UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2004

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

Commission file number: 0-16645

RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)


California		33-0157561
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

400 South El Camino Real, Suite 1100 San Mateo, California		94402-1708
(Address of principal executive offices)		(Zip Code)

(650) 343-9300

(Registrant’s telephone number, including area code)

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 preceding 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. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No x

Total number of units outstanding as of August 12, 2004: 12,737

INDEX

RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP


			Page No.
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements of Rancon Income Fund I (Unaudited):

		Balance Sheets at June 30, 2004 and December 31, 2003	3

		Statements of Operations for the three and six months ended June 30, 2004 and 2003	4

		Statement of Partners’ Equity for the six months ended June 30, 2004	5

		Statements of Cash Flows for the six months ended June 30, 2004 and 2003	6

		Notes to Financial Statements	7-10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11-16

Item 3.	Qualitative and Quantitative Information About Market Risk		16

Item 4.	Controls and Procedures		16

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings		17

Item 4.	Submission of Matters to a Vote of Security Holders		17

Item 6.	Exhibits and Reports on Form 8-K		17

SIGNATURES			18

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Balance Sheets

(in thousands, except units outstanding)

(Unaudited)


	June 30, 2004			December 31, 2003
Assets
Investments in real estate:
Rental properties	$	7,033		$	6,900
Accumulated depreciation		(2,875	)		(2,723	)

Rental properties, net		4,158			4,177
Cash and cash equivalents		216			348
Deferred costs, net of accumulated amortization of $166 and $148 at June 30, 2004 and December 31, 2003, respectively		65			123
Prepaid expenses and other assets		70			73

Total assets	$	4,509		$	4,721

Liabilities and Partners’ Equity
Liabilities:
Accounts payable and other liabilities	$	30		$	34
Security deposits		70			84

Total liabilities		100			118

Commitments and contingent liabilities (Note 4)

Partners’ Equity:
General Partner		(185	)		(185	)
Limited partners, 12,749 and 12,966 limited partnership units outstanding at June 30, 2004 and December 31, 2003, respectively		4,594			4,788

Total partners’ equity		4,409			4,603

Total liabilities and partners’ equity	$	4,509		$	4,721

The accompanying notes are an integral part of these financial statements.

RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Statements of Operations

(in thousands, except per unit and units amounts)

(Unaudited)


	Three months ended June 30,				Six months ended June 30,
	2004		2003		2004		2003
Revenue
Rental income	$	341	$	361	$	638	$	648
Interest and other income		—		1		1		4

Total revenues		341		362		639		652

Expenses
Operating		149		136		273		255
Depreciation and amortization		126		74		218		148
General and administrative		52		49		101		97

Total expenses		327		259		592		500

Net income	$	14	$	103	$	47	$	152

Basic and diluted net income per limited partnership unit	$	1.09	$	7.68	$	3.64	$	11.37

Weighted average number of limited partnership units outstanding during each period		12,752		13,212		12,798		13,239

The accompanying notes are an integral part of these financial statements.

RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Statement of Partners’ Equity

For the six months ended June 30, 2004

(in thousands)

(Unaudited)


	General Partners			Limited Partners			Total
Balance (deficit) at December 31, 2003	$	(185	)	$	4,788		$	4,603
Redemption of Limited Partnership Units		—			(88	)		(88	)
Distributions ($11.80 per limited partnership unit)		—			(153	)		(153	)
Net income		—			47			47

Balance (deficit) at June 30, 2004	$	(185	)	$	4,594		$	4,409

The accompanying notes are an integral part of these financial statements.

RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Statements of Cash Flows

(in thousands)

(Unaudited)


	Six months ended June 30,
	2004			2003
Cash flows from operating activities:
Net income	$	47		$	152
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		218			148
Changes in certain assets and liabilities:
Deferred costs		(8	)		(65	)
Prepaid expenses and other assets		3			5
Accounts payable and other liabilities		(4	)		27
Security deposits		(14	)		(13	)
Prepaid rent		—			41

Net cash provided by operating activities		242			295

Cash flows used for investing activities:
Additions to real estate investments		(133	)		(254	)

Cash flows from financing activities:
Distributions to limited partners		(153	)		(135	)
Redemption of limited partnership units		(88	)		(46	)

Net cash used for financing activities		(241	)		(181	)

Net decrease in cash and cash equivalents		(132	)		(140	)
Cash and cash equivalents at beginning of period		348			712

Cash and cash equivalents at end of period	$	216		$	572

The accompanying notes are an integral part of these financial statements.

RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Financial Statements

(Unaudited)

Note 1. ORGANIZATION

Rancon Income Fund I, a California Limited Partnership (“the Partnership”) was organized in accordance with the provisions of the California Revised Limited Partnership Act for the purpose of acquiring, operating and disposing of existing income producing commercial, industrial and residential real estate properties. The Partnership reached final funding in April 1989. The Partnership was formed with initial capital contributions from Rancon Income Partners I, L.P. (the General Partner) and Daniel L. Stephenson and Rancon Financial Corporation (RFC), the initial limited partner, who indirectly owns and controls the General Partner. RFC is wholly-owned by Daniel L. Stephenson. The General Partner and its affiliates are hereinafter referred to as the Sponsor or the General Partner. The Partnership has no employees.

During the six months ended June 30, 2004, 217 Units were redeemed at an average price of $409. At June 30, 2004, there were 12,749 Units outstanding.

In the opinion of RFC and the General Partner, the accompanying unaudited financial statements contain all adjustments (consisting of only normal accruals) necessary to present fairly the financial position of the Partnership as of June 30, 2004 and December 31, 2003, and the related statements of operations for the three and six months ended June 30, 2004 and 2003, partners’ equity for the six months ended June 30, 2004, and cash flows for the six months ended June 30, 2004 and 2003.

Allocation of Net Income and Net Loss

Allocations of the profits and losses from operations are made pursuant to the terms of the Partnership Agreement.

Generally, net income from operations is allocated to the General Partner and the limited partners in proportion to the amounts of cash from operations distributed to the partners for each fiscal year. In no event shall the General Partner be allocated less than 1% of the net income from any period. If there are no distributions of cash from operations during such fiscal year, net income shall be allocated 90% to the limited partners and 10% to the General Partner. Net losses from operations are allocated 90% to the limited partners and 10% to the General Partner until such time as a partner’s account is reduced to zero. Additional losses will be allocated entirely to those partners with positive account balances until such balances are reduced to zero. In no event will the General Partner be allocated less than 1% of net loss for any period.

Net income other than net income from operations shall be allocated as follows: (i) first, 1% to the General Partner; (ii) second, to the partners who have a deficit balance in their capital account in proportion to and to the extent of such deficit balances, provided, that in no event shall the General Partner be allocated more than 10% of the net income other than net income from operations until the earlier of sale or disposition of substantially all of the assets or the distribution of cash (other than cash from operations) equal to the original invested capital of the General Partner and the limited partner; (iii) the balance, if any, shall be allocated (a) first, to the General Partner in an amount equal to the lesser of (1) the amount of cash from sale or financing anticipated to be distributed to the General Partner or (2) an amount sufficient to increase the General Partner’s account balance to an amount equal to such distribution from sale or financing; (b) the balance, to the limited partners. In no event shall the General Partner be allocated less than 1% of the net income other than net income from operations for any period.

Distributions

Distributions of cash from operations are generally allocated as follows: (i) first, to the limited partners until they receive a non-cumulative 6% return per annum on their unreturned capital contributions and (ii) the remainder, if any in a given year, shall be divided in the ratio of 90% to the limited partners and 10% to the General Partner.

Distributions of cash from sales or financing are generally allocated as follows: (i) first, 2% to the General Partner and 98% to the limited partners until the limited partners have received an amount equal to their capital contributions; (ii) second, 2% to the General Partner and 98% to the limited partners until the limited partners have received a cumulative non-compounded return of 6% per annum on their unreturned capital contributions (less prior distributions of cash from operations); (iii) third, to the General Partner for the amount of subordinated real estate commissions payable per the Partnership Agreement; (iv) fourth, 2% to the General Partner and 98% to the limited partners until the limited partners have received an additional 4% return on their unreturned capital contributions (less prior distributions of cash from operations); (v) fifth, 2% to the General Partner and 98% to the limited partners until the limited partners who purchased their partnership units (“Units”) prior to June 1, 1988, receive an additional return (depending on the date on which they purchased the Units) on their unreturned capital of either 8%, 5% or 2% (calculated through the first anniversary date of the purchase of the Units); (vi) sixth, 98% to the General Partner and 2% to the limited partners until the General Partner has received an amount equal to 15% of all prior distributions made to the limited partners and the General Partner pursuant to subparagraph (iv) and (v), reduced by the aggregate of all prior distributions to the General Partner under subparagraph (iv) and (v); and (vii) seventh, the balance, 85% to the limited partners and 15% to the General Partner.

RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Financial Statements

(Unaudited)

The terms of the Partnership agreement call for the general partner to restore any deficits that may exist in its capital account after allocation of gains and losses from the sale of the final property owned by the Partnership, but prior to any liquidating distributions being made to the partners.

