “regularly traded” on an established securities market. Accordingly, a non-U.S. shareholder’s sale of our shares would be subject to tax under FIRPTA as a sale of a United States real property interest if we were not a domestically controlled REIT. If the gain on the sale of shares were subject to taxation under FIRPTA, a non-U.S. shareholder would be subject to the same treatment as a U.S. shareholder with respect to the gain, subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals. Under FIRPTA, the purchaser of our shares may be required to withhold 10% of the purchase price and remit this amount to the IRS.

Even if not subject to FIRPTA, capital gains will be taxable to a non-U.S. shareholder if the non-U.S. shareholder is a non-resident alien individual who is present in the United States for 183 days or more during the taxable year and some other conditions apply, in which case the non-resident alien individual will be subject to a 30% tax on his U.S. source capital gains.

Non-U.S. shareholders are urged to consult their tax advisors concerning the U.S. tax effect of an investment in our shares.

Retirement Plan Risks

There are special considerations that apply to qualified plans and IRAs investing in our shares. Investors who are qualified plans, such as a pension, profit sharing, 401(k), Keogh or other qualified retirement plan, or who are IRAs 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, “UBTI” 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. PROPERTIES

General Information

We own or have an equity interest in sixteen (16) separate properties located in three states. The following tables provide certain additional information about our properties as of December 31, 2009.

																								Renovation or
		Date				Type of		Year Property				Purchase				Percent								Improvement
Property/Location		Acquired				Property		Constructed				Price*				Ownership				Occupancy				Cost.
Casa Grande Apts.(1)			4/99			Residential			1973			$	1,020,000				20.07	%			84.6	%			—
Cheyenne, WY
Havana/Parker Complex(2)			6/06			Office			1975			$	5,828,963				100	%			53.0	%		$	108,000
Aurora, CO
Escondido 7-Eleven(3)			9/06			Retail			1980			$	1,404,864				67.6	%			100.0	%			—
Escondido, CA
Garden Gateway Plaza(4)			3/07			Office			1982			$	15,132,624				94.01	%			85.1	%			—
Colorado Springs, CO
World Plaza(5)			9/07			Retail			1974			$	7,650,679				100	%			87.1	%			—
San Bernardino, CA
Regatta Square(6)			10/07			Retail			1996			$	2,180,166				100	%			100.0	%			—
Denver, CO
Sparky’s Palm Self-Storage(7)			11/07			Self-Storage			2003			$	4,848,919				51.97	%			86.7	%			—
Highland, CA
Sparky’s Joshua Self-Storage(8)			12/07			Self-Storage			2003/2005			$	8,007,127				100	%			75.4	%			—
Hesperia, CA
Executive Office Park(9)			7/08			Office			2000/2001			$	10,125,881				100	%			90.7	%			—
Colorado Springs, CO
Waterman Plaza(9)			8/08			Retail			2008			$	7,164,029				100	%			83.6	%			—
San Bernardino, CA
Pacific Oaks Plaza (10)			9/08			Office			2005			$	4,876,483				100	%			100.0	%			—
Escondido, CA
Morena Office Center (2)			1/09			Office			1987			$	6,575,000				100	%			77.2	%			—
San Diego, CA
Fontana Medical Plaza (11)			2/09			Medical Office			1980			$	1,919,800				51.0	%			100.0	%		$	300,000
Fontana, CA
Rangewood Medical Office Building(2)			3/09			Medical Office			1998			$	2,630,000				100	%			94.3	%			—
Colorado Springs, CO
Sparky’s Thousand Palms Self-Storage			8/09			Self-Storage			2007			$	6,200,000				100	%			41.6	%			—
Thousand Palms, CA
Sparky’s Hesperia East Self-Storage			12/09			Self-Storage			2007			$	2,775,000				100	%			34.6	%			—
Hesperia, CA

Physical Occupancy Table for Last 5 Years (1)

