ACPT Form 10Q 9-30-2006
 
 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q


(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006, 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 1-14369

AMERICAN COMMUNITY PROPERTIES TRUST
(Exact name of registrant as specified in its charter)

MARYLAND
(State or other jurisdiction of incorporation or organization)
52-2058165
(I.R.S. Employer Identification No.)
 
222 Smallwood Village Center
St. Charles, Maryland 20602
(Address of principal executive offices)(Zip Code)
(301) 843-8600
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “an accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):.
 
Large accelerated filer o  Accelerated filer o Non-accelerated filer x
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
 
Yes o No x

 


As of November 6, 2006, there were 5,229,954 Common Shares, par value $0.01 per share, outstanding

-1-

AMERICAN COMMUNITY PROPERTIES TRUST
FORM 10-Q
SEPTEMBER 30, 2006
TABLE OF CONTENTS
   
Page Number
     
PART I
FINANCIAL INFORMATION
  
     
Item 1.
Consolidated Financial Statements
  
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
8
     
Item 2.
25
     
Item 3.
38
     
Item 4.
38
     
PART II
OTHER INFORMATION
  
     
Item 1.
39
     
Item 1A.
39
     
Item 2
42
     
Item 3.
42
     
Item 4.
42
     
Item 5.
42
     
Item 6.
42
     
 
43


-2-


AMERICAN COMMUNITY PROPERTIES TRUST
  
CONSOLIDATED STATEMENTS OF INCOME
  
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
  
(In thousands, except per share amounts)
  
(Unaudited)
  
           
   
2006
  
2005
  
           
             
Rental property revenues
  
$
39,946
  
$
16,612
  
Community development-land sales
    
11,317
   
16,882
 
Homebuilding-home sales
    
16,343
   
-
 
Management and other fees, substantially all from related entities
    
885
   
2,424
 
Reimbursement of expenses related to managed entities
    
1,622
   
4,691
 
Total revenues
    
70,113
    
40,609
  
               
Expenses
              
Rental property operating expenses
    
19,072
   
7,005
 
Cost of land sales
    
6,156
   
11,108
 
Cost of home sales
    
12,310
   
21
 
General, administrative, selling and marketing
    
7,394
   
8,035
 
Depreciation and amortization
    
6,239
   
2,952
 
Expenses reimbursed from managed entities
    
1,622
   
4,691
 
Total expenses
    
52,793
   
33,812
 
               
Operating income
    
17,320
   
6,797
 
               
Other income (expense)
              
 Interest and other income
    
838
   
780
 
 Equity in earnings from unconsolidated entities
    
510
   
904
 
Interest expense
    
(10,915
)
  
(4,917
)
Minority interest in consolidated entities
    
(2,997
)
  
(372
)
               
Income before provision for income taxes
    
4,756
   
3,192
 
Provision for income taxes
    
1,754
   
1,287
 
               
Net income
  
$
3,002
  
$
1,905
  
               
Earnings per share - basic and diluted
  
$
0.58
  
$
0.37
  
Weighted average shares outstanding - basic and diluted
    
5,199
   
5,194
 
Cash dividends per share
  
$
0.73
  
$
0.30
  
 

 
Note: The income statement for the nine months ended September 30, 2006 reflects the adoption of Emerging Issues Task Force Issue 04-05, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,” (“EITF 04-05”) on January 1, 2006 (Refer to Note 2).


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


-3-


AMERICAN COMMUNITY PROPERTIES TRUST
  
CONSOLIDATED STATEMENTS OF INCOME
  
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
  
(In thousands, except per share amounts)
  
(Unaudited)
  
           
   
2006
  
2005
  
           
             
Rental property revenues
  
$
13,808
  
$
5,784
  
Community development-land sales
    
4,691
   
4,161
 
Homebuilding-home sales
    
5,084
   
-
 
Management and other fees, substantially all from related entities
    
320
   
727
 
Reimbursement of expenses related to managed entities
    
518
   
1,464
 
Total revenues
    
24,421
   
12,136
  
               
Expenses
              
Rental property operating expenses
    
6,729
   
2,631
 
Cost of land sales
    
2,490
   
2,228
 
Cost of home sales
    
3,789
   
-
 
General, administrative, selling and marketing
    
2,387
   
2,620
 
Depreciation and amortization
    
2,165
   
1,002
 
Expenses reimbursed from managed entities
    
518
   
1,464
 
Total expenses
    
18,078
   
9,945
 
               
Operating income
    
6,343
   
2,191
 
               
Other income (expense)
              
 Interest and other income
    
620
   
134
 
 Equity in earnings from unconsolidated entities
    
167
   
276
 
Interest expense
    
(3,715
)
  
(1,538
)
Minority interest in consolidated entities
    
(331
)
  
(134
)
               
Income before provision for income taxes
    
3,084
   
929
 
Provision for income taxes
    
1,040
   
540
 
               
Net income
  
$
2,044
  
$
389
  
               
Earnings per share - basic and diluted
  
$
0.39
  
$
0.07
  
Weighted average shares outstanding - basic and diluted
    
5,201
   
5,198
 
Cash dividends per share
  
$
0.10
  
$
0.10
  

Note: The income statement for the three months ended September 30, 2006 reflects the adoption of Emerging Issues Task Force Issue 04-05, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,” (“EITF 04-05”) on January 1, 2006 (Refer to Note 2).


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


-4-


AMERICAN COMMUNITY PROPERTIES TRUST
  
CONSOLIDATED BALANCE SHEETS
  
(In thousands, except share and per share amounts)
  
           
   
As of
  
As of
  
   
September 30, 2006
  
December 31, 2005
  
   
(Unaudited)
  
(Audited)
  
ASSETS
          
             
Investments in real estate:
              
Operating real estate, net of accumulated depreciation
  
$
142,717
  
$
76,578
  
of $141,688 and $46,412 respectively
              
Land and development costs
    
64,865
   
54,232
 
Condominiums under construction
    
11,171
   
17,621
 
Rental projects under construction or development
    
21,015
   
4,458
 
Investments in real estate, net
    
239,768
   
152,889
 
               
Cash and cash equivalents
    
14,768
   
21,156
 
Restricted cash and escrow deposits
    
19,310
   
8,925
 
Investments in unconsolidated real estate entities
    
6,625
   
9,738
 
Receivable from bond proceeds
    
15,513
   
8,422
 
Accounts receivable
    
2,004
   
1,332
 
Deferred tax assets
    
15,993
   
5,610
 
Property and equipment, net of accumulated depreciation
    
1,094
   
1,182
 
Deferred charges and other assets, net of amortization of
             
$2,273 and $898 respectively
    
12,076
    
7,831
 
               
Total Assets
  
$
327,151
  
$
217,085
  
               
LIABILITIES AND SHAREHOLDERS' EQUITY
              
LIABILITIES:
             
Non-recourse debt
  
$
242,157
  
$
119,865
  
Recourse debt
    
43,954
   
32,981
 
Accounts payable and accrued liabilities
    
21,706
   
19,243
 
Deferred income
   
3,886
   
3,961
 
Accrued current income tax liability
    
699
   
6,545
 
Total Liabilities
    
312,402
   
182,595
 
               
SHAREHOLDERS' EQUITY
              
Common shares, $.01 par value, 10,000,000 shares authorized,
              
5,229,954 shares and 5,197,954 shares issued and outstanding
              
as of September 30, 2006 and December 31, 2005, respectively
    
52
   
52
 
Treasury stock, 67,709 shares at cost
    
(376
)
  
(376
)
Additional paid-in capital
    
17,206
   
17,066
 
Retained earnings (deficit)
    
(2,133
)
  
17,748
 
Total Shareholders' Equity
    
14,749
   
34,490
 
               
Total Liabilities and Shareholders' Equity
  
$
327,151
  
$
217,085
  

Note: The balance sheet as of September 30, 2006 reflects the adoption of Emerging Issues Task Force Issue 04-05, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,” (“EITF 04-05”) on January 1, 2006 (Refer to Note 2).
 
