MID-YEAR 2025 UPDATE

Greetings Everyone - Happy 4th of July Weekend and I hope the summer is going well.  I write to provide an Update on Clarameda Fund which will require input from everyone.  I will call each of you separately, however please read this first so you can understand the background and general strategy.

General Market / Real Estate Environment

---> Our best guess is that macro conditions will stongly favor real estate in the coming year:

1. Lower interest rates next year

2. Defined lower tax rates

3. Continued good robust job market

The big news of the summer has been of course that of President Trump's BBB bill and other policies.  From a Real Estate standpoint there are 3 main areas to highlight - all of which are a positive:

1.  100% Bonus Depreciation

2. The bill increases the SALT deduction cap from $10,000 to $40,000 

3. Finally, for all of us it extends individual income tax rates (10% to 37%) beyond their 2025 expiration, preventing an increase to pre-2017 rates (e.g., top rate rising to 39.6%). It also widens tax brackets and adjusts withholding tables for inflation.  The no tax on tips and overtime will also be a boon to those workers in the hospitality and other industries.  

From a fiscal standpoint we believe that 2025 BBB is highly stimulative for real estate and combined with the massive investments being made by companies in the United States we see a continued strong job market.   

Even more important, what is still a drag on the real estate market are the high interest rates.  Federal Reserve Chairman Jerome Powell has so far resisted lowering rates.  The stated rationale is the uncertainty the tariff "war" would have on inflation.  It does appear that the inflation numbers have been in the 2.3% - 2.5% range which is close to the stated goal of 2% and certainly well below the rate of the previous post-Covid years.  Chairman Powell has strongly suggested that rates will come down in the Fall if current conditions hold.  

On the negative side for real estate is that if the number of deportations are high then absolute demand for housing falls as the number of people in the country is fewer.  Mitigating this somewhat is President Trumps recent overtures to letting certain immigrants in necessary industries stay.  We hope that an offset will be an increase in legal immigration including expanded guest work visas.  

Clarameda Fund - We are going to shift to dissolving the Fund

We started Clarameda Fund in 2008 with the original intent of holding it thru one real estate cycle we are now at the tail end of the second based on past cycle lengths.  Real estate cycles are typically 7-9 years.   Of course when we started the Fund we were in the depths of the mortgage crisis which took down values far more than a historical trend.   The Pandemic had the opposite effect of pushing up prices more than historical trends.  We believe that we are right about at the end of the second cycle and about to embark on a third one.  However, we do not plan on holding it for another cycle.  Thus, the Fund will dispose of its assets.  How do we best do that?  

This is still preliminary and we haven't gotten final answers from our Accountants however the best way to dispose of the assets is the following:

1.  Offer to sell (drop down) properties to Partners who want to continue to keep real estate in their portfolios.  The cost of acquisiton would be the current market value of the property less your calculated gain of the Fund.  We believe this will be the best choice for those of you who want to keep real estate in your portfolio.  We are discussing with our Accountants the way to make this tax optimal - which would be to not have this count as a gain so you would not pay tax on this dropdown.  You woud then be able to re-finance the property, and sell it whenever you want (or not).  Of course this involves taking on the ownership duties.   Partners will get first crack at the properties before the Managing Member and if there is interest in buying - we will make all pertinent information available to Partners to help them decide.   If enough interest in buying properties, we can dispose of the Fund this year.  Think of this as selling to ourselves instead of someone else and hopefully in a tax advantaged way.  

2. Sell your stake to another Partner.  Given Option 1 we believe there is a market to sell your shares now.  This will offer immediate liquidity.  We anticipate the market price will be less than under Option 1 or 3 however it offers immediate liquidity and removes any uncertainty.  We believe  it also passes along the tax basis including all the accumulated depreciation so the price will have to discount for that depreciation recapture.  The Managing Member will not be participating in this option either on the BUY or SALE side.    

3. Do Nothing - this will be the as-is case.  After Partners decide which properties they want - we will sell the others and will divvy up the proceeds.  The waiting is a combination of needing to let leases expire, giving tenants notice and our belief that macro conditions will be better later as well as the tried and true seasonality of putting properties on market at the start of the summer.  

--> We will need to get from each Partner which OPTION they are considering.  This will help us put the operational plans in place to make them happen.  Feel free to call and if we don't hear from you we will call you.   

Operational Update 

In line with the strategy of selling, we have had a vacancy in the first property that we acquired for the Fund in East Oakland.  We had a tenant move out after being in the property for about 14 years.  This house was brought in rough condition as a foreclosure and we did the minumum that we needed to get it up to habitable standards and get it rented out in line with our strategy of getting cash flow.  This was objectively speaking the worst property in our portfolio.  Now that we are going to sell the houses we need to get it up to the standard of a for sale property.  Also, the passage of 75 years necessitated a significant amount of work regardless of whatever we are doing.   We are doing a full renovation of the house.  Among the items:

1.  Structural - fix foundation issues to level the house.   Fix cracked ceiling beams by sistering new ones.  Removing mold and water damage.  

2. Modernizing floor plan - remove wall between living area and kitchen - open up the space.  Remove hallway and expand the other rooms.  Change access to backyard to new living area.  Place new water heater outside the house to gain space.  Remove dead space for old vents.  

3. Update electrical from old knob and tube to modern electrical with breakers throughout the house.  New electrical fixtures and lighting.  

4. Update plumbing replace old galvanized pipes with copper as we  install new fixtures and move water heater.  

5. Add full bathroom - convert washer/dryer room into bathroom with access from of  one of the two bedrooms.  Put stacked washer dryer in expanded old bathroom.  

6. Update kitchen new cabinets, solid surface counter, tile backsplash, new stainless steel appliances.

7. Roof maintenance including patching old vent holes and waterproofing around new ones.

8. New tile flooring in kitchen and baths, try and restore old hardwood flooring in living area and bedrooms (remove carpet placed over old hardwood). 

9. Smooth texture throughout, new drywall where needed and paint.

10. Some landscape improvements - fix fence, posts, new concrete pavers and replace broken concrete path.  

Fortunately over the years I have a good network of lead handyman and subcontractors.  The guys we use tend to be high quality, low cost (relationship pricing), and medium on time.  I anticipate $70 to $85K in costs and about 4 months.  Which is great on cost and probably average on time.  Will send out after pics in a few months.  Also, we anticipate a reduction in construction labor (one of our guys is taking the buyout offer from the government soon) and so we are getting this done now before we anticipate supply issues.  

Its going to be a busy summer managing this needed renovation - the results should be great so looking forward to that!

For investors - to help with planning, we will be fully expensing this capital expenditure in 2025, which is a positive from the BBB, so we anticipate passing along a loss.  On the capital front, the Company has anticipated this renovation and we believe that at the current estimate the Company can pay that from Operating Funds.  So no need to raise capital for this capital expenditure.  

Talk to everyone soon!  

Biren 

Managing Member