		Date				Percentage Occupancy as of the Year Ended December 31,
		Acquired				2005				2006				2007				2008				2009
Casa Grande Apartments			4/99				97.2	%			94.2	%			92.0	%			96.1	%			84.6	%
Havana/Parker Complex			6/06								79.0	%			74.9	%			54.0	%			53.0	%
Escondido 7-Eleven			9/06								100.0	%			100.0	%			100.0	%			100.0	%
Garden Gateway Plaza			3/07												85.1	%			88.3	%			85.1	%
World Plaza			9/07												98.1	%			94.0	%			87.1	%
Regatta Square			10/07												100.0	%			100.0	%			100.0	%
Sparky’s Palm Self-Storage			11/07												85.0	%			84.2	%			86.7	%
Sparky’s Joshua Self-Storage			12/07												77.0	%			67.8	%			75.4	%
Executive Office Park			7/08												94.8	%			94.8	%			90.7	%
Waterman Plaza			8/08																74.3	%			83.6	%
Pacific Oaks Plaza (2)			9/08																100.0	%			100.0	%
Morena Office Center			1/09																				77.2	%
Fontana Medical Plaza			2/09																				100.0	%
Rangewood Medical Office Building			3/09																				94.3	%
Sparky’s Thousand Palms Self-Storage			8/09																				41.6	%
Sparky’s Hesperia East Self-Storage			12/09																				34.6	%

Top Ten Tenants Physical Occupancy Table

The following table sets forth certain information with respect to our top ten tenants.

										Percent of Total
						Annualized Base				Annualized Base
						Rent as of				Rent as of
Tenant		Number of Leases				December 31, 2009(1)				December 31, 2009
County of San Bernardino			1			$	519,348				8.9	%
Goodwill Industries of Southern California			1			$	434,261				7.4	%
Marvell Semiconductor			1			$	353,685				6.0	%
Keller Williams Realty			3			$	346,578				5.9	%
Fairchild Semiconductor			1			$	307,850				5.2	%
The Travelers Indemnity Company			1			$	261,611				4.5	%
DVA Healthcare Renal Care			1			$	258,915				4.4	%
Security Title Guaranty Corporation			1			$	190,869				3.3	%
Lloyd’s Pest Control			1			$	137,098				2.3	%
Citizens Business Bank			1			$	128,000				2.2	%

Occupancy and Average Effective Annual Rent Per Square Foot

The following table presents the average effective annual rent per square foot for our properties as of December 31, 2009.

										Percentage				Annual Rent
		Square				Annual				Occupied at				Per Sq Ft
Property		Footage				Gross Rent(1)				December 31, 2009				At Full Occupancy
Casa Grande Apts.			29,250			$	220,298				84.6	%		$	8.90
Havana/Parker Complex			114,000			$	595,020				53.0	%		$	9.83
Escondido 7-Eleven			3,000			$	108,000				100.0	%		$	36.00
Garden Gateway Plaza			115,052			$	1,660,314				85.1	%		$	16.96
World Plaza			55,098			$	701,995				87.1	%		$	14.63
Regatta Square			5,983			$	185,768				100.0	%		$	31.05
Sparky’s Palm Self-Storage			50,250			$	492,484				86.7	%		$	11.30
Sparky’s Joshua Self-Storage			149,750			$	739,719				75.4	%		$	6.55
Executive Office Park			65,084			$	1,109,796				90.7	%		$	18.80
Waterman Plaza			21,170			$	550,828				83.6	%		$	31.12
Pacific Oaks Plaza(2)			16,000			$	112,700				100.0	%		$	(2	)
Morena Office Center			26,784			$	548,599				77.2	%		$	26.53
Fontana Medical Plaza			10,500			$	258,915				100.0	%		$	24.60
Rangewood Medical Office Building			18,222			$	372,673				94.3	%		$	21.69
Sparky’s Thousand Palms Self-Storage			113,126			$	487,898				41.6	%		$	10.37
Sparky’s Hesperia East Self-Storage			72,940			$	197,132				34.6	%		$	7.81