The accompanying notes are an integral part of these consolidated statements.

-5-


 
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
 
(In thousands, except share amounts)
  
                           
                           
                           
                           
                           
   
Common Shares
      
Additional
  
Retained
      
       
Par
  
Treasury
  
Earnings
  
Earnings
      
   
Number
  
Value
  
Stock
  
Capital
  
(Deficit)
  
Total
  
                           
Balance December 31, 2005 (Audited)
    
5,197,954
 
$
52
  
$
(376
)
$
17,066
  
$
17,748
  
$
34,490
  
Net income
    
-
   
-
   
-
   
-
   
3,002
   
3,002
  
Dividends declared
    
-
   
-
   
-
   
-
   
(3,745
)
  
(3,745
)
Issuance of restricted shares to Trustees
    
32,000
   
-
   
-
   
140
   
-
   
140
 
 
Cumulative effect of change in accounting for EITF 04-05
    
-
   
-
   
-
   
-
   
(19,138
)
  
(19,138
)
Balance September 30, 2006 (Unaudited)
    
5,229,954
 
$
52
  
$
(376
)
$
17,206
  
$
(2,133
)
$
14,749
  
 
The accompanying notes are an integral part of these consolidated statements.
            


-6-


AMERICAN COMMUNITY PROPERTIES TRUST
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
  
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
  
(In thousands)
  
(Unaudited)
  
           
   
2006
  
2005
  
           
Cash Flows from Operating Activities
              
Net income
  
$
3,002
  
$
1,905
  
Adjustments to reconcile net income to net cash provided
              
by operating activities:
              
Depreciation and amortization
    
6,239
   
2,952
 
Deficit distribution to minority interests
    
2,957
   
322
 
Benefit for deferred income taxes
    
(542
)
  
(3,275
)
Equity in earnings-unconsolidated entities
    
(510
)
  
(904
)
Cost of sales-community development
    
6,156
   
11,108
 
Cost of sales-homebuilding
    
12,310
   
21
 
Stock based compensation expense
    
219
   
1,294
 
Minority interest in consolidated entities
    
2,997
   
372
 
Amortization of deferred loan costs
    
411
   
340
 
Changes in notes and accounts receivable
    
(71
)
  
(1,755
)
 Additions to community development assets
    
(16,789
)
  
(15,594
)
Homebuilding-construction expenditures
    
(5,860
)
  
(9,902
)
Deferred income
    
(75
)
  
-
 
Changes in accounts payable, accrued liabilities
    
(5,682
)
  
2,958
 
Net cash provided by/(used in) operating activities
  
$
4,762
  
$
(10,158
)
               
Cash Flows from Investing Activities
              
Investment in office building and apartment construction
    
(16,557
)
  
(2,309
)
Distribution from land real estate joint venture
    
-
   
1,160
 
Cash from newly consolidated properties
    
4,723
   
-
 
Change in investments-unconsolidated apartment partnerships
    
537
   
1,243
 
Change in investments-unconsolidated commercial partnerships
    
-
   
545
 
Change in restricted cash
    
503
   
(272
)
Additions to rental operating properties including acquisitions, net
    
(20,096
)
  
(4,258
)
Other assets
    
(1,176
)
  
(984
)
Net cash used in investing activities
  
$
(32,066
)
$
(4,875
)
               
Cash Flows from Financing Activities
              
Cash proceeds from debt financing
    
51,847
   
27,080
 
Payment of debt
    
(26,270
)
  
(13,293
)
County Bonds proceeds, net of undisbursed funds
    
2,041
   
2,138
 
Payments of distributions to minority interests
    
(2,957
)
  
(322
)
Dividends paid to shareholders
    
(3,745
)
  
(1,536
)
Net cash provided by financing activities
  
$
20,916
  
$
14,067
  
               
Net Decrease in Cash and Cash Equivalents
    
(6,388
)
  
(966
)
Cash and Cash Equivalents, Beginning of Year
    
21,156
   
16,138
 
Cash and Cash Equivalents, September 30,
  
$
14,768
  
$
15,172
  
 
The accompanying notes are an integral part of these consolidated statements.

-7-

AMERICAN COMMUNITY PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(Unaudited)


(1)
ORGANIZATION

American Community Properties Trust ("ACPT") is a self-managed holding company that is primarily engaged in the investment of rental properties, property management services, community development, and homebuilding. These operations are concentrated in the Washington, D.C. metropolitan area and Puerto Rico and are carried out through American Rental Properties Trust ("ARPT"), American Rental Management Company ("ARMC "), American Land Development U.S., Inc. ("ALD") and IGP Group Corp. ("IGP Group") and their subsidiaries.
ACPT is taxed as a U.S. partnership and its taxable income flows through to its shareholders.  ACPT is subject to Puerto Rico taxes on IGP Group's taxable income, generating foreign tax credits that are passed through to ACPT's shareholders.  ACPT's federal taxable income consists of certain passive income from IGP Group, a controlled foreign corporation, additional distributions from IGP Group including Puerto Rico taxes paid on behalf of ACPT, and dividends from ACPT's U.S. subsidiaries.  Other than Interstate Commercial Properties ("ICP"), which is taxed as a Puerto Rico corporation, the taxable income from the remaining Puerto Rico operating entities passes through to IGP Group or ALD.  Of this taxable income, only the portion of taxable income applicable to the profits, losses or gains on the residential land sold in Parque Escorial passes through to ALD.  ALD, ARMC, and ARPT are taxed as U.S. corporations.  The taxable income from the U.S. apartment properties flows through to ARPT.

(2)
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
The accompanying consolidated financial statements include the accounts of ACPT and its subsidiaries and partnerships, after eliminating all intercompany transactions. Unless the context otherwise requires, all of the entities included in the consolidated financial statements are hereinafter referred to collectively as the “Company” or “ACPT.”
The Company consolidates entities which are not variable interest entities as defined by FASB Interpretation No. 46 (revised December 2003) (“FIN 46 (R)”) in which it owns, directly or indirectly, a majority voting interest in the entity. In addition, beginning January 1, 2006, the Company consolidates entities, regardless of ownership percentage, in which the Company serves as the general partner and the limited partners do not have substantive kick-out rights or substantive participation rights in accordance with Emerging Issues Task Force Issue 04-05, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights," (“EITF 04-05”).
As of December 31, 2005, the consolidated group included ACPT and its four major subsidiaries, ARPT, ARMC, ALD and IGP Group. In addition, the consolidated group then included American Housing Management Company, American Housing Properties L.P. (“AHP”), St. Charles Community, LLC, Interstate General Properties Limited Partnership S.E., Land Development Associates, S.E., LDA Group LLC, Torres del Escorial, Inc., Escorial Office Building I, Inc., Interstate Commercial Properties, Inc., Bannister Associates Limited Partnership, Coachman's Limited Partnership, Crossland Associates Limited Partnership, Fox Chase Apartments General Partnership, Headen House Associates Limited Partnership, Lancaster Apartments Limited Partnership, New Forest Apartments General Partnership, Owings Chase, LLC, Palmer Apartments Associates Limited Partnership, Prescott Square, LLC, Sheffield Greens Apartments, LLC, Village Lake L.P., Wakefield Terrace Associates Limited Partnership, and Wakefield Third Age Associates Limited Partnership.
Beginning January 1, 2006, as a result of EITF 04-05, the consolidated group also includes the following properties: Alturas del Senorial Associates Limited Partnership, Bayamon Garden Associates Limited Partnership, Carolina Associates Limited Partnership S.E., Colinas de San Juan Associates Limited Partnership, Essex Apartments Associates Limited Partnership, Huntington Associates Limited Partnership, Jardines de Caparra Associates Limited Partnership, Monserrate Associates Limited Partnership, San Anton Associates S.E., Turabo Limited Dividend Partnership and Valle del Sol Associates Limited Partnership. Historically, these partnerships had been recorded using the equity method of accounting.
On April 28, 2006, the Company, through its subsidiary AHP, completed the acquisition of two apartment properties, Milford Station I LLC and Milford Station II LLC, in Baltimore, Maryland containing a total of 250 units for approximately $14,300,000. The purchase price of acquired properties was allocated to land, building and in-place leases based on the relative fair value of each component in accordance with SFAS No. 141, “Business Combinations.” The acquisitions of Milford I and Milford II are included within our results of operations from the date of acquisition.
The Company's investments in the four real estate entities that it does not control, does not serve as the general partner, or for which it is not the primary beneficiary if such entity is a variable interest entity, are recorded using the equity method of accounting. Refer to Note 3 for further discussion regarding investments in unconsolidated real estate entities.

