sept09_3qtr10q.htm
UNITED STATES
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, 2009
OR
 
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)

Securities registered pursuant to Section 12(b) of the Act:

TITLE OF EACH CLASS
Common Shares, $.01 par value
NAME OF EACH EXCHANGE ON WHICH REGISTERED
NYSE Amex

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        Yes /x/ No / /

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  / /  Accelerated filer  / /   Non-accelerated filer  / /    Smaller Reporting Company /x/

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  / /    No  /x/

As of November 1, 2009, there were 5,622,660 common shares outstanding.
 



AMERICAN COMMUNITY PROPERTIES TRUST
FORM 10-Q
SEPTEMBER 30, 2009
TABLE OF CONTENTS


PART I
FINANCIAL INFORMATION
  
     
Item 1.
Consolidated Financial Statements
  
 
 
 
 
3
 
4
     
 
5
     
 
6
     
 
7
     
 
8
     
Item 2.
35
     
Item 4T.
52
     
PART II
  
     
Item 1.
52
     
Item 1A.
53
     
Item 2
53
     
Item 3.
53
     
Item 4.
53
     
Item 5.
53
     
Item 6.
53
     
 
54



CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(In thousands, except per share amounts)
(Unaudited)
   
2009
    
2008
Revenues
          
  Rental property revenues
  
$
25,772
    
$
25,406
  Community development-land sales
    
6,992
      
6,457
  Homebuilding-home sales
    
246
      
3,476
  Management and other fees, substantially all from related entities
    
219
      
208
  Reimbursement of expenses related to managed entities
    
177
      
1,106
    Total revenues
    
33,406
      
36,653
               
Expenses
              
  Rental property operating expenses
    
11,454
      
11,497
  Cost of land sales
    
5,196
      
5,218
  Cost of home sales
    
217
      
2,694
  General, administrative, selling and marketing
    
7,304
      
7,380
  Depreciation
    
3,829
      
3,855
  Expenses reimbursed from managed entities
    
177
      
1,106
    Total expenses
    
28,177
      
31,750
               
Operating Income
    
      5,229
      
4,903
               
Other income (expense)
              
  Interest and other income
    
262
      
497
  Equity in earnings from unconsolidated entities
    
302
      
489
  Interest expense
    
(8,120
)
    
(7,460)
               
Loss before benefit for income taxes
    
(2,327
)
    
(1,571)
Benefit for income taxes
    
(1,604
)
    
(1,037)
               
Loss from continuing operations
    
(723)
      
(534)
Income from discontinued operations
              
     (less applicable income taxes of $797 and $44, respectively)
    
1,338
      
224
 Gain on sale of discontinued operations (less applicable income taxes of $10,453)
    
25,351
      
-
Total discontinued operations
    
26,689
      
224
               
Consolidated net income (loss)
    
25,966
      
(310)
  Less: Net income attributable to noncontrolling interest
    
704
      
1,691
 Net income (loss) attributable to ACPT
  
$
25,262
    
 $
(2,001)
               
Income (loss) per common share – Basic and Diluted
              
  Loss from continuing operations
  
$
(0.13
)
  
$
(0.11)
  Discontinued operations
    
5.02
      
0.05
  Income attributable to noncontrolling interest
    
(0.13
)
    
(0.32)
  Income (loss) applicable to common shareholders
  
$
4.76
    
$
(0.38)
               
Weighted average common shares outstanding:
              
  Basic and diluted
    
5,312
      
5,215
Cash dividends per common share
  
$
-
    
$
-
The accompanying notes are an integral part of these consolidated statements.
        

 

 
  
CONSOLIDATED STATEMENTS OF OPERATIONS
  
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
  
(In thousands, except per share amounts)
  
(Unaudited)
 
  
   
2009
    
2008
  
Revenues
            
  Rental property revenues
   $ 8,600     $ 8,526  
  Community development-land sales
     3,462       460  
  Homebuilding-home sales
     246       494  
  Management and other fees, substantially all from related entities
     109       68  
  Reimbursement of expenses related to managed entities
     (366 )     344  
    Total revenues
     12,051       9,892  
                 
Expenses
                
  Rental property operating expenses
     3,981       3,779  
  Cost of land sales
     2,552       493  
  Cost of home sales
     197       394  
  General, administrative, selling and marketing
     2,964       2,309  
  Depreciation
     1,249       1,132  
  Expenses reimbursed from managed entities
     (366 )     344  
    Total expenses
     10,577       8,451  
                 