Average Effective Annual Rent Per Square Foot for Last 5 Years (1)

		Average Effective Annual Rent per Square Foot
		For the Years Ended December 31,
		2005				2006				2007				2008				2009
Casa Grande Apts.		$	5.59			$	5.71			$	6.24			$	6.26			$	6.05
Havana/Parker Complex						$	8.07			$	7.38			$	6.35			$	5.46
Escondido 7-Eleven						$	18.02			$	18.02			$	18.02			$	36.00
Garden Gateway Plaza										$	14.40			$	14.84			$	14.62
World Plaza										$	15.49			$	15.40			$	14.09
Regatta Square										$	38.17			$	38.17			$	32.08
Sparky’s Palm Self-Storage										$	9.32			$	9.45			$	8.02
Sparky’s Joshua Self-Storage										$	6.06			$	4.80			$	3.62

		Average Effective Annual Rent per Square Foot
		For the Years Ended December 31,
		2005				2006				2007				2008				2009
Executive Office Park														$	17.90			$	18.20
Waterman Plaza														$	23.32			$	24.81
Pacific Oaks Plaza(2)														$	33.79			$	33.79
Morena Office Center																		$	23.80
Fontana Medical Plaza																		$	27.07
Rangewood Medical Office Building																		$	15.62
Sparky’s Thousand Palms Self-Storage																		$	3.73
Sparky’s Hesperia East Self-Storage																		$	2.11

Lease Expirations Table⁽¹⁾

The following table shows lease expirations for our properties as of December 31, 2009, assuming that none of the tenants exercise renewal options.

		Number of Leases								Annual Rental				Percent
Expiration Year		Expiring				Square Footage				From Lease				of Total
2010			64				68,425			$	1,055,470				17.2	%
2011			25				97,583			$	1,580,070				25.8	%
2012			15				68,373			$	1,214,095				19.8	%
2013			13				49,064			$	957,211				15.6	%
2014			6				15,419			$	303,732				5.0	%
2015			2				6,967			$	166,272				2.7	%
2016			—				—				—				—
2017			—				—				—				—
2018			2				18,057			$	539,230				8.8	%
2019			1				10,525			$	258,915				4.2	%
2020			1				2,807				55,645				0.9	%
Totals			129				337,220			$	6,130,640				100.0	%

Concentration of Tenants

As of December 31, 2009, the following tenants accounted for 10% or more of our aggregate annual rental income for the specific property:

				Current Base				% of Total
Property		Tenant		Annual Rent(1)				Rental Income
Casa Grande Apartments (2)
Havana/Parker Complex		None
Escondido 7-Eleven		7-Eleven, Inc.		$	108,000				100.0	%
Garden Gateway Plaza		Marvell Semiconductor		$	344,184				20.7	%
		Fairchild Semiconductor		$	303,912				18.3	%
		The Travelers Indemnity Co.		$	261,611				15.8	%
World Plaza		County of San Bernardino		$	508,608				69.2	%
Regatta Square		India’s Express Menu		$	62,826				33.8	%
		Pinnacle Restaurant Group		$	45,600				24.5	%
		5th Avenue Nails		$	41,796				22.5	%
		Kashdom, Inc.		$	35,546				19.1	%
Sparky’s Palm Self-Storage(2)
Sparky’s Joshua Self-Storage(2)
Executive Office Park		Keller Williams Realty		$	377,184				34.0	%
		Security Title Guaranty Co		$	188,948				17.0	%
Waterman Plaza		Goodwill Industries		$	431,230				78.3	%
		Subway		$	72,420				13.1	%
Pacific Oaks Plaza		(3)			—				—
Morena Office Center		Community Research Foundation		$	331,056				60.3	%
		Lloyd’s Pest Control		$	169,180				24.9	%
Fontana Medical Plaza		DVA Healthcare Renal Care		$	258,915				100.0	%
Rangewood Medical Office Building		Rocky Mountain Prosthetic Dentistry		$	92,405				24.8	%
		Dr. Ruxandra Georgescu		$	64,960				17.4	%
		Michael J. Foy, D.D.S.		$	61,508				16.5	%
		Rangewood Orthodontics		$	55,645				14.9	%
		Diane E. Reck, D.D.S.		$	54,680				14.7	%
Sparky’s Thousand Palms Self-Storage(2)
Sparky’s Hesperia East Self-Storage(2)

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, 2009.