-8-


Interim Financial Reporting
These unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The Company has no items of other comprehensive income for any of the periods presented. In the opinion of management, these unaudited financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present a fair statement of results for the interim period. While management believes that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report filed on Form 10-K/A for the year ended December 31, 2005. The operating results for the nine and three months ended September 30, 2006 and 2005 are not necessarily indicative of the results that may be expected for the full year. Net income per share is calculated based on weighted average shares outstanding.

Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements, and accompanying notes and disclosures. These estimates and assumptions are prepared using management's best judgment after considering past and current events and economic conditions. Actual results could differ from those estimates and assumptions.

Implementation of EITF 04-05
As of January 1, 2006, we consolidated 11 partnerships which were previously unconsolidated as a result of the application of EITF 04-05. Those partnerships own, or control other entities that own, 14 apartment properties. Our interests in the profits and losses of these partnerships range from 1 to 50 percent. The initial consolidation of those partnerships resulted in increases (decreases), net of intercompany eliminations, and included the recording of deferred taxes in amounts reported in our consolidated balance sheet as of January 1, 2006, as follows (in thousands):
   
Increase (decrease)
  
Operating real estate, net of accumulated depreciation
  
$
53,282
  
Cash and cash equivalents
    
4,723
  
Investments in unconsolidated real estate entities
    
(920
)
Deferred tax assets
    
9,841
  
All other assets
    
11,618
  
Total assets
  
$
78,544
  
         
Non-recourse debt
  
$
98,556
  
All other liabilities
    
(874
)
Shareholders’ equity
    
(19,138
)
Total liabilities and shareholders’ equity
  
$
78,544
  

The Company recorded an overall reduction to retained earnings of $19.1 million in a manner similar to a cumulative effect of a change in accounting principle. The retained earnings impact is net of a deferred tax asset recorded of $9.8 million related to temporary differences arising from the negative deficits absorbed by the Company as a result of consolidating the partnerships.


-9-

The impact to our consolidated statements of income for the nine months ended September 30, 2006 is summarized as follows:

   
Balance prior
      
Nine Months
  
   
to the
     
Ended
  
   
Implementation
  
Increase
  
September 30,
  
   
of EITF 04-05
  
(Decrease)
  
2006
  
Rental property revenues
  
$
19,262
  
$
20,684
  
$
39,946
  
Management and other fees
    
2,238
   
(1,353
)
  
885
 
Reimbursement of expenses related to managed entities
    
4,709
   
(3,087
)
  
1,622
 
Total revenues
    
53,869
   
16,244
   
70,113
 
                     
Rental property operating expenses
    
8,820
   
10,252
   
19,072
 
Depreciation and amortization
    
3,423
   
2,816
   
6,239
 
Expenses reimbursed from managed entities
    
4,709
   
(3,087
)
  
1,622
 
Total expenses
    
42,812
   
9,981
   
52,793
 
                     
Operating income
    
11,057
   
6,263
   
17,320
 
                     
Equity in earnings from unconsolidated entities
    
823
   
(313
)
  
510
 
Interest expense
    
(5,713
)
  
(5,202
)
  
(10,915
)
Minority interest in consolidated entities
    
(457
)
  
(2,540
)
  
(2,997
)
                     
Income (loss) before provision (benefit) for income taxes
    
6,548
   
(1,792
)
  
4,756
 
Provision (benefit) for income taxes
    
2,433
   
(679
)
  
1,754
 
                     
Net income
    
4,115
   
(1,113
)
  
3,002
 
                     
Earnings per share basic and diluted
  
$
0.79
  
$
(0.21
)
$
0.58
  

-10-


The impact to our consolidated statements of income for the three months ended September 30, 2006 is summarized as follows:

   
Balance prior
      
Three Months
  
   
to the
     
Ended
  
   
Implementation
  
Increase
  
September 30,
  
   
of EITF 04-05
  
(Decrease)
  
2006
  
Rental property revenues
  
$
6,738
  
$
7,070
  
$
13,808
  
Management and other fees
    
761
   
(441
)
  
320
 
Reimbursement of expenses related to managed entities
    
1,528
   
(1,010
)
  
518
 
Total revenues
    
18,802
   
5,619
   
24,421
 
                     
Rental property operating expenses
    
3,308
   
3,421
   
6,729
 
Depreciation and amortization
    
1,211
   
954
   
2,165
 
Expenses reimbursed from managed entities
    
1,528
   
(1,010
)
  
518
 
Total expenses
    
14,713
   
3,365
   
18,078
 
                     
Operating income
    
4,089
   
2,254
   
6,343
 
                     
Equity in earnings from unconsolidated entities
    
313
   
(146
)
  
167
 
Interest expense
    
(1,976
)
  
(1,739
)
  
(3,715
)
Minority interest in consolidated entities
    
(243
)
  
(88
)
  
(331
)
                     
Income (loss) before provision (benefit) for income taxes
    
2,803
   
281
   
3,084
 
Provision (benefit) for income taxes
    
1,060
   
(20
)
  
1,040
 
                     
Net income
    
1,743
   
301
   
2,044
 
                     
Earnings per share basic and diluted
  
$
0.34
  
$
0.05
  
$
0.39
  

In prior periods, we used the equity method of accounting to account for our investments in the partnerships that we consolidated in 2006 in accordance with EITF 04-05. Under the equity method of accounting, we recognized partnership income or losses based generally on our percentage interest in the partnership. Consolidation of a partnership does not ordinarily result in a change to the net amount of the partnership income or loss that is recognized using the equity method of accounting. However, when consolidated real estate partnerships make cash distributions or allocate losses to partners in excess of the minority partners’ basis in the property, generally accepted accounting principles require that the consolidating partner record a charge equal to the amount of such excess distribution. Certain of the partnerships that we consolidated in accordance with EITF 04-05 had deficits in equity that resulted from distributions made to the partners in excess of basis and losses during prior periods when we accounted for our investment using the equity method of accounting. We would have been required to recognize the non-controlling partners’ share of those distributions in excess of basis and losses had we consolidated these entities in prior periods.



