Group Two

Menlo Gate Group Two

Status Report

Menlo Gate Group Two Closed with Four Members (Not Including Managing Member)This Group has been closed at four members, not including the managing member. The decision to close the group with four members was made in order to benefit the members’ back end equity position. No more than four members are required in order to close the transaction with positive cash flow. As the company’s 15% back end equity position does not change regardless of the number of members, the members’ equity position in this group will increase to 21.25%, instead of 15%, based on the total number of members.

Thank you to all for your continued support and feedback regarding Menlo Gate, LLC . We very much appreciate the words of encouragement and look forward to further capitalizing on the present state of the real estate market and investment opportunities in the Bay Area. We have prepared and attached the pro forma financials for Menlo Gate Group Two Holding, LLC.

The Listing, Offer, and Ratification

This property is already under contract. The property was originally listed at an offering price of $995,000. The property was being sold by a trustee and was listed in connection with a pending probate. We were initially attracted to this property due to three primary factors. First, the location of the property is very strong. The property is located in the Mt. Carmel area of Redwood City. This is a very strong rental area. This area is “mixed residential” meaning that it is comprised of primarily single family homes (“SHF’s”) with interspersed duplexes and triplexes. Mixed residential areas are preferable to exclusive rental neighborhoods. The pride of ownership of the SFH’s tends to increase the overall appeal of the neighborhood. This translates to higher rents and resale values over time. Second, our review of the property as well as comparable sales for the area led to the conclusion that the property was listed “under market” by approximately $75,000 to $100,000. Upon further review, it became apparent that the trustee and the listing agent were attempting to derive a quick sale of the property and, therefore, listed the property under market to drive up demand. Third, probate listings generally tend to turn away agents due to the additional work that can be required by the agent in connection with probate sales. After further investigation of the listing, however, we ascertained that court approval of the transaction would not be required due to the presence of a single trustee. Accordingly, we were hopeful that a strong offer at the list price would win the day. As discussed further below, we were right!

The broker’s tour for the property was held the day after the property was listed on the MLS. Following the tour, we obtained from the assistant to the listing agent the only full copy of the disclosers. The listing required all offers to be submitted with a signed copy of the disclosures confirming that they had been read and approved. The assistant for the listing agent was apparently having trouble uploading the disclosures to Fidelity Title’s on-line disclosure depository. Accordingly, when we submitted our offer, we were the only offer that had complied with the MLS listing requirements in regards to disclosures. Further, we had a pre-approval letter from the lender and were therefore able to submit the offer without a financing contingency. Moreover, we offered to close in 30 days. There were multiple offers over asking on this property. In the words of the listing agent, Menlo Gate’s offer was accepted since it was the “cleanest” and “strongest” offer. We utilized the leverage offered by the probate listing and the trustee’s desire to rely on a solid offer without contingencies in order to beat out higher priced offers. In the end, we were able to obtain this terrific triplex on a great street in Redwood City for only $995,000.

Pro Forma Financials and Assumptions:

The attached pro forma financials necessarily incorporate certain assumptions that are typical in the context of forecasting valuations for real estate investments. These assumptions are overviewed below and should be kept in mind in the course of reviewing the attached pro forma financials.

Rental Value:

There are two, two bedroom/one bath units. These units have a fair market value of approximately $1,700 per month. Market rent for the three bedroom/two bath is between $2,400 and $2,600. Accordingly, we have run the attached pro forma financials at a combined rent of $5,900 to be conservative. We estimate a conservative future annual rental increase of 5%. The financials also reflect a 2% vacancy rate. There are also coin-operated laundry machines in a separate laundry room at the property. We estimate a monthly income of $300 from the coin-operated laundry. The laundry income is reflected in the financials and does represent a separate revenue source for the members.

