DALTON MANAGEMENT, INC

Spring 2016 Investment Update

Dalton Management, Inc.8417 SW Beaverton Hillsdale Hwy

Portland, Oregon 97225

Tel: 503.297.4665Fax: 503.297.5899

Dalton Realty510 Waverley Street

Palo Alto, California 94301

Tel: 650.321.1711Fax: 650.327.2383

www.daltonmngt.com

Investment Team:

Dale DensonPresident

denson@daltonmngt.com

Brad DensonChief Financial Officer

bdenson@daltonmngt.com

Jeffrey M. Denson Principal Broker

jeff@daltonmngt.com

Ross Crosby Broker / Investment Partner

530.672.2123

Dalton does not offer a housing option someone can buy. We cannot compete against the lure of home ownership. Even in today’s demographics where millennials want urban and living flexibility, home ownership is still held as an important step for raising a family and economic independence.

During much of the 2000s, the apartment market was softened by individuals purchasing houses. Portland Metro’s apartment market suffered from economic downturn, i.e. high unemployment after the dot.com bust and after the invasion of Iraq in 2003. As the economy improved from 2004 to 2008, the apartment market made small strides in rent level. However, home ownership persisted to increase in those years through a poor economy via easy to obtain loans, moderated interest rates, and increase housing supply which kept prices stable. People would choose house purchasing again and again over leasing an apartment.

The years after the housing collapse was a recovery from the great recession. Now that we are clearly recovered sans a solution to the national deficit, funding social security, and paying for a global military presence. (Those problems are above my pay grade.) What I can speak to you is the cost between purchasing and renting.

If a person is fortunate to find housing in Portland Metro area by purchasing or renting, the costs are relatively straight forward.

Example: a $350,000 home at 4% with a 10% down payment for a 30-year loan. Let’s assume the down payment includes closing costs. However, I am being realistic that the new

owner will need $10,000 at a minimum to do repairs. To start, the buyer will need $45,000.

Monthly costs the buyer will have to cover:• Monthly mortgage: $1,503.86• Property Taxes 1%: $292• Insurance 0.5% : $186• PMI 0.5%: $186

Total monthly cost: $2,187.86 or $26,254.32 per year. If we were going to use a guide of 1/3 total income towards housing the purchaser would need to earn $78,763 per year. Wow! Or in layman’s language $37.87 per hour. I am not sure what is less likely for most Oregonians, saving $45,000 or earning $78,763.

Renting a modest apartment in the Portland area costs roughly $1.50 per square foot. Let’s keep this example simple and rent a 2 bedroom, 1,000 square foot apartment. $1,500 is the monthly cost. In most cases, there will be extra for utilities, but that would be the same for home ownership.

It’s a close race between ownership and renting since there are tax deductions for mortgages and taxes and most people will pay more to own than rent. For now, my bet is on renting staying competitive because wages have not increased significantly and a the need for a prudent down payment. How many first time home buyers have $45,000 in savings? Few. How many have $45,000 in credit card and student loan debt? Many more.

Though we cannot compete with the legal and emotional benefits of ownership we can compete on economic reality.

Identifying Our Competitionby Jeffrey M. Denson

Apartments new and old, as well as rental houses are competition we can develop marketing and management strategies to combat. But what about home ownership?

Dalton Management, Inc.

The Salem Trend Excerpts from an article in The Oregonian, “When it comes to this key demographic trend, Salem has an edge” printed on 03/26/16

How long have you worked for Dalton?All my life! I started at Dalton in 1984 – 2001, then 2004 – 2006, and then 2007 to present.

What is a typical workday for you? What are some of your responsibilities?I am the bookkeeper for the California Client Trust Accounts and properties. I also work with the principles in our investor relations department. And I manage the Palo Alto office.

What is the one thing people would never guess you do at Dalton?Monthly, I walk to 7 banks and personally deposit Client Trust Account owner distributions.

What is the most exciting or rewarding aspect of your job?The most rewarding aspect of my job is when all accounts are in balance!

What’s your proudest accomplishment at Dalton?I suggested, researched, and helped implement the employee pension plan (401K)

Before working here, what was the most unusual or interesting job you’ve ever had? I worked selling women’s shoes, starting my shoe addic-tion!