-11-

Cash Dividends

As announced on March 10, 2006, the Company entered into a closing agreement with the United States Internal Revenue Service ("IRS") by which the Company will maintain its publicly traded partnership ("PTP") status for U.S. federal income tax purposes.  The closing agreement with the IRS required the Company to report approximately $5.0 million to shareholders as taxable income on March 29, 2006.  Under the terms of the Company's governing documents, the Company was required to make minimum annual distributions to the shareholders equal to at least 45% of net taxable income allocated to shareholders.  Accordingly, the Board of Trustees declared a dividend of $0.43 per share, or approximately $2,230,000 in the aggregate, that was paid on April 12, 2006 to shareholders of record on March 29, 2006.

On March 30, 2006, the Board of Trustees declared a cash dividend of $0.10 per share, paid on April 27, 2006 to shareholders of record on April 13, 2006. On May 15, 2006, the Board of Trustees declared a $0.10 cash dividend paid on June 13, 2006 to shareholders of record on May 30, 2006. On August 10, 2006, the Board of Trustees declared a $0.10 per share cash dividend on its common shares, paid on September 8, 2006 to shareholders of record on August 24, 2006.

Issuance of Restricted Shares to Trustees
On August 28, 2006, the Company awarded 8,000 shares to each of its four non-employee Trustees pursuant to the American Community Properties Trust Trustees’ Share Incentive Plan.  The shares vest annually at a rate of 1,600 per year, per Trustee, with the initial tranche of shares vesting immediately at the grant date.  In accordance with SFAS 123(R), the Company measured compensation cost at the grant date fair value and will recognize compensation expense in the Company’s financial statements over the vesting period.
 
Impairment of Long-Lived Assets
ACPT carries its rental properties, homebuilding inventory, land and development costs at the lower of cost or fair value in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." For real estate assets such as our rental properties which the Company plans to hold and use, which includes property to be developed in the future, property currently under development and real estate projects that are completed or substantially complete, we evaluate whether the carrying amount of each of these assets will be recovered from their undiscounted future cash flows arising from their use and eventual disposition. If the carrying value were to be greater than the undiscounted future cash flows, we would recognize an impairment loss to the extent the carrying amount is not recoverable. Our estimates of the undiscounted operating cash flows expected to be generated by each asset are performed on an individual project basis and based on a number of assumptions that are subject to economic and market uncertainties, including, among others, demand for apartment units, competition, changes in market rental rates, and costs to operate and complete each project.
The Company evaluates, on an individual project basis, whether the carrying value of its substantially completed real estate projects, such as our homebuilding inventory that are to be sold, will be recovered based on the fair value less cost to sell. If the carrying value were to be greater than the fair value less costs to sell, we would recognize an impairment loss to the extent the carrying amount is not recoverable. Our estimates of the fair value less costs to sell are based on a number of assumptions that are subject to economic and market uncertainties, including, among others, comparable sales, demand for commercial and residential lots and competition. The Company performed similar reviews for land held for future development and sale considering such factors as the cash flows associated with future development expenditures. Should this evaluation indicate an impairment has occurred, the Company will record an impairment charge equal to the excess of the historical cost over fair value less costs to sell.
 
Depreciable Assets and Depreciation
The Company's operating real estate is stated at cost and includes all costs related to acquisitions, development and construction. The Company makes assessments of the useful lives of our real estate assets for purposes of determining the amount of depreciation expense to reflect on our income statement on an annual basis. The assessments, all of which are judgmental determinations, are as follows:
·  
Buildings and improvements are depreciated over five to forty years using the straight-line or double declining balance methods,
·  
Furniture, fixtures and equipment are depreciated over five to seven years using the straight-line method,
·  
Leasehold improvements are capitalized and depreciated over the lesser of the life of the lease or their estimated useful life,
·  
Maintenance and other repair costs are charged to operations as incurred.

-12-
 
The table below presents the major classes of depreciable assets as of September 30, 2006 and December 31, 2005 (in thousands):


 
 
September 30,
 
December 31,
 
 
 
2006
 
2005
 
 
 
(unaudited)
 
(audited)
 
 
 
 
 
 
 
Building
 
$ 240,099
 
$ 102,140
 
Building improvements
 
 
7,683
 
 
4,525
 
Equipment
 
 
12,974
 
 
6,260
 
 
 
 
260,756
 
 
112,925
 
Less: Accumulated depreciation
 
 
141,688
 
 
46,412
 
 
 
 
119,068
 
 
66,513
 
Land
 
 
23,649
 
 
10,065
 
Operating properties, net
 
$
142,717
 
$
76,578
 


Other Property and Equipment
In addition, the Company owned other property and equipment of $1,094,000 and $1,182,000, net of accumulated depreciation of $2,021,000 and $1,769,000 respectively, as of September 30, 2006 and December 31, 2005 respectively.

Depreciation
Total depreciation expense was $6,239,000 and $2,952,000 for the nine months ended September 30, 2006 and 2005, respectively, and $2,165,000 and $1,002,000 for the three months ended September 30, 2006 and 2005, respectively.
 
Reclassifications
Certain amounts from prior years have been reclassified to conform to our current year's presentation. This includes the reclassification of the Company’s consolidated balance sheet as of December 31, 2005 to conform to the revised presentation elected as of January 1, 2006. The revised presentation as of September 30, 2006 is more condensed than prior periods and categorizes assets and liabilities by type.

Impact of Recently Issued Accounting Standards

SFAS 123(R)
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), "Share Based Payment," a revision of SFAS No. 123, which is similar in concept to SFAS No. 123, but requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Proforma disclosure is no longer an alternative.  In addition, this revision requires a public entity to measure the cost of employee services received in exchange for an award of liability instruments at their fair value.  The use of intrinsic value for liability instruments is no longer allowed by public entities. 
The Company implemented the provisions of SFAS No. 123(R) as of January 1, 2006, the impact of which was not material on the Company’s financial position or results of operations.

SFAS 154
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections," which replaces APB Opinion No. 20 and SFAS No. 3, and changes the requirements for the accounting for and reporting of a change in accounting principle.  This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, although early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date SFAS 154 was issued.  The adoption of SFAS 154 did not have a material impact on our financial condition or results of operations.
 
 
- 13 -
 
SFAS 157
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair values as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS 157 applies whenever other standards require assets or liabilities to be measured at fair value and does not expand the use of fair value in any new circumstances. SFAS 157 establishes a hierarchy that prioritizes the information used in developing fair value estimates. The hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, such as the reporting entity’s own data. SFAS 157 requires fair value measurements to be disclosed by level within the fair value hierarchy. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We have not yet determined the impact that SFAS 157 will have on our financial statements.

FIN 48
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective as of the beginning of our 2007 fiscal year. We are currently evaluating the impact, if any, that FIN 48 will have on our financial statements.

(3)
INVESTMENT IN UNCONSOLIDATED REAL ESTATE ENTITIES

The Company accounts for investments in unconsolidated real estate entities that are not considered variable interest entities under FIN 46(R) in accordance with SOP 78-9 "Accounting for Investments in Real Estate Ventures" and APB Opinion No. 18 "The Equity Method of Accounting for Investments in Common Stock". For entities that are considered variable interest entities under FIN 46(R), the Company performs an assessment to determine the primary beneficiary of the entity as required by FIN 46(R). The Company accounts for variable interest entities in which the Company is not a primary beneficiary and does not bear a majority of the risk of expected loss in accordance with the equity method of accounting.
The Company considers many factors in determining whether or not an investment should be recorded under the equity method, such as economic and ownership interests, authority to make decisions, and contractual and substantive participating rights of the partners. Income and losses are recognized in accordance with the terms of the partnership agreements and any guarantee obligations or commitments for financial support. The Company's investments in unconsolidated real estate entities accounted for under the equity method of accounting consisted of general partnership interests in two limited partnerships which own apartment properties in the United States; a limited partnership interest in a limited partnership that owns a commercial property in Puerto Rico; and a 50% ownership interest in a joint venture formed as a limited liability company.
 