Financing:

There is a first and a second loan reflected in the pro forma for financing. The reason for the second loan is the present conforming loan rate for triplexes under Freddie Mac and Fannie Mae guidelines. Presently the conforming loan limit is $645,000. First loans within the conforming rate are eligible for financing at the rate of 6.25. This is a very good rate for rental income property. To obtain this rate on the first, however, a second loan is required. As reflected, the rate for the second loan is 8% which is a very reasonable rate for this type of loan. The pro forma financials are based upon a 7 year interest only loan for the first loan. The reason for this is that the Menlo Gate investment vehicle is structured to place the property on the market seven years from the date of close of escrow in order to distribute the proceeds to the members. Accordingly, there is no need to obtain financing beyond seven years.

Repairs:

As per the attached inspection report, this property is in very good shape. We do not estimate that any immediate repairs will be required for the property other than those performed in connection with tenant turnovers. These include updating of fixtures, painting, and general updating of the units. General updating of the units will, however, be spread out over the term of ownership at the discretion of the company and will be paid for using the cash flow from the property that is further discussed below. The purpose for this is to avoid lost rental income. The repairs, therefore, will be performed during tenant turnovers or at the discretion of the company. The pro forma financials also incorporate an annual expenditure of $1,000 per year for maintenance for the property. Again, we do not expect to require this amount in annual maintenance for the property. This amount is incorporated, however, in order to insure that the pro forma financials reflect a conservative approach for the members.

Expected Sales Price:

We have calculated the appreciation of the property as 7.5% over the next seven years. For those of us that follow the Bay Area market closely, this is not an unrealistic number. The appreciation for the property over seven years may exceed or fall short of this number. The estimated appreciation rate, however, represents a realistic middle ground number for the appreciation of Bay Area real estate. The expected sales price based upon appreciation is also calculated using a base price of $995,000 which we believe is well below the present fair market value of the property. Based upon the pro forma financials, the company estimates that each member will realize a return on investment [in addition to return of initial capital contribution minus applicable fees] of $118,300.57 in pre-tax proceeds after seven years. This figure is derived by taking the estimated value of the property in Year Seven of $1,650,753.89, backing out the purchase price and sales transaction costs [i.e. sales commissions, and escrow fees], and calculating 21.25% of the remainder. These figures represent estimated returns based upon the pro forma financials and are dependant upon the risk factors overviewed in the private placement memorandum located at Menlo Gate’s website.

Cash Flow:

Based upon the pro forma financials, the property is estimated to have a cash flow before tax of approximately $5,273.94 and cash flow after tax of approximately $9,734.36 over the first year. The after-tax distributions (based on depreciation of the building) are based upon a taxable income rate of 35%. The company advises each member to consult their independent tax advisor to determine their applicable income tax rate. The cash flow for the property is achieved by the down payment of $200,000 for the property from the capital pool and the use of the second loan to obtain the favorable conforming financing rate for triplexes in our area. Accordingly, it is anticipated that there will be pre-tax cash flow distributions to the members of approximately $1120.71 and after-tax distributions of approximately $2,068.55 during the first year of ownership. Further, as rents for the property increase on an annual basis, the annual distributions to the members will likewise increase. These figures represent estimated returns based upon the pro forma financials and are dependant upon the risk factors overviewed in the private placement memorandum located at Menlo Gate’s website.

As always, we are here to help and are willing to answer any questions you may have following your review of the attached pro forma financials. The company encourages all members to seek the independent advice of their tax consultant, attorney, or accountant regarding this or any significant investment. It is our goal to provide each member with a conservative investment vehicle that takes advantage of the leveraged rates of return of real estate.

At present, the company has received requisite Subscription Agreements from all Menlo Gate Group Two Holding members as well as capital contributions from two members. The company requests that remaining capital contributions be submitted no later than Friday, May 30, 2008. Close of escrow for Menlo Gate Group Two Holding is set for Monday, June 21, 2008. For members who are in the process of transferring capital contributions through their IRA intermediary, we request that you inform the company of anticipated transfer dates as soon as possible. As always, if the company can be of any assistance with the intermediary, please do not hesitate to let us know. We look forward to yet another successful venture and thank you for choosing Menlo Gate, LLC as your real estate investing vehicle.