Management Agreement

Effective January 1, 1995, Glenborough Corporation (“GC”) entered into an agreement with the Partnership and other related Partnerships (collectively, the “Rancon Partnerships”) to perform or contract on the Partnership’s behalf for financial, accounting, data processing, marketing, legal, investor relations, asset and development management and consulting services for a period of ten years or until the liquidation of the Partnership, whichever comes first. Effective January 1, 1998, the agreement was amended to eliminate GC’s responsibility for providing investor relation services and Preferred Partnership Services, Inc., a California corporation unaffiliated with the Partnership, contracted to assume the investor relations services. In October 2000, GC merged into Glenborough.

Effective July 1, 1999, the agreement was further amended to: (i) reduce the asset administration fee to $100,000 plus CPI annually ($54,000 and $52,500 for the six months ended June 30, 2004 and 2003, respectively); (ii) increase the sales fee for improved properties from 2% to 3% and (iii) reduce the management fee applicable to Wakefield Industrial Center from 5% to 3% of the gross rental receipts. The Partnership will also pay Glenborough: (i) a sales fees of 4% for land; (ii) a refinancing fee of 1% and (iii) a management fee of 5% of gross rental receipts from Bristol Medical Center. As part of this agreement, Glenborough will perform certain duties for the General Partner of the Rancon Partnerships. RFC agreed to cooperate with Glenborough should Glenborough attempt to obtain a majority vote of the limited partners to substitute itself as the Sponsor for the Rancon Partnerships. Glenborough is not an affiliate of the Partnership or RFC.

Risks and Uncertainties

The Partnership’s ability to achieve positive cash flow from operations, provide distributions from operations and continue as a going concern may be impacted by changes in property values, local and regional economic conditions, or the entry of other competitors into the market. The accompanying financial statements do not provide for adjustments with regard to these uncertainties.

Note 2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported results of operations during the reporting period. Actual results could differ from those estimates.

Rental Properties

Rental properties, including the related land, are stated at cost unless events or circumstances indicate that cost cannot be recovered, in which case the carrying value is reduced to the estimated fair value. Estimated fair value: (i) is based upon the Partnership’s plans for the continued operation of each property; and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized rental income based upon the age, construction and use of the building. The fulfillment of the Partnership’s plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Partnership to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of the Partnership’s properties could be materially different than current expectations.

Depreciation is provided using the straight-line method over useful lives ranging from five to forty years for the respective assets.

RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Financial Statements

(Unaudited)

Cash and Cash Equivalents

The Partnership considers certificates of deposit and money market funds with original maturities of less than ninety days when purchased to be cash equivalents. As of June 30, 2004, the Partnership does not own any certificates of deposit, and or money market funds.

Fair Value of Financial Instruments

For certain financial instruments, including cash and cash equivalents, accounts payable and other liabilities and security deposits, recorded amounts approximate fair value due to the relatively short maturity period.

Deferred Costs

Deferred lease commissions are amortized over the initial fixed term of the related lease agreement on a straight-line basis.

Revenue

The Partnership recognizes rental revenue on a straight-line basis at amounts that it believes it will collect on a tenant by tenant basis. The estimation process may result in higher or lower levels from period to period as the Partnership’s collection experience and the credit quality of the Partnership’s tenants changes. Actual amounts collected could be lower or higher than the amounts recognized on a straight-line basis if specific tenants are unable to pay rent that the Partnership has previously recognized as revenue, or if other tenants pay rent whom the Partnership previously estimated would not.

The Partnership’s portfolio of leases turns over continuously, with the number and value of expiring leases varying from year to year. The Partnership’s ability to re-lease the space to existing or new tenants at rates equal to or greater than those realized historically is impacted by, among other things, the economic conditions of the market in which a property is located, the availability of competing space, and the level of improvements which may be required at the property. No assurance can be given that the rental rates that the Partnership will obtain in the future will be equal to or greater than those obtained under existing contractual commitments.

Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue in the period the applicable expenses are incurred. Differences between estimated and actual amounts are recognized in the subsequent year.

Net Income (Loss) Per Limited Partnership Unit

Net income (loss) per limited partnership unit is calculated using the weighted average number of limited partnership units outstanding during the period and the limited partners’ allocable share of the net income (loss).

Income Taxes

No provision for income taxes is included in the accompanying financial statements as the Partnership’s results of operations are passed through to the partners for inclusion in their respective income tax returns. Net income (loss) and partners’ equity for financial reporting purposes will differ from the Partnership’s income tax return because of different accounting methods used for certain items, principally depreciation expense and the provision for impairment of investments in real estate.

Concentration Risk

Two tenants represented 47% of rental income and three tenants represented 59% of rental income for the six months ended June 30, 2004 and 2003, respectively.

Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” which addresses consolidation by business enterprises of variable interest entities (“VIEs”) either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (FIN 46 Revised) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. However, FIN 46 Revised must be applied

RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Financial Statements

(Unaudited)

no later than the first quarter of fiscal 2004. Special Purpose Entities (“SPEs”) created prior to February 1, 2003 may be accounted for under FIN 46 or FIN 46 Revised’s provisions no later than the fourth quarter of fiscal 2003. The Partnership has not entered into any arrangements which are considered SPEs. FIN 46 Revised may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The disclosure requirements of FIN 46 Revised are effective for all financial statements initially issued after December 31, 2003. The adoption of FIN 46 Revised did not have any impact on the financial statements of the Partnership, since the Partnership has not entered into any arrangements that are VIEs.

Reference to 2003 audited financial statements

These unaudited financial statements should be read in conjunction with the Notes to Financial Statements included in the December 31, 2003 audited financial statements on Form 10-K.

Note 3. INVESTMENTS IN REAL ESTATE

Rental properties consisted of the following at June 30, 2004 and December 31, 2003 (in thousands):


	2004			2003
Land	$	1,928		$	1,928
Buildings and improvements		3,891			3,872
Tenant improvements		1,214			1,100

		7,033			6,900
Less: accumulated depreciation		(2,875	)		(2,723	)

Total	$	4,158		$	4,177

None of the Partnership’s properties were encumbered by debt as of June 30, 2004 and December 31, 2003.

Note 4. COMMITMENTS AND CONTINGENT LIABILITIES

General Uninsured Losses

The Partnership carries property and liability insurance with respect to the properties. This coverage has policy specification and insured limits customarily carried for similar properties. However, certain types of losses (such as from earthquakes and floods) may be either uninsurable or not economically insurable. Should the properties sustain damage as a result of an earthquake or flood, the Partnership may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Additionally, the Partnership has elected to obtain insurance coverage for “certified acts of terrorism” as defined in the Terrorism Risk Insurance Act of 2002; however, the Partnership’s policies of insurance may not provide coverage for other acts of terrorism. Any losses from such other acts of terrorism might be uninsured. Should an uninsured loss occur, the Partnership could lose some or all of its capital investment, cash flow and anticipated profits related to the properties.

Other matters

The Partnership is contingently liable for a subordinated real estate commission payable to the General Partner in the amount of $30,000 at June 30, 2004 for the May 1999 sale of Aztec Village Shopping Center. Upon the sale of a Partnership property, the Partnership Agreement entitles the General Partner to a subordinated real estate commission, provided that, in no event shall the subordinated real estate commission payable to the General Partner exceed 3% of the gross sales price of the property which is sold. The subordinated real estate commission is payable only after the limited partners have received distributions equal to their original invested capital plus a cumulative non-compounded return of 6% per annum on their adjusted invested capital. Since the conditions under which this commission would be payable have not been achieved, the liability has not been recognized in the accompanying financial statements; however, the amount will be recorded if and when it becomes payable.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Background

Rancon Income Fund I, a California Limited Partnership, (“the Partnership”) was organized in accordance with the provisions of the California Revised Limited Partnership Act for the purpose of acquiring, operating and disposing of existing income producing commercial, industrial and residential real estate properties. The General Partner of the Partnership is Rancon Income Partners I (“General Partner”). The Partnership was organized in 1986 and completed its public offering of partnership units (“Units”) in April 1989. As of June 30, 2004 and December 31, 2003, there were 12,749 and 12,966 Units outstanding, respectively. The Partnership has no employees.

Overview

As of June 30, 2004, the Partnership owns the properties listed below:


*Name*	*Location*	*Type*	*Size*	*Encumbrances*
Wakefield Industrial Center	Temecula, California	Light Industrial	44,200 sq. ft.	None
Bristol Medical Center	Santa Ana, California	Office	52,311 sq. ft.	None

Occupancy rates at the Partnership’s rental properties as of June 30, 2004 were as follows:


	2004		2003
Wakefield Building	100	%	100	%
Bristol Medical Center	79	%	100	%

Weighted average occupancy	89	%	100	%

Wakefield Industrial Center

In April 1987, the Partnership acquired the Wakefield facility, at a cost of approximately $1,899,000 plus acquisition fees of $87,000. The Wakefield property consists of three parcels totaling approximately 3.99 acres of land. Two buildings are constructed on two of the parcels with the remaining parcel serving as a parking lot between the buildings. The property is located in Temecula, California, on the west side of Jefferson Avenue, approximately 500 feet west of the Interstate 15 highway in an area that is zoned for “medium manufacturing”. Temecula Valley submarket is continuing to grow. As the population increases, the demand for commercial and industrial space, as well as the rental rates, are expected to increase.