Apartment Partnerships
The unconsolidated apartment partnerships as of September 30, 2006 include two partnerships owning 110 rental units compared to 13 partnerships owning 3,463 rental units in 16 apartment complexes as of September 30, 2005. The two remaining unconsolidated complexes are owned by Brookside Gardens Limited Partnership and Lakeside Apartments Limited Partnership.
We have determined that two of our unconsolidated apartment partnerships, Brookside Gardens and Lakeside Apartments, are variable interest entities under FIN 46-R, however, the Company is not required to consolidate the partnerships due to the fact that it is not the primary beneficiary and does not bear the majority of the risk of expected losses. The Company holds less than a 20% economic interest in Brookside and Lakeside. As a general partner, we have significant influence over operations of Brookside and Lakeside that is disproportionate to our economic ownership in these two partnerships. In accordance with SOP 78-9 and APB No. 18, these investments are accounted for under the equity method. The Company is exposed to losses for Brookside of $192,000 and Lakeside of $167,000, consisting of our net investment, loans and unpaid fees. All amounts are fully reserved. Pursuant to the partnership agreement for Brookside, the Company, as general partner, is responsible for providing operating deficit loans to the partnership in the event that it is not able to generate sufficient cash flows from its operating activities.

-14-
Commercial Partnerships
The Company holds a limited partner interest in a commercial property in Puerto Rico that it accounts for under the equity method of accounting. ELI, S.E. ("ELI"), is a partnership formed for the purpose of constructing a building for lease to the State Insurance Fund of the Government of Puerto Rico. ACPT contributed the land in exchange for $700,000 and 27.82% ownership interest in the partnership's assets, equal to a 45.26% interest in cash flow generated by the thirty-year lease of the building.
On April 30, 2004, the Company purchased a 50% limited partnership interest in El Monte Properties, S.E. ("El Monte") from Insular Properties Limited Partnership ("Insular") for $1,462,500. Insular is owned by the J. Michael Wilson Family, a related party. In December 2004, a third party buyer purchased El Monte for $20,000,000, $17,000,000 in cash and $3,000,000 in notes. The net cash proceeds from the sale of the real estate were distributed to the partners. As a result, the Company received $2,500,000 in cash and recognized $986,000 of income in 2004. The gain on sale was reduced by the amount of the seller's note which is subject to future subordination. In January 2005, El Monte distributed to the Company its share of the $3,000,000 note, $1,500,000. The Company will recognize income as it receives cash payments on the note. The note is due in installments over a three year period beginning in December 2007. El Monte will distribute any remaining cash when it winds up its affairs.

Land Development Joint Venture
In September 2004, the Company entered into a joint venture agreement with Lennar Corporation for the development of a 352-unit, active adult community located in St. Charles, Maryland. The Company manages the project's development for a market rate fee pursuant to a management agreement. In September 2004, the Company transferred land to the joint venture in exchange for a 50% ownership interest and $4,277,000 in cash. The Company's investment in the joint venture was recorded at 50% of the historical cost basis of the land with the other 50% recorded within our deferred charges and other assets. The proceeds received are reflected as deferred revenue. The deferred revenue and related deferred costs will be recognized into income as the joint venture sells lots to Lennar. In March 2005, the joint venture closed a non-recourse development loan which was amended in June 2006. Per the amended terms of the loan, both the Company and Lennar provided development completion guarantees and Lennar is required to purchase a minimum of 100 lots per year; therefore the joint venture is required to develop 100 lots per year. In the third quarter of 2006, the joint venture sold 25 lots to Lennar. As a result, the Company recognized $324,000 in off-site and management fees, $286,000 of deferred revenue and $176,000 of deferred costs.

-15-

The following table summarizes the financial data and principal activities of the unconsolidated real estate entities, which the Company accounts for under the equity method. The information is presented to segregate the apartment partnerships from the commercial partnerships as well as our 50% ownership interest in the land development joint venture, which are all accounted for as “investments in unconsolidated real estate entities” on the balance sheet.

           
Land
      
           
Development
      
   
Apartment
  
Commercial
  
Joint
      
   
Partnerships
  
Partnerships
  
Venture
  
Total
  
   
(In thousands)
  
Summary Financial Position:
                  
Total Assets
                          
September 30, 2006
  
$
5,197
  
$
28,578
  
$
12,574
  
$
46,349
  
December 31, 2005
    
77,830
   
28,464
   
11,947
   
118,241
 
Total Non-Recourse Debt
                          
September 30, 2006
    
3,255
   
23,335
   
3,760
   
30,350
 
December 31, 2005
    
101,848
   
23,120
   
4,019
   
128,987
 
Total Other Liabilities
                          
September 30, 2006
    
1,256
   
1,226
   
1,880
   
4,362
 
December 31, 2005
    
9,782
   
1,516
   
994
   
12,292
 
Total Equity (Deficit)
                          
September 30, 2006
    
686
   
4,017
   
6,934
   
11,637
 
December 31, 2005
    
(33,800
)
  
3,828
   
6,934
   
(23,038
)
Company's Investment, net (1)
                          
September 30, 2006
    
-
   
4,797
   
1,828
   
6,625
 
December 31, 2005
    
(1,597
)
  
4,824
   
1,828
   
5,055
 
                           
Summary of Operations
                          
 Total Revenue
                          
Nine Months Ended September 30, 2006
    
588
   
2,742
   
2,453
   
5,783
 
Nine Months Ended September 30, 2005
    
20,799
   
2,742
   
-
   
23,541
 
Three Months Ended September 30, 2006
    
196
   
914
   
2,453
   
3,563
 
Three Months Ended September 30, 2005
    
6,928
   
915
   
-
   
7,843
 
Net (Loss) Income
                          
Nine Months Ended September 30, 2006
    
(83
)
  
1,374
   
-
   
1,291
 
Nine Months Ended September 30, 2005
    
1,470
   
1,346
   
(3
)
  
2,813
 
Three Months Ended September 30, 2006
    
(25
)
  
448
   
-
   
423
 
Three Months Ended September 30, 2005
    
453
   
448
   
-
   
901
 
Company's Recognition of Equity in Earnings
                          
Nine Months Ended September 30, 2006
    
-
   
510
   
-
   
510
 
Nine Months Ended September 30, 2005
    
385
   
519
   
-
   
904
 
Three Months Ended September 30, 2006
    
-
   
167
   
-
   
167
 
Three Months Ended September 30, 2005
    
129
   
147
   
-
   
276
 

-16-


           
Land
      
           
Development
      
   
Apartment
  
Commercial
  
Joint
      
   
Partnerships
  
Partnerships
  
Venture
  
Total
  
   
(In thousands)
  
Summary of Cash Flows:
                  