Operating Income
     1,474       1,441  
                 
Other income (expense)
                
  Interest and other income
     56       136  
  Equity in earnings from unconsolidated entities
     96       159  
  Interest expense
     (2,614 )     (2,465 )
                 
Loss before benefit for income taxes
     (988 )     (729 )
Benefit for income taxes
     (574 )     (762 )
                 
(Loss) income from continuing operations
     (414 )     33  
Loss from discontinued operations
(less applicable income taxes of $178 and ($370), respectively)
     (950 )     (293 )
Gain on sale of discontinued operations (less applicable income taxes of $10,453)
     25,351       -  
Total discontinued operations
     24,401       (293 )
                 
Consolidated net income (loss)
     23,987       (260 )
  Less: Net (loss) income attributable to noncontrolling interest
     (588 )     370  
Net income (loss) attributable to ACPT
     24,575       (630 )
                 
Earnings (loss)  per share –Basic and Diluted
                
  Loss from continuing operations
   $ (0.07 )   $ -  
  Discontinued operations
     4.59       (0.05 )
  (Loss) income attributable to noncontrolling interest
     0.11       (0.07 )
  Income (loss) applicable to common shareholders
   $ 4.63     $ (0.12 )
                 
Weighted average shares outstanding:
                
  Basic and diluted
     5,312       5,222  
Cash dividends per share
   $ -     $ -  
The accompanying notes are an integral part of these consolidated statements.
          
 


 
 
(In thousands, except share and per share amounts)
  
   
As of
September 30,
2009
    
As of
December 31,
 2008
  
   
(Unaudited)
        
ASSETS
            
ASSETS:
            
Investments in real estate, at cost:
            
  Operating real estate, net of accumulated depreciation
            
   of $83,007 and $79,379, respectively
  
$
80,506
    
$
82,918
  
  Land and development costs
    
98,357
      
96,266
  
  Condominiums under construction
    
1,606
      
1,745
  
  Rental projects under construction or development
    
24,075
      
4,564
  
    Investments in real estate, net
    
204,544
      
185,493
  
                 
Property and related assets held for sale
    
36,961
      
93,628
  
                 
Cash and cash equivalents
    
21,507
      
24,035
  
Restricted cash and escrow deposits
    
10,127
      
9,500
  
Investments in unconsolidated real estate entities
    
6,363
      
5,121
  
Receivable from bond proceeds
    
2,525
      
2,052
  
Accounts receivable, net
    
1,183
      
992
  
Deferred tax assets
    
28,208
      
28,540
  
Property and equipment, net of accumulated depreciation
    
630
      
898
  
Deferred charges and other assets, net of amortization of
                
  $3,823 and $2,764, respectively
    
7,071
      
4,934
  
    Total Assets
  
$
319,119
    
$
355,193
  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
                
LIABILITIES:
                
Non-recourse debt
  
$
180,148
    
$
168,221
  
Recourse debt
    
37,596
      
39,416
  
Accounts payable and accrued liabilities
    
20,795
      
19,553
  
Deferred income
    
1,561
      
200
  
Deferred tax liability
    
2,296
          
Accrued current income tax liability
    
18,301
      
14,754
  
Liabilities related to assets held for sale
    
31,304
      
111,812
  
    Total Liabilities
    
292,001
      
353,956
  
                 
COMMITMENTS AND CONTINGENT LIABILITIES  (NOTE 5)
                
                 
SHAREHOLDERS’ EQUITY
                
  ACPT’s shareholders equity:
                
    Common shares, $.01 par value, 10,000,000 shares authorized,
                
     5,622,660 and 5,229,954 shares issued and outstanding
                
      as of September 30, 2009 and December 31, 2008
    
56
      
52
  
    Treasury stock, 67,709 shares at cost
    
(376
)
    
(376
 )
    Additional paid-in capital
    
19,224
      
18,144
  
    Retained earnings (deficit)
    
8,783
      
(16,479
 ) 
        Total ACPT shareholders’ equity
    
27,687
      
1,341
  
  Noncontrolling interests
    
(569
)
    
(104)
  
    Total  Shareholders’ Equity
    
27,118
      
1,237
  
    Total Liabilities and Shareholders’ Equity
  
$
319,119
    
$
355,193
  
The accompanying notes are an integral part of these consolidated statements.