Both buildings are composed of concrete tilt-up construction and have central heating and air conditioning systems in the office areas. One building contains approximately 25,000 square feet of leasable space, of which approximately 5,900 square feet is office space, with the balance used for manufacturing and related purposes. The other building contains approximately 19,200 square feet of leasable space of which approximately 4,800 square feet is office space, with the balance used for warehousing and related purposes. The Wakefield facility provides uncovered parking for approximately 54 cars and includes partially improved land which is used for car parking and truck access.

According to research conducted by the Partnership’s leasing director, the market has approximately 12 million square feet of existing industrial space, with an overall vacancy rate of 7.5%. The area offers a wide range of high quality, attractive industrial projects ranging from multi-tenant incubator space to large, single-user distribution facilities located in master-planned business parks. There is approximately 600,000 square feet of multi-tenant and free standing industrial space that competes directly with Wakefield Industrial Center. Wakefield is one of the original industrial buildings in the area. The asking rent for industrial space in this area ranges between $4.56 and $6.24 per square foot triple net (tenant pays all operating expenses, including taxes, insurance, and capital) with newer properties at the high end.

The neighborhood surrounding Wakefield has grown over the years and now has added many retail properties which benefit from the high traffic count on Jefferson Avenue. A new retail shopping center is now located directly adjacent to Wakefield. This high-visibility location could create an opportunity for future conversion of the property to a retail/showroom use.

One tenant occupies 100% of the net rentable square footage of the property. The principal terms of the lease and the nature of the tenant’s business are as follows:


		*Wakefield Engineering, Inc.*

Nature of Business:		Manufacturer
Lease Term:		10 years
Expiration Date:		November 30, 2004
Square Feet:		44,200
(% of rentable total):		100%
Annual Rent:		$214,000
Rent Increase:		Annual - CPI
Renewal Options:		Two 5-year options

The lease term of Wakefield will expire at the end of 2004. Management is currently negotiating with the tenant for a new term.

Bristol Medical Center

In October 1987, the Partnership entered into an agreement with Rancon Financial Corporation (“RFC”) to acquire Bristol Medical Center for a purchase price of $5,105,000, plus all costs incurred by RFC in ownership and management of the property from December 1986. The purchase price was paid in installments through May 1988, for a total cost of $5,370,000. Bristol Medical Center is located in Santa Ana, California, on the west side of Bristol Street, approximately 1.5 miles from a major east-west freeway and approximately 2 miles from a major north-south freeway. The John Wayne Orange County airport is located 2.5 miles northwest of the property.

Bristol Medical Center consists of two 2-story medical office buildings and related parking spaces on approximately 3.42 acres. The two office buildings contain an aggregate of approximately 52,311 net rentable square feet of office space. Each of the buildings has one elevator and three stairways, and each suite is served by its own roof-mounted heating and air conditioning unit. The property contains uncovered parking for approximately 299 cars.

According to research conducted by the Partnership’s leasing director, the direct market area consists of five medical buildings totaling approximately 190,000 rentable square feet, all of which are older Class “B” Buildings. Bristol Medical Center is located on the proposed route for a mass-transit system (“Centerline Project”) which is expected to run down Bristol Street directly in front of the project. This will greatly improve access to the project from the large population base in nearby Santa Ana. Currently, total vacancy in this market is approximately 12%. The annual rental rates for the class “B” medical buildings range from $18.00 per square foot to $21.60 per square foot on a modified gross basis (tenant pays interior janitorial costs).

Bristol Medical Center benefits from its high-visibility location on heavily traveled Bristol Street, a main thoroughfare which runs from downtown Santa Ana to South Coast Plaza in Costa Mesa. There is excellent public transportation with a bus stop directly in front of the property and ample parking for medical tenants. Recently, a stop-light was installed at the intersection directly in front of the property which improves the ingress and egress to the property.

One tenant occupies more than ten percent of the net rentable square footage of Bristol Medical Center. The principal terms of the lease and the nature of the tenant’s business is as follows:


		*Bristol Medical Clinic*

Nature of Business:		Medical clinic
Lease Term:		7 years
Expiration Date:		December 31, 2007
Square Feet:		13,674
(% of rentable total):		27%
Annual Rent:		$257,000
Rent Increase:		3% annually
Renewal Options:		None

In June 2004, a tenant at Bristol Medical Center, The Richli Group, defaulted on their lease of a 6,854 square foot space due to their inability to obtain the required operating licenses to run a medical clinic. The tenant’s lease had commenced on November 1, 2003, with monthly base rent of $10,966 for a five-year term. Although The Richli Group had not yet occupied the space, they paid their monthly rent from November 2003 through May 2004, as well as a portion of June 2004. In addition, they had paid a security deposit of one month’s rent of $10,966 which was applied to rental income upon their default. Lease commissions of approximately $45,000 were paid, however, no tenant improvements had yet been incurred. This space is currently being actively marketed for lease.