Cash Flows from Operating Activities
                  
Nine Months Ended September 30, 2006
    
93
   
1,606
   
3,333
   
5,032
 
Nine Months Ended September 30, 2005
    
5,228
   
1,750
   
108
   
7,086
 
Three Months Ended September 30, 2006
    
16
   
574
   
3,201
   
3,791
 
Three Months Ended September 30, 2005
    
2,032
   
875
   
66
   
2,973
 
Company's Share of Cash Flows from Operating Activities
                  
Nine Months Ended September 30, 2006
    
1
   
727
   
1,666
   
2,394
 
Nine Months Ended September 30, 2005
    
1,577
   
792
   
54
   
2,423
 
Three Months Ended September 30, 2006
    
-
   
260
   
1,600
   
1,860
 
Three Months Ended September 30, 2005
    
563
   
396
   
33
   
992
 
Operating Cash Distributions
                          
Nine Months Ended September 30, 2006
    
-
   
1,185
   
-
   
1,185
 
Nine Months Ended September 30, 2005
    
2,969
   
1,213
   
-
   
4,182
 
Three Months Ended September 30, 2006
    
-
   
438
   
-
   
438
 
Three Months Ended September 30, 2005
    
491
   
460
   
-
   
951
 
Company's Share of Operating Cash Distributions
                          
Nine Months Ended September 30, 2006
    
-
   
537
   
-
   
537
 
Nine Months Ended September 30, 2005
    
1,320
   
545
   
-
   
1,865
 
Three Months Ended September 30, 2006
    
-
   
199
   
-
   
199
 
Three Months Ended September 30, 2005
    
245
   
189
   
-
   
434
 
Refinancing Cash Distributions
                          
Nine Months Ended September 30, 2006
    
-
   
-
   
-
   
-
 
Nine Months Ended September 30, 2005
    
100
   
-
   
2,320
   
2,420
 
Three Months Ended September 30, 2006
    
-
   
-
   
-
   
-
 
Three Months Ended September 30, 2005
    
-
   
-
   
-
   
-
 
Company's Share of Refinancing Cash Distributions
                          
Nine Months Ended September 30, 2006
    
-
   
-
   
-
   
-
 
Nine Months Ended September 30, 2005
    
1
   
-
   
1,160
   
1,161
 
Three Months Ended September 30, 2006
    
-
   
-
   
-
   
-
 
Three Months Ended September 30, 2005
    
-
   
-
   
-
   
-
 

Notes:
(1) Represents the Company's net investment, including assets and accrued liabilities in the consolidated balance sheet for
unconsolidated real estate entities.

-17-


(4)
DEBT

The Company's outstanding debt is collateralized primarily by land, land improvements, homebuilding assets, receivables, investment properties, investments in partnerships, and rental properties. The following table summarizes the indebtedness of the Company at September 30, 2006 and December 31, 2005 (in thousands):

   
Maturity
  
Interest
  
Outstanding as of
  
   
Dates
  
Rates (a)
  
September 30,
  
December 31,
  
   
From/To
  
From/To
  
2006
  
2005
  
           
(unaudited)
  
(audited)
  
Recourse Debt
                          
Community Development (b), (c), (d)
    
08-31-08/03-01-21
    
P+1%/5.125
%
$
35,579
  
$
14,161
  
Homebuilding (e)
    
10-31-07
    
P
    
3,709
   
13,905
 
Investment Properties (f)
    
05-15-07/01-23-13
    
P+1.25%/6.98
%
  
4,545
   
4,752
 
General obligations (g)
    
07-29-07/05-01-10
    
Non-interest
              
 
          
 bearing/5.99 
  %  
121
   
163
 
Total Recourse Debt
                
43,954
   
32,981
 
                           
Non-Recourse Debt
                          
Community Development (h)
    
11-23-07
    
Non-interest bearing
    
500
   
500
 
Investment Properties (i), (j), (k)
    
04-30-09/08-01-47
    
4.95%/10
%
  
241,657
   
119,365
 
Total Non-Recourse Debt
                
242,157
   
119,865
 
Total debt
          
$
286,111
  
$
152,846
  

 
(a)
"P" = Prime lending interest rate.  (The prime rate at September 30, 2006 was 8.25%)
 
(b)
As of September 30, 2006, $22,292,000 of the community development recourse debt relates to the general obligation bonds issued by the Charles County government as described in detail under the heading "Financial Commitments" in Note 5. 
 (c)  
On April 14, 2006, the Company closed a three year $14,000,000 revolving line of credit loan (“the Revolver”) secured by a first lien deed
of trust on property located in St. Charles, MD. The maximum amount of the loan at any one time is $14,000,000. The facility includes various sub-limits on a revolving basis for amounts to finance apartment project acquisitions and land development in St. Charles. The terms require certain financial covenants to be calculated annually as of December 31, including a tangible net worth to senior debt ratio for ALD and a minimum net worth test for ACPT. As of September 30, 2006, $11,300,000 was outstanding on the Revolver.
    (d)  On September 1, 2006, LDA secured a revolving line of credit facility of $15,000,000 to be utilized as follows: (i) to repay its outstanding loan of $800,000; and (ii) to fund development costs of a project in which the Company plans to develop a planned community in Canovanas, Puerto Rico, to fund acquisitions and/or investments mainly in estate ventures, to fund transaction costs and expenses, to fund future payments of interest under the line of credit and to fund the working capital needs of the Company. The line of credit bears interest at a fluctuating rate equivalent to the LIBOR Rate plus 200 basis points and matures on August 31, 2008. The outstanding balance of this facility on September 30, 2006, was $2,000,000. The outstanding balance bears interest at the 90-day LIBOR Rate (7.39% at September 30, 2006).
 
(e)
The outstanding recourse debt related to the homebuilding operations is composed of a $26,000,000 revolving construction loan with a maximum outstanding balance limited to $18,000,000 for Torres Del Escorial.  This loan is secured by a mortgage on the property and will be repaid by the proceeds from home sales.
 
(f)
As of September 30, 2006 and December 31, 2005, the outstanding recourse debt within the investment properties is comprised of a loan borrowed to finance the acquisition of our properties Village Lake and Coachman's in January 2003, as well as a 2 year, $3,000,000 recourse note with Columbia Bank that the Company obtained in June 2005.  The loan with Columbia Bank carries a fixed interest rate of 6.98% and requires the Company to pay monthly principal and interest payments until its maturity on May 15, 2007 and is collateralized by the Company's cash receipts from the two apartment properties acquired in 2004 and two parcels of land in St. Charles acquired in the second quarter of 2005.
 
(g)
The general recourse debt outstanding as of September 30, 2006 is made up of various capital leases outstanding within our U.S. and Puerto Rico operations as well as vehicle notes.
 
(h)
In the fourth quarter 2005, the Company purchased 22 residential acres adjacent to the Sheffield Neighborhood for $1,000,000. The Company funded half of the purchase price with cash and signed a two-year note for $500,000 due in November 2007. The Company plans to annex the land into the St. Charles master plan community.
(i)  
The non-recourse debt related to the investment properties is collateralized by the apartment projects. As of September 30, 2006, approximately $94,767,000 of this debt is secured by the Federal Housing Administration ("FHA") or the Maryland Housing Fund. The non-recourse debt balance is also composed of an $8,600,000 mortgage on the office building in Parque Escorial. The mortgage is a thirty-year loan with a ten year fixed rate equal to 7.33%. At the end of the first ten years the interest rate will be reset, at the discretion of management, to a fixed rate for an additional five, seven or ten years equal to the SWAP rate plus 2.25%. The non-recourse debt related to the investment properties also includes a construction loan for Sheffield Greens Apartments LLC (Sheffield Greens). As of September 30, 2006, the balance of the construction loan was $17,730,000.
(j)  
On April 5, 2006, the non-recourse mortgage for one of our consolidated apartment properties in Puerto Rico, Colinas de San Juan Associates L.P., was refinanced with a ten-year,  6.59%, non-recourse mortgage loan of $9,680,000. The proceeds from the refinancing were used for capital improvements at the property site and distributions to the general and limited partners.
(k)  
On April 28, 2006, the Company, through its subsidiary AHP, acquired two apartment properties, Milford Station I LLC and Milford Station II LLC, in Baltimore, Maryland containing a total of 250 units for approximately $14,300,000.  The acquisition was financed through a combination of $11,836,000 of non-recourse notes and borrowing $3,755,000 from the Revolver which included funding improvement escrows and payment of closing costs.

The Company’s loans contain various financial, cross collateral, cross default, technical and restrictive provisions. As of September 30, 2006, the Company is in compliance with the financial covenants and the other provisions of its loan agreements.