- 5 -

 
  
 
(In thousands, except share amounts)
                                           
                                           
   
ACPT Shareholders’ Equity
              
   
Common Shares
          
Additional
          
Non-
    
Total
  
         
Par
    
Treasury
    
Paid-in
    
Retained
    
Controlling
    
Shareholders’
  
   
Number
    
Value
    
Stock
    
Capital
    
Deficit
    
Interest
    
Equity
  
                                           
Balance December 31, 2008
    
5,229,954
    
$
52
    
$
(376
)
  
$
18,144
    
$
(16,479
)
  
$
(104
) 
  
$
1,237
  
Net income attributable to ACPT
    
-
      
-
      
-
      
-
      
25,262
      
-
      
25,262
  
Net income attributable to noncontrolling interests
    
-
      
-
      
-
      
-
      
-
      
5,150
      
5,150
  
Dividends paid to noncontrolling interests
    
-
      
-
      
-
      
-
      
-
      
(5,615
)
    
(5,615
)
Issuance of common shares
    
392,706
      
4
      
-
      
(4
)
    
-
      
-
      
-
  
Equity Compensation
    
-
      
-
      
-
      
1,084
      
-
      
-
      
1,084
  
Balance September 30, 2009 (unaudited)
    
5,622,660
    
$
56
    
$
(376
)
  
$
19,224
    
$
8,783
    
$
(569
)
  
$
27,118
  
The accompanying notes are an integral part of these consolidated statements.
  


- 6 -
AMERICAN COMMUNITY PROPERTIES TRUST
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(In thousands)
(Unaudited)
         
     
2009 
      
2008 
  
 Cash Flows from Operating Activities
                
  Consolidated net income (loss)
  
$
25,966
    
$
(310
)
   Adjustments to reconcile consolidated net income (loss) to net cash provided
                
    by (used in) operating activities:
                
      Depreciation
    
3,829
      
7,511
  
      Provision (benefit) for deferred income taxes
    
679
      
(703
)
      Equity in earnings from unconsolidated entities
    
(174
)
    
(489
)
      Distribution of earnings from unconsolidated entities
    
476
      
490
  
      Cost of land sales
    
5,196
      
5,251
  
      Cost of home sales
    
217
      
2,694
  
      Write-down of assets
    
882
      
-
  
      Stock based compensation expense
    
1,117
      
91
  
      Amortization of deferred loan costs
    
699
      
633
  
      Gain on sale of discontinued operations, net of income taxes
    
(23,285
)
    
-
  
      Changes in accounts receivable
    
(281
) 
    
717
  
      Additions to land and development costs
    
(10,917
)
    
(19,992
)
      Additions to condominiums under construction
    
(78
)
    
(151
)
      Change in deferred income
    
1,361
      
(197
)
      Change in deferred charges and other assets
    
 (36
) 
    
(248
)
      Changes in accounts payable, accrued liabilities
    
(3,231
) 
    
(2,265
)
  Net cash provided by (used in) operating activities
    
2,420
      
(6,968
)
                 
Cash Flows from Investing Activities
                
  Investment in rental projects under construction or development
    
(11,411
)
    
(2,866
)
  Change in investments - unconsolidated entities
    
(1,544
)
    
51
  
  Net deposits to restricted cash
    
(554
)
    
(191
) 
  Additions to operating real estate, net
    
(2,844
)
    
(2,561
)
  Proceeds received upon sale of discontinued operations
   
7,864
      
-
  
  Net purchase of other assets
    
(3,565
)
    
(91
)
  Net cash used in investing activities
    
(12,054
)
    
(5,658
)
                 
Cash Flows from Financing Activities
                
  Cash proceeds from debt financing
    
20,019
      
6,386
  
  Payment of debt
    
(7,541
)
    
(2,888
)
  County Bonds proceeds, net of undisbursed funds
    
243
      
5,106
  
  Payments of distributions to noncontrolling interests
    
(5,615
)
    
(1,587
)
  Net cash provided by financing activities
    
7,106
      
7,017
  
Net Decrease in Cash and Cash Equivalents
    
(2,528
)
    
(5,609
)
Cash and Cash Equivalents, Beginning of Period
    
24,035
      
24,912
  
Cash and Cash Equivalents, End of Period
  
$
21,507
    
$
19,303
  
                 
 The accompanying notes are an integral part of these consolidated statements.
                