What do you like to do outside of work? I love spending time with my family, watching my son Isaiah play basketball

What’s your favorite vacation spot?Anywhere there is warm sand.

Employee Spotlight:Teri Victor is the office manager of our office in Palo Alto, California. During her tenure, Teri has done every job in the accounting department from payroll to accounts payable to investor distributions.

The Oregon Office of Economic Analysis found that Salem’s higher-than-average youth population means the metro area’s workforce could grow faster than Portland’s or the state’s overall. This trend has benefited Dalton’s Salem investments. While there’s no guarantee young peo-ple will remain in Salem after they fin-ish school, the capital city’s job base is growing in a way that could encourage them to stay. “Salem is in the midst of a job-growth boom that hasn’t been seen in 25 years,” said Josh Lehner, a senior economist who wrote the report. Lehner looked at American Community Survey data and compared population distribu-tion by age in Salem, Portland and Or-egon as a whole. He found Salem has a higher percentage of children and teens than was true in the other geographic ar-eas. Those children will be entering the workforce over the next two decades. As Salem’s youth population grows, more

programs in the area are geared toward training future workers. This school year, Salem-Keizer Public Schools opened the Career and Technical Education Cen-ter, a program that centralizes the dis-trict’s technical-education classes. Stu-dents who attend district high schools can study construction and manufactur-ing programs at CTEC at the same time. The district plans to expand the class of-ferings over the next five years.

There are more jobs now for young workers to fill. Salem is gaining jobs at a fastest rate since the 1990s.“We’re at this point now today where the middle-wage jobs are starting to come

back,” Lehner said, in reference to in-dustries such as education and con-struction. “A much stronger economy is starting to result in more opportunities across the board.”

Oregon State Capitol building

Teri Victor

Spring Investment Update - April 2016

Your Questions Answeredby Brad Denson and Tiffany Abrams

This annual mailing allows you to ver-ify the information we have on file for you. It also gives you an oppor-tunity for us to send K-1s directly to your CPA. A typical question asked is, “Why not keep my CPA on file to use from year to year?” We used to do this, but cannot risk sending sensitive tax information to a “former” CPA.

The survey gave us a chance to hear your feedback. There were five yes or no questions:

1. Have you found the Dalton staff helpful with your business dealings?

2. When contacting the office, did you feel satisfied with the response?

3. Have your investment expectations been met?

4. Are you happy with your quarterly reports and statements?

5. Would you recommend Dalton to others?

The majority responded “yes” to all five questions with generally posi-

tive comments. A few questions came up on whether investment expecta-tions have been met. And not surpris-ingly, a comment or two wanting K-1s earlier. We thought we’d address these concerns.

We start in late November by send-ing our CPAs at Sensiba San Filippo as much information as we can. This in-cludes cash distribution amounts and investor information. Also included are any acquisition, sale, or refinance statements; and any details on ma-jor capital improvements. As soon as

December bank statements are recon-ciled, we send the year-end financial statements. Beginning in mid-January, we have a weekly conference call with our CPA team to answer any questions and to prod them along.

Our CPAs have 14 partnership tax re-turns and 560 K-1s to prepare for our 159 investors. Unfortunately, the K-1s cannot be generated until the tax re-turn is complete. We push our CPAs to deliver the K-1s by March 15th so you have time to file your taxes. Our goal is to get first in line with our accountants so we can meet this deadline. Some-times hiccups happen especially for complicated sales and acquisitions, but overall our CPAs have done an excel-lent job at keeping that date.

The other question on the survey is regarding investment expectations. When we look for acquisitions, our general goal is 6-8% cash-on-cash re-turn plus capital appreciation and pres-ervation. These types of investments are increasingly difficult to find and we may have to lower this expectation as the demand for apartment investments accelerates. We have always been val-ue-add investors, looking for an apart-ment investment where we can improve the busi-ness model through bet-ter management and tar-geted improvements.

Our 14 different partner-ships are generating reg-ular spendable cash dis-tributions plus some tax advantages. Most, if not all, are performing above our original expectations. One goal is to provide a wide range of apartment

investments in different markets to create diversity and hopefully lower overall risk. Most of our partners own multiple partnership investments to achieve this goal.