-18-
(5)
COMMITMENTS AND CONTINGENT LIABILITIES

Financial Commitments
 Pursuant to an agreement reached between ACPT and the Charles County Commissioners in 2002, the Company agreed to accelerate the construction of two major roadway links to the Charles County (the "County") road system. Also, as part of the agreement, the County agreed to issue general obligation public improvement bonds (the “Bonds”) to finance $20,000,000 of this construction guaranteed by letters of credit provided by Lennar as part of a residential lot sales contract for 1,950 lots in Fairway Village.  In March 2006, the Charles County Commissioners issued the last tranche of Bonds on behalf of the Company in conjunction with the roadway construction project.  The Bonds bear interest rates from 4% to 8% and call for semi-annual interest payments and annual principal payments and mature in fifteen years. The Company is obligated to pay interest and principal on the full amount of the Bonds; as such, the Company recorded the full amount of the debt and a receivable from the County representing the remaining Bond proceeds to be advanced to the Company as major infrastructure development within the project occurs. As part of the agreement, the Company is required to fund an escrow account from lot sales to repay the bonds. Additionally, as part of the agreement, the Company is required to pay the County a monthly payment equal to one-sixth of the semi-annual interest payments and one-twelfth of the annual principal payment.
In August 2005, the Company signed a memorandum of understanding ("MOU") with the Charles County Commissioners regarding a land donation that will house a planned minor league baseball stadium and entertainment complex. Under the terms of the MOU, the Company donated 42 acres of land in St. Charles to Charles County on December 31, 2005. The Company also agreed to expedite off-site utilities, storm-water management and road construction improvements that will serve the entertainment complex and future portions of St. Charles so that the improvements will be completed concurrently with the entertainment complex. Charles County will be responsible for infrastructure improvements on the site of the complex. In return, Charles County agreed to issue $7,000,000 of general obligation bonds structured similar to those discussed above to finance the infrastructure improvements. In March 2006, $4,000,000 of these bonds were issued for this project. The funds for this project will be repaid by ACPT over a 15-year period. In addition, the County agreed to issue an additional 100 school allocations a year to St. Charles commencing with the issuance of bonds. The County also requires ACPT to fund an escrow account from lot sales to repay these bonds.
During the third quarter of 2006, the Company received approximately $470,000 from the County related to interest earned on the Bonds proceeds held by the County but not yet drawn by the Company. The interest payment represented interest earnings by the County from July 1, 2005 through June 30, 2006, the County’s fiscal year. Although the Company expects to receive an interest payment again next year based on verbal discussions with County representatives, a formal written agreement has not yet been completed. As such, the Company only recognized the cash received from the County and did not accrue any interest income for the third quarter. Once a written agreement is finalized, the Company will begin to accrue interest income based on the terms of the agreement.
As of September 30, 2006, ACPT is guarantor of $23,676,000 of surety bonds for the completion of land development projects with Charles County; substantially all are for the benefit of the Charles County Commissioners.

Consulting Agreement and Arrangement
ACPT entered into a consulting and retirement compensation agreement with Interstate General Company L.P.’s (“IGC”) founder and Chief Executive Officer, James J. Wilson, effective October 5, 1998 (the "Consulting Agreement"). IGC was the predecessor company to ACPT. Under the terms of the Consulting Agreement, the Company will pay Mr. Wilson $200,000 per year through October 2008.

Guarantees
ACPT and its subsidiaries typically provide guarantees for another subsidiary's loans. In many cases more than one company guarantees the same debt. Since all of these companies are consolidated, the debt or other financial commitment made by the subsidiaries to third parties and guaranteed by ACPT, is included within ACPT's consolidated financial statements. As of September 30, 2006, ACPT has guaranteed $38,125,000 of outstanding debt owed by its subsidiaries. IGP has guaranteed $5,709,000 of its subsidiaries' outstanding debt. LDA guaranteed $3,709,000 of outstanding debt owed by its subsidiary. In addition, St. Charles Community LLC guaranteed $15,832,000 of outstanding debt owed by AHP and ALD. The guarantees will remain in effect until the debt service is fully repaid by the respective borrowing subsidiary. The terms of the debt service guarantees outstanding range from one to nine years. In addition to debt service guarantees, both the Company and Lennar provided development completion guarantees related to the St. Charles Active Adult Community Joint Venture. We do not expect any of these guarantees to impair the individual subsidiary or the Company's ability to conduct business or to pursue its future development plans.

Legal Matters
There have been no material changes to the legal proceedings previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005.
The Company and/or its subsidiaries have been named as defendants, along with other companies, in tenant-related lawsuits. The Company carries liability insurance against certain types of claims that management believes meets industry standards.  To date, payments made to the plaintiffs of the settled cases were covered by our insurance policy.  The Company believes it has strong defenses to the claims, and intends to continue to defend itself vigorously in these matters.
In the normal course of business, ACPT is involved in various pending or unasserted claims. In the opinion of management, these are not expected to have a material impact on the financial condition or future operations of ACPT.

-19-
 
(6)
 
RELATED PARTY TRANSACTIONS

Certain officers and trustees of ACPT have ownership interests in various entities that conduct business with the Company. The financial impact of the related party transactions on the accompanying consolidated financial statements are reflected below (in thousands):

CONSOLIDATED STATEMENT OF INCOME:
                      
       
Nine Months Ended
 
Three Months Ended
 
       
September 30,
 
September 30,
 
       
2006
  
2005
  
2006
  
2005
  
                       
Management and Other Fees (A)
                      
Unconsolidated subsidiaries with third party partners
        
$
32
  
$
1,458
  
$
13
  
$
323
  
Affiliates of J. Michael Wilson, CEO and Chairman
          
333
   
502
   
85
   
258
 
         
$
365
  
$
1,960
  
$
98
  
$
581
  
                                 
Rental Property Revenues (B)
        
$
5
  
$
-
  
$
5
  
$
-
  
                                 
General and Administrative Expense
                                
Affiliates of J. Michael Wilson, CEO and Chairman
    
(C1
)
$
19
  
$
101
  
$
-
  
$
32
  
Reserve additions and other write-offs-
                                
Unconsolidated real estate entities with third party partners
    
(A
)
  
(6
)
  
(31
)
  
(11
)
  
(13
)
 
                                
Reimbursement to IBC for ACPT's share of J. Michael Wilson's salary
          
281
   
263
   
93
   
88
 
Reimbursement of administrative costs-
                                
Affiliates of J. Michael Wilson, CEO and Chairman
          
(16
)
  
(16
)
  
(11
)
  
(7
)
James J. Wilson, IGC chairman and director
    
(C2
)
  
150
   
150
   
50
   
50
 
Thomas J. Shafer, Trustee
    
(C3
)
  
45
   
32
   
15
   
11
 
                                 
         
$
473
  
$
499
  
$
136
  
$
161
  
                                 
BALANCE SHEET IMPACT:
                                
 
                      
Balance
    
Balance
  
 
                      
September 30, 
    
December 31,
  
                       
2006
    
2005
  
Assets Related to Rental Properties
                                
Receivables-All unsecured and due on demand
                                
Unconsolidated real estate entities with third party partners, net of reserves
                    
$
-
  
$
506
  
Other Assets
                                
Receivables-All unsecured and due on demand
                                
Affiliate of J. Michael Wilson, CEO and Chairman
                    
$
69
  
$
108
  
 
-20-
(A)     Management and Other Services
The Company provides management and other support services to its unconsolidated subsidiaries and other affiliated entities in the normal course of business. The fees earned from these services are typically collected on a monthly basis, one month in arrears. Receivables are unsecured and due on demand. Certain partnerships experiencing cash shortfalls have not paid timely. Generally, receivable balances of these partnerships are fully reserved, until satisfied or the prospect of collectibility improves. The collectibility of management fee receivables is evaluated quarterly. Any increase or decrease in the reserves is reflected accordingly as additional bad debt expenses or recovery of such expenses.
In prior years, we managed a commercial property in Puerto Rico owned by the Wilson Family. The Wilson Family property was sold to a third party in April 2005. Management fees generated by this property represented less than 1% of the Company's total revenue.
Effective April 30, 2006, ARMC’s management agreement with Chastleton Associates LP terminated due to the fact that the apartment property was sold to a third party. The property was previously owned by an affiliate. Management fees generated by this property accounted for less than 1% of the Company’s total revenue. The Company earned an agreed-upon management fee for administrative services through the end of the second quarter 2006.