Results of Operations

Comparison of the three and six months ended June 30, 2004 to the three and six months ended June 30, 2003.

Revenue

Rental income decreased $20,000 and $10,000 for the three and six months ended June 30, 2004, compared to the three and six months ended June 30, 2003, respectively, primarily due to a decrease in occupancy at Bristol Medical Center.

Expenses

Operating expenses increased $13,000, or 10%, and $18,000, or 7%, for the three and six months ended June 30, 2004, compared to the three and six months ended June 30, 2003, respectively, primarily due to a write-off of rents recognized on a straight line basis for The Richli Group’s lease. See above for further discussion.

Depreciation and amortization expense increased $52,000, or 70%, and $70,000, or 47%, for the three and six months ended June 30, 2004, compared to the three and six months ended June 30, 2003, respectively, primarily due to a write-off of the lease commissions paid for The Richli Group’s lease, as well as depreciation of tenant improvements and lease commissions paid for other tenants.

Liquidity and Capital Resources

The following discussion should be read in conjunction with the Partnership’s December 31, 2003 audited financial statements and the notes thereto.

On April 21, 1989, Rancon Income Fund I (“the Partnership”) was funded from the sale of 14,559 limited partnership units (“Units”) in the amount of $14,559,000. Four Units were retired in 1990. Prior to 2004, a total of 1,589 Units were redeemed. During the six months ended June 30, 2004, 217 Units were redeemed at an average price of $409. As of June 30, 2004, there were 12,749 Units outstanding.

As of June 30, 2004, the Partnership had cash of $216,000. The remainder of the Partnership’s assets consists primarily of its real estate investments, which totaled approximately $4,158,000 at June 30, 2004.

The Partnership is contingently liable for a subordinated real estate commission payable to the General Partner in the amount of $30,000 at June 30, 2004 for the May 1999 sale of Aztec Village Shopping Center. Per the Partnership Agreement, upon the sale of a Partnership property, the General Partner shall be entitled to a subordinated real estate commission, provided that, in no event shall the subordinated real estate commission payable to the General Partner exceed 3% of the gross sales price of the property which is sold. The subordinated real estate commission is payable only after the limited partners have received distributions equal to their original invested capital plus a cumulative non-compounded return of 6% per annum on their adjusted invested capital. Since the conditions under which this commission would be payable have not been achieved, the liability has not been recognized in the Partnership’s financial statements; however, the amount will be recorded if and when it becomes payable.

Operationally, the Partnership’s primary source of funds consists of cash generated from operating its rental properties. Cash flows from operating activities have been sufficient to provide funds to reinvest in the properties by way of improvements, as well as to fund distributions to the limited partners.

Management believes that the Partnership’s cash and cash equivalents at June 30, 2004, together with the cash from operations, will be sufficient to finance the Partnership’s and the properties continued operations on both a short-term and long-term basis. There can be no assurance that the Partnership’s results of operations will not fluctuate in the future and at times affect its ability to meet its operating requirements.

Operating Activities

During the six months ended June 30, 2004, the Partnership’s cash provided by operating activities totaled $242,000.

The $8,000 increase in deferred costs at June 30, 2004, compared to December 31, 2003, was primarily due to lease commissions paid for new leases.

The $14,000 decrease in security deposits at June 30, 2004, compared to December 31, 2003, was primarily due to the application of The Richli Group’s security deposit upon default of their lease in June 2004.

Investing Activities

During the six months ended June 30, 2004, the Partnership’s cash used for investing activities totaled $133,000 for building and tenant improvements at Bristol Medical Center.

Financing Activities

During the six months ended June 30, 2004, the Partnership’s cash used for financing activities totaled $241,000 which consisted of $153,000 of distributions to the Limited Partners, and $88,000 paid to redeem 217 limited partnership units (“Units”).

Critical Accounting Policies

Revenue recognized on a straight-line basis

The Partnership recognizes rental revenue on a straight-line basis at amounts that it believes it will collect on a tenant by tenant basis. The estimation process may result in higher or lower levels from period to period as the Partnership’s collection experience and the credit quality of the Partnership’s tenants changes. Actual amounts collected could be lower than the amounts recognized on a straight-line basis if specific tenants are unable to pay rent that the Partnership has previously recognized as revenue.