We make regular site visits and pride ourselves as being hands-on manag-ers who regularly inspect individual apartments and directly supervise all capital projects. We participate in all phases of operations from turnovers to refinances to the sale of the build-ing. We take extra time each quarter to determine distribution amounts. We mainly distribute cash generated from operations and often set aside some funds for needed capital needs. If we take out cash from a refinance, we gen-erally distribute most of the cash and set aside funds for immediate or future capital needs. Our goal is dispersing regular profits.

Since we are investors in our projects, we take every aspect of management seriously. We pledge our personal as-sets as collateral for your loans and are active stake holders. We appreciate the friendships we have made over the years and truly value your business.

In December, we sent a “How are we doing?” survey, and your K-1 Investor Information verification sheet. We received an outstanding response: 2/3 of the K-1 investor forms and 1/3 of the surveys. Thank you!

2015 Tax Returns ready for filing

Before each rainy season, we clear storm drains, downspouts, and remove any visible dead or damaged tree limbs. We attend to any drainage issues from the prior season and make sure that run-off over walkways are addressed to lower the chance of slip and falls. Prevention is the key.

Dalton Management has an in-house landscape and maintenance company. When severe weather is predicted, we bring the team leaders together. A good plan will protect the properties from damage. Our goal is to avoid expensive repairs and keep residents in their homes.

The landscape company stock-piles bulk sand and bags for all sites with a history of high water. They understand

drainage and run off and make sure that bioswales are clear and that water can get to the drains as easily as possible. The maintenance company will visit all properties without on-site maintenance first and then offer additional support to properties that need extra hands.

Like this December, some weather events can last over a week. Once the weather clears, the team leaders have a post meeting. We discuss what went well and what did not and make a plan for next time. We also discuss the best way to make any damaged properties whole again.

Having the maintenance and landscape team leaders at these meetings are crucial. After a storm emergency, restoration companies and general

contractors are booked out several month leaving units empty and tenants unhappy. Our management, landscape, and maintenance companies can coordinate a portion of the emergency services and the restoration so life can get back to normal.

We can’t control what the weather does, but we do our best to control what we can in order to protect your investment.

When Weather HappensBy Rebecca Cook

December 2015 had the heaviest rainfall we’ve seen in 20 years with a monthly total of 13.52 inches. Although we were all surprised by rain that wouldn’t stop, we were prepared for it.

Urban GrowthBy Andrea Swiski

Oregon is growing fast. Portland is the most popular city in Oregon and the third most popular city in the United States. Giving us every reason to house more residents each year. You don’t have to look far to a wide variety of out of state plates. Multnomah County has a population of 776,712 people. Business is booming with strong job growth. New businesses are setting up shop in Portland at a record pace. With popular food carts, nationally recognized restaurants, trendy clothing boutiques, fine breweries and a nearby wine country, we don’t see the population growth slowing.

High rents in the inner core of Portland have increased the demand for both single family homes and apartments in the suburbs. This affordability crisis in the traditional urban core has created strong in-fill activity in the suburbs where Dalton has it is traditional base. In Washington County, Clackamas County, Medford, and Salem, we see increased multi-family, office and retail development.

Increasing population in the Portland Metro Area and scarce available land because of our Urban Growth Boundary has caused a regional housing shortage. Strong demand for rentals has allowed Dalton to raise rents to record levels. In 2015, vacancy was under 3% and we increased rents from $100 to $300 per month for a standard 2-bedroom apartment. We anticipate this trend to continue into 2016.

During the last three years, over 18,000 new apartment units have been built locally. During this period, we have been increasing rents and have actually seen our vacancy rate decline Through the next decade, the Portland Metropolitan area will continue to grow by up to 30,000 residents per year Forecasters

predict adding 4,750 to 5,700 new units every year.

The 2014 Census states the Portland-Metropolitan area has 275,000 total multi-family units. Using the 2.87% vacancy rate calculated by the Fall 2015 Apartment Report, that is roughly 7,900 vacant homes. If one would assume that a market in balance will show a vacancy rate of 5% then Portland has a current shortage of 5,850 units.

With the growth and expansion of Portland, Dalton sees a very promising 2016.

A Portland bioswale example