 
- 7 -


AMERICAN COMMUNITY PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)
ORGANIZATION

American Community Properties Trust (“ACPT”) is a self-managed holding company that is primarily engaged in the business of investing in and managing multifamily rental properties as well as community development and homebuilding.  ACPT’s operations are primarily concentrated in the Washington, D.C. metropolitan area and Puerto Rico and are carried out through its U.S. subsidiaries, American Rental Properties Trust (“ARPT”), American Rental Management Company ("ARMC "), American Land Development, Inc. ("ALD") and their subsidiaries and its Puerto Rican subsidiary, IGP Group Corp. ("IGP Group").

ACPT is taxed as a U.S. partnership and its income flows through to its shareholders.  ACPT is subject to Puerto Rico income taxes on IGP Group’s taxable income, generating foreign tax credits that have been passed through to ACPT’s shareholders.  A federal tax regulation has been proposed that could eliminate ACPT’s ability to pass through these foreign tax credits to its shareholders.  Comments on the proposed regulation are currently being evaluated, and the final regulation will be effective for tax years beginning after the final regulation is ultimately published in the Federal Register.  ACPT’s income consists of (i) certain passive income from IGP Group, (ii) additional distributions from IGP Group including Puerto Rico taxes paid on behalf of ACPT and (iii) dividends from ACPT’s U.S. subsidiaries.  Other than Interstate Commercial Properties (“ICP”), which is a subsidiary of IGP Group and is taxed as a Puerto Rico corporation, the income from the remaining Puerto Rico operating entities passes through to IGP Group or ALD.  Of this income, only the portion attributable to the profits, losses or gains on the residential land sold in our Parque Escorial property passes through to ALD.  ALD, ARMC, and ARPT are taxed as U.S. corporations. 

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

Basis of Presentation

The accompanying consolidated financial statements include the accounts of American Community Properties Trust and its majority owned subsidiaries and partnerships, after eliminating all intercompany transactions.  All of the entities included in the consolidated financial statements are hereinafter referred to collectively as the "Company" or "ACPT."

The Company consolidates entities that are not variable interest entities, as defined by Financial Accounting Standard Board Accounting Standards Codification (“FASB ASC”) Topic 810, “Consolidation” (FASB Interpretation No. 46(R)), in which it owns, directly or indirectly, a majority voting interest in the entity.  In addition, 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 FASB ASC Topic 810, “Control of Partnership and Similar Entities” (Emerging Issues Task Force Issue 04-05)  The assets of consolidated real estate partnerships not 100% owned by the Company are generally not available to pay creditors of the Company.

The consolidated group includes ACPT and its four major subsidiaries, ARPT, ARMC, ALD, and IGP Group.  In addition, the consolidated group includes the following other entities:



- 8 -


 
American Housing Management Company
  
LDA Group, LLC
American Housing Properties L.P.
  
Milford Station I, LLC
Bannister Associates Limited Partnership
  
Milford Station II, LLC
Coachman's Apartments, LLC
  
New Forest Apartments, LLC
Crossland Associates Limited Partnership
  
Nottingham South, LLC
Escorial Office Building I, Inc.
  
Owings Chase, LLC
Essex Apartments Associates Limited Partnership
  
Palmer Apartments Associates Limited Partnership
Fox Chase Apartments, LLC
  
Prescott Square, LLC
Gleneagles Apartments, LLC
  
St. Charles Community, LLC
Headen House Associates Limited Partnership
  
Sheffield Greens Apartments, LLC
Huntington Associates Limited Partnership
  
Torres del Escorial, Inc.
Interstate Commercial Properties, Inc.
  
Village Lake Apartments, LLC
IGP Property Holdings, LLC
  
Wakefield Terrace Associates Limited Partnership
Lancaster Apartments Limited Partnership
  
Wakefield Third Age Associates Limited Partnership
Land Development Associates S.E.
    

The Company’s investments in entities that it does not control are recorded using the equity method of accounting.  Refer to Note 3 for further discussion regarding Investments in Unconsolidated Real Estate Entities.

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 for the year ended December 31, 2008.  The operating results for the nine and three months ended September 30, 2009 and 2008, are not necessarily indicative of the results that may be expected for the full year. Net income (loss) 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.

Sales, Profit Recognition and Cost Capitalization
 
In accordance with FASB ASC 360, “Real Estate Sales”, and 976, “Real Estate – Retail Land”, (Statement of Financial Accounting Standard (“SFAS”) No. 66, “Accounting for Sales of Real Estate,”) community development land sales and multifamily rental property sales are recognized at closing only when sufficient down payments have been obtained, possession and other attributes of ownership have been transferred to the buyer, and ACPT has no significant continuing involvement.  Under the provisions of FASB ASC 360, related to condominium sales, revenues and costs are to be recognized when construction is beyond the preliminary stage, the buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit, sufficient units in the project have been sold to ensure that the property will not be converted to rental property, the sales proceeds are collectible and the aggregate sales proceeds and the total cost of the project can be reasonably estimated.  Accordingly we recognize revenues and costs upon settlement with the homebuyer which does not occur until after we receive use and occupancy permits for the building.
 