										Percentage of
		Rentable								Property				Current Base				Renewal
Property and Lessee		Square Feet				Lease Ends				Leased				Annual Rent(1)				Options
Casa Grande Apartments			None	(2)
Escondido 7-Eleven 7-Eleven			3,000				12/31/2018				100.0	%		$	108,000			Two 5 yr.
Havana/Parker Complex			None
Garden Gateway Plaza Marvell Semiconductor			20,730				1/31/2012				18.0	%		$	344,184			One 2 yr.
Fairchild Semiconductor			18,900				7/31/2013				16.4	%		$	303,912			One 5 yr.
The Travelers Indemnity Co.			15,157				2/28/2011				13.2	%		$	261,611			One 5 yr.
World Plaza																		Two 1 yr.
County of San Bernardino			29,942				2/28/2011				54.3	%		$	508,608			& One 5 yr.
Regatta Square Pinnacle Restaurant Group			2,300				4/30/2011				38.4	%		$	45,600			None
India’s Express Menu			1,851				5/31/2013				30.9	%		$	62,826			None
5th Avenue Nails			1,032				8/31/2012				17.2	%		$	41,796			One 5 yr.
Fancy, Inc.			800				5/31/2012				13.4	%		$	35,546			One 5 yr.
Sparky’s Palm Self-Storage			None	(2)
Sparky’s Joshua Self-Storage			None	(2)
Executive Office Park Keller Williams Realty			19,869				8/31/2012				30.5	%		$	377,184			None
Security Title Guaranty Co.			9,217				7/31/2012				14.2	%		$	188,949			None
Waterman Plaza Goodwill Industries			14,503				9/24/2018				68.5	%		$	431,230			Two 5 yr.
Pacific Oaks Plaza(3)			None
Morena Office Center Community Research Foundation			12,122				3/31/2013				45.3	%		$	331,056			None
Lloyd’s Pest Control			6,722				1/31/2015				25.1	%		$	169,180			None
Fontana Medical Plaza DVA Healthcare Renal Care			10,525				11/22/2019				100.0	%		$	258,915			Three 5 yr.
Rangewood Medical Office Building Rocky Mountain Prosthetic     Dentistry			3,717				3/31/2013				20.4	%		$	92,405			Two 5 yr.
Dr. Ruxandra Georgescu			2,512				3/31/2014				13.8	%		$	64,960			Three 5 yr.
Rangewood Orthodontics			2,807				3/31/2020				13.4	%		$	55,645			Two 5 yr.
Michael J. Foy, D.D.S			2,778				3/31/2013				13.2	%		$	61,508			Two 5 yr.
Diane E. Reck, D.D.S			2,095				3/31/2021				11.5	%		$	54,680			Two 5 yr.
Sparky’s Hesperia East Self-Storage			None	(1)
Sparky’s Thousand Palms Self-Storage			None	(1)

Geographic Diversification Table

The following table shows a list of properties we owned as of December 31, 2009, grouped by the state where each of our investments is located.

																		Approximate %
		No. of				Aggregate				Approximate %				Current Base				of Aggregate
State		Properties				Square Feet				of Square Feet				Annual Rent(1)				Annual Rent
California			10				518,618				59.9	%		$	2,281,039				36.8	%
Colorado			5				318,341				36.8	%			3,923,570				63.2	%
Wyoming			1				29,250				3.3	%			—				—
Total			16				866,209				100.0	%			6,204,609				100.0	%