Carrying value of rental properties

The Partnership’s rental properties are stated at cost unless events or circumstances indicate that cost cannot be recovered, in which case, the carrying value of the property is reduced to its estimated fair value. Estimated fair value is based upon (i) the Partnership’s plans for the continued operations of each property, and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized rental income based upon the age, construction and use of the building. The fulfillment of the Partnership’s plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Partnership to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of the Partnership’s properties could be materially different than current expectations.

Forward Looking Statements; Factors That May Affect Operating Results

This Report on Form 10-Q contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, including statements regarding the Partnership’s expectations, hopes, intentions, beliefs and strategies regarding the future. These forward looking statements include statements relating to:

•	The Partnership’s belief that certain claims and lawsuits which have arisen against it in the normal course of business will not have a material adverse effect on its financial position, cash flow or results of operations;

•	The Partnership’s belief that its cash balance and cash generated by its operations will be adequate to meet its operating requirements in both the short and the reasonably foreseeable long-term.

All forward-looking statements included in this document are based on information available to the Partnership on the date hereof. It is important to note that the Partnership’s actual results could differ materially from those stated or implied in such forward-looking statements. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

•	market fluctuations in rental rates, concessions and occupancy;

•	reduced demand for rental space;

•	defaults or non-renewal of leases by customers;

•	availability and credit worthiness of prospective tenants and our ability to execute lease deals with them;

•	differing interpretations of lease provisions regarding recovery of expenses;

•	increased operating costs;

•	the unpredictability of both the frequency and final outcome of litigation;

•	the unpredictability of changes in accounting rules;

•	failure of market conditions and occupancy levels to improve in certain geographic areas; and

•	continuing threat of terrorist attacks.

The forward-looking statements in this Quarterly Report on Form 10-Q are subject to additional risks and uncertainties further discussed below under Risk Factors. The Partnership assumes no obligation to update any forward looking-statement or statements.

Risk Factors

Market Fluctuations in Rental Rates and Occupancy Could Adversely Affect Our Operations

As leases turn over, our ability to re-lease the space to existing or new tenants at rates equal to or greater than those realized historically is impacted by, among other things, the economic conditions of the market in which a property is located, the availability of competing space (including sublease space offered by tenants who have vacated space in competing buildings prior to the expiration of their lease term), and the level of improvements which may be required at the property. We cannot assure you that the rental rates we obtain in the future will be equal to or greater than those obtained under existing contractual commitments. If we cannot lease all or substantially all of the expiring space at our properties promptly, or if the rental rates are significantly lower than expected, then our results of operations and financial condition could be negatively impacted.

Tenants’ Defaults Could Adversely Affect Our Operations

Our ability to manage our assets is subject to federal bankruptcy laws and state laws that limit creditors’ rights and remedies available to real property owners to collect delinquent rents. If a tenant becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the tenant promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to that tenant. We also cannot be sure that we would receive rent in the proceeding sufficient to cover our expenses with respect to the premises. If a tenant becomes bankrupt, the federal bankruptcy code will apply, which in some instances may restrict the amount and recoverability of our claims against the tenant. A tenant’s default on its obligations to us could adversely affect our results of operations and financial condition.

Potential Liability Due to Environmental Matters

Under federal, state and local laws relating to protection of the environment, or Environmental Laws, a current or previous owner or operator of real estate may be liable for contamination resulting from the presence or discharge of petroleum products or other hazardous or toxic substances on the property. These owners may be required to investigate and clean-up the contamination on the property as well as the contamination which has migrated from the property. Environmental Laws typically impose liability and clean-up responsibility without regard to whether the owner or operator knew of, or was responsible for, the presence of the contamination. This liability may be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. In addition, the owner or operator of a property may be subject to claims by third parties based on personal injury, property damage and/or other costs, including investigation and clean-up costs, resulting from environmental contamination. Environmental Laws may also impose restrictions on the manner in which a property may be used or transferred or in which businesses may be operated. These restrictions may require expenditures. Under the Environmental Laws, any person who arranges for the transportation, disposal or treatment of hazardous or toxic substances may also be liable for the costs of investigation or clean-up of those substances at the disposal or treatment facility, whether or not the facility is or ever was owned or operated by that person.

Our tenants generally are required by their leases to operate in compliance with all applicable Environmental Laws, and to indemnify us against any environmental liability arising from their activities on the properties. However, we could be subject to strict liability by virtue of our ownership interest in the properties. Also, tenants may not satisfy their indemnification obligations under the leases. We are also subject to the risk that:

•

any environmental assessments of our properties may not have revealed all potential environmental liabilities,

•

any prior owner or prior or current operator of these properties may have created an environmental condition not known to us, or

•

an environmental condition may otherwise exist as to any one or more of these properties.