(B)  Rental Property Revenue
On September 1, 2006, the Company, through one of its Puerto Rican subsidiaries, Escorial Office Building I, Inc. (“Landlord”), executed a lease with Caribe Waste Technologies, Inc. (“CWT”), a Company owned by the J. Michael Wilson Family. The lease provides for 1,842 square feet of office space to be leased by CWT for five years at $19.00 per rentable square foot. The company provided CWT with an allowance of $9,000 in tenant improvements which are being amortized over the life of the lease. In addition, CWT shall have the right to terminate this lease at any time after one year, provided it gives Landlord written notice six (6) months prior to termination.  The lease agreement is unconditionally guaranteed by Interstate Business Corporation (“IBC”), a company owned by the J. Michael Wilson Family.

(C)     Other

Other transactions with related parties are as follows:

(1)
In 2005, the Company rented executive office space and other property from an affiliate in the United States pursuant to a lease that expires in 2010. In management’s opinion, all leases with affiliated persons were on terms at least as favorable as these generally available from unaffiliated persons for comparable property. Effective January 27, 2006, the office building was sold to a third party who assumed the Company’s lease agreements.
(2)
Represents fees paid to James J. Wilson pursuant to a consulting and retirement agreement. At Mr. Wilson's request, payments are made to IGC.
(3)
Represents fees paid to Thomas J. Shafer, a trustee, pursuant to a consulting agreement.

Related Party Acquisitions

El Monte
On April 30, 2004, the Company purchased a 50% limited partnership interest in El Monte Properties S.E. ("El Monte") from Insular Properties Limited Partnership ("Insular") for $1,462,500. Insular is owned by the J. Michael Wilson Family. Per the terms of the agreement, the Company was responsible to fund $400,000 of capital improvements and lease stabilization costs, and had a priority on cash distributions up to its advances plus accrued interest at 8%, investment and a 13% cumulative preferred return on its investment. The purchase price was based on a third party appraisal of $16,500,000 dated April 22, 2003. The Company's limited partnership investment was accounted for under the equity method of accounting.
In December 2004, a third party buyer purchased El Monte for $20,000,000 - $17,000,000 in cash and $3,000,000 in notes. The net cash proceeds from the sale of the real estate were distributed to the partners. As a result, the Company received $2,500,000 in cash and recognized $986,000 of income in 2004. El Monte distributed the note, $1,500,000 to the Company in January 2005. The note bears interest at a rate of prime plus 2% with a ceiling rate of 9% and matures on December 3, 2009. The note is payable in three installments, the first installment of $250,000 is due on December 3, 2007, the second installment of $250,000 is due on December 3, 2008 and the balance is due on December 3, 2009. The Company will recognize the $1,500,000 as income as the cash payments on the note are received. El Monte will distribute any remaining cash when it winds up its affairs.


-21-


(7)
SEGMENT INFORMATION

ACPT has two reportable segments: U.S. operations and Puerto Rico operations. The Company's chief decision-makers allocate resources and evaluate the Company's performance based on these two segments. The U.S. segment is comprised of different components grouped by product type or service, to include: investments in rental properties, community development and property management services. The Puerto Rico segment entails the following components: investment in rental properties, community development, homebuilding and property management services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

Customer Dependence
Residential land sales to Lennar within our U.S. segment were $9,715,000 for the nine months ended September 30, 2006 which represents 27% of the U.S. segment's revenue and 14% of our total year-to-date consolidated revenue. No other customers accounted for more than 10% of our consolidated revenue for the nine and three months ended September 30, 2006.
During the first nine months of 2005, the Company sold commercial land for $7,448,000 to Jalexis, Inc. within our Puerto Rico segment. That commercial land sale represented 62% of the Puerto Rico segment's revenue and 18% of our consolidated year to date 2005 revenue. No other customers accounted for more than 10% of our consolidated revenue in the nine and three months ended September 30, 2005.

-22-


The following presents the segment information for the nine months ended September 30, 2006 and 2005 (in thousands):

   
United
  
Puerto
  
Inter-
      
Nine Months (Unaudited)
  
States
  
Rico
  
Segment
  
Total
  
                   
2006:
                  
Rental property revenues
  
$
23,889
  
$
16,057
  
$
-
  
$
39,946
  
Rental property operating expenses
    
11,265
   
7,822
   
(15
)
  
19,072
 
Land sales revenue
    
11,317
   
-
   
-
   
11,317
 
Cost of land sales
    
6,156
   
-
   
-
   
6,156
 
Home sales revenue
    
-
   
16,343
   
-
   
16,343
 
Cost of home sales
    
-
   
12,310
   
-
   
12,310
 
Management and other fees
    
461
   
443
   
(19
)
  
885
 
General, administrative, selling and marketing expense
    
4,974
   
2,424
   
(4
)
  
7,394
 
Depreciation and amortization
    
3,532
   
2,707
   
-
   
6,239
 
Operating income
    
9,740
   
7,580
   
-
   
17,320
 
Interest income
    
576
   
95
   
(40
)
  
631
 
Equity in earnings from unconsolidated entities
    
(1
)
  
511
   
-
   
510
 
Interest expense
    
6,604
   
4,351
   
(40
)
  
10,915
 
Minority interest in consolidated entities
    
610
   
2,387
   
-
   
2,997
 
Income before provision for income taxes
   
3,105
   
1,651
   
-
   
4,756
 
Income tax provision
    
1,284
   
470
   
-
   
1,754
 
Net income
    
1,821
   
1,181
   
-
   
3,002
 
Gross profit on land sales
    
5,161
   
-
   
-
   
5,161
 
Gross profit on home sales
    
-
   
4,033
   
-
   
4,033
 
Total assets
    
220,662
   
106,489
   
-
   
327,151
 
Additions to long lived assets
  
$
33,801
  
$
1,192
  
$
-
  
$
34,993
  
 
2005:
                          
Rental property revenues
  
$
16,603
  
$
9
  
$
-
  
$
16,612
  
Rental property operating expenses
    
6,957
   
48
   
-
   
7,005
 
Land sales revenue
    
6,485
   
10,397
   
-
   
16,882
 
Cost of land sales
    
3,761
   
7,506
   
(159
)
  
11,108
 
Home sales revenue
    
-
   
-
   
-
   
-
 
Cost of home sales
    
-
   
21
   
-
   
21
 
Management and other fees
    
767
   
1,660
   
(3
)
  
2,424
 
General, administrative, selling and marketing expense
    
5,571
   
2,467
   
(3
)
  
8,035
 
Depreciation and amortization
    
2,836
   
116
   
-
   
2,952
 
Operating income
    
4,730
   
1,908
   
159
   
6,797
 
Interest income
    
116
   
547
   
(521
)
  
142
 
Equity in earnings from unconsolidated entities
    
118
   
786
   
-
   
904