Any one of these conditions could have an adverse effect on our results of operations and financial condition. Moreover, future environmental laws, ordinances or regulations may have an adverse effect on our results of operations and financial condition. Also, the current environmental condition of those properties may be affected by tenants and occupants of the properties, by the condition of land or operations in the vicinity of the properties (such as the presence of underground storage tanks), or by third parties unrelated to us.

Environmental Liabilities May Adversely Affect Operating Costs and Ability to Borrow

The obligation to pay for the cost of complying with existing Environmental Laws as well as the cost of complying with future legislation may affect our operating costs. In addition, the presence of petroleum products or other hazardous or toxic substances at any of our properties, or the failure to remediate those properties properly, may adversely affect our ability to borrow by using those properties as collateral. The cost of defending against claims of liability and the cost of complying with Environmental Laws, including investigation or clean-up of contaminated property, could materially adversely affect our results of operations and financial condition.

General Risks of Ownership of Real Estate

We are subject to risks generally incidental to the ownership of real estate. These risks include:

•

changes in general economic or local conditions;

•

changes in supply of or demand for similar or competing properties in an area;

•

the impact of environmental protection laws;

•

changes in interest rates and availability of financing which may render the sale or financing of a property difficult or unattractive;

•

changes in tax, real estate and zoning laws; and

•

the creation of mechanics’ liens or similar encumbrances placed on the property by a lessee or other parties without our knowledge and consent.

Should any of these events occur, our results of operations and financial condition could be adversely affected.

Uninsured Losses May Adversely Affect Operations

We, or in certain instances, tenants of our properties, carry property and liability insurance with respect to the properties. This coverage has policy specification and insured limits customarily carried for similar properties. However, certain types of losses (such as from earthquakes and floods) may be either uninsurable or not economically insurable. Further, certain of the properties are located in areas that are subject to earthquake activity and floods. Should a property sustain damage as a result of an earthquake or flood, we may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Additionally, we have elected to obtain insurance coverage for “certified acts of terrorism” as defined in the Terrorism Risk Insurance Act of 2002; however, our policies of insurance may not provide coverage for other acts of terrorism. Any losses from such other acts of terrorism might be uninsured. Should an uninsured loss occur, we could lose some or all of our capital investment, cash flow and anticipated profits related to one or more properties. This could have an adverse effect on our results of operations and financial condition.

Illiquidity of Real Estate May Limit Our Ability to Vary Our Portfolio

Real estate investments are relatively illiquid and, therefore, will tend to limit our ability to vary our portfolio quickly in response to changes in economic or other conditions.

Potential Liability Under the Americans With Disabilities Act

All of our properties are required to be in compliance with the Americans With Disabilities Act. The Americans With Disabilities Act generally requires that places of public accommodation be made accessible to people with disabilities to the extent readily achievable. Compliance with the Americans With Disabilities Act requirements could require removal of access barriers. Non-compliance could result in imposition of fines by the federal government, an award of damages to private litigants and/or a court order to remove access barriers. Because of the limited history of the Americans With Disabilities Act, the impact of its application to our properties, including the extent and timing of required renovations, is uncertain. Pursuant to lease agreements with tenants in certain of the “single-tenant” properties, the tenants are obligated to comply with the Americans With Disabilities Act provisions. If our costs are greater than anticipated or tenants are unable to meet their obligations, our results of operations and financial condition could be adversely affected.

Risks of Litigation

Certain claims and lawsuits have arisen against us in our normal course of business. We believe that such claims and lawsuits will not have a material adverse effect on our financial position, cash flow or results of operations.

Item 3. Qualitative and Quantitative Information About Market Risk

The Partnership does not own any derivative instruments, and does not have any debt obligations.

Item 4. Controls and procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision of the General Partner’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the General Partner’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in alerting him on a timely basis to material information required to be included in this report. There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Certain claims and lawsuits have arisen against the Partnership in its normal course of business. The Partnership believes that such claims and lawsuits will not have a material adverse effect on the Partnership’s financial position, cash flow or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits:


31.1		Section 302 Certification of Daniel L. Stephenson, Chief Executive Officer and Chief Financial Officer of General Partnership.

32.1		Section 906 Certification of Daniel L. Stephenson, Chief Executive Officer and Chief Financial Officer of General Partnership.

(b)

Reports on Form 8-K (incorporated herein by reference):

None

SIGNATURES

Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	RANCON INCOME FUND I,
	a California limited partnership

	By	Rancon Income Partners I, L.P.
		its General Partner

Date: August 13, 2004	By:	/s/ Daniel L. Stephenson
		Daniel L. Stephenson
		Director, President, Chief Executive
		Officer and Chief Financial Officer of
		Rancon Financial Corporation, General
		Partner of Rancon Income Partners I, L.P.

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RANCON INCOME FUND I 10-Q