- 9 -
 
     The costs of developing the land are allocated to our land assets and charged to cost of sales as the related inventories are sold using the relative sales value method which rely on estimated costs and sales values.   In accordance with FASB ASC 970,”Real Estate Project Costs” (SFAS No. 67 "Accounting for Costs and Initial Rental Operations of Real Estate Projects"), the costs of acquiring and developing land are allocated to these assets and charged to cost of sales as the related inventories are sold. Within our homebuilding operations, the costs of acquiring the land and construction of the condominiums are allocated to these assets and charged to cost of sales as the condominiums are sold.  The cost of sales is determined by the percentage of completion method.  The Company considers interest expense on all debt available for capitalization to the extent of average qualifying assets for the period.  Interest specific to the construction of qualifying assets, represented primarily by our recourse debt, is first considered for capitalization.  To the extent qualifying assets exceed debt specifically identified, a weighted average rate including all other debt is applied.  Any excess interest is reflected as interest expense.

Impairment of Long-Lived Assets and Adjustments to Assets Held for Sale
 
ACPT carries its rental properties, homebuilding inventory, land and development costs at the lower of cost or fair value in accordance with FASB ASC 360, “Impairment or Disposal of Long-Lived Assets” (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 charge 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.
 
Assets classified as held for sale are measured at the lower of their carrying amount or fair value less costs to sell and are not depreciated or amortized while classified as held for sale. Fair value of assets held for sale is based on estimated future cash flows, which includes expected proceeds to be received. ACPT recognizes a loss for any initial or subsequent write-down to fair value less costs to sell and recognizes a gain for any subsequent increase in fair value less costs to sell, up to the cumulative loss previously recognized. During the nine months ended September 30, 2009, ACPT recognized a loss on write-down to fair value less cost to sell of $882,000 related to the revaluation of the Baltimore properties.   This impairment is included in income from discontinued operations on the Consolidated Statement of Operations.  The Company has binding agreements for two of the five properties (Milford I and II) subject to loan assumption and continues to market Nottingham, Owings Chase and Prescott Square.  As a result, the Company revised its estimated sales values determined though discussions with our broker, which represent Level 3 inputs under the fair value hierarchy in FASB ASC 820, “Fair Value Measurements” (SFAS No. 157, “Fair Value Measurements”), and an asset write-down was required to further reduce the carrying values of the Baltimore properties to their estimated fair market value less costs to sell.
       
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 a charge 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 that 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.  There were no impairment charges for the nine months ended September 30, 2009 and 2008.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, unrestricted deposits with financial institutions and short-term investments with original maturities of three months or less. Restricted cash and escrow deposits include funds held in restricted escrow accounts used for maintenance and capital improvements with the approval of the U.S.
 
- 10 -
 
Department of Housing and Urban Development (“HUD”) and/or the State Finance Agency.  The account also includes tenant security deposits as well as deposits collected within our homebuilding operations as well as funds in an escrow account that are restricted for the repayment of the Charles County bonds.
 
As of September 30, 2009, the Company had cash and cash equivalents of $21,507,000 and restricted cash of $10,127,000.  Included in the Company’s cash and cash equivalents is $3,908,000 of cash located within multifamily apartment entities, over which the Company does not have direct control.  Cash flow from our consolidated apartment properties whose mortgage loans are insured by the Federal Housing Authority ("FHA"), or financed through the housing agencies in Maryland, Virginia or Puerto Rico (the "Financing Agencies,") are subject to guidelines and limits established by the apartment partnerships' regulatory agreements with HUD and the State Financing Agencies.

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; and
·
  Maintenance and other repair costs are charged to operations as incurred.

Operating Real Estate

The table below presents the major classes of depreciable assets as of September 30, 2009 and December 31, 2008 (in thousands):
   
September 30, 2009
    
December 31, 2008
  
   
        (Unaudited)
        
Building
  
$
131,192
    
$
135,067
  
Building improvements
    
10,020
      
8,313
  
Equipment
    
9,892
      
6,912
  
     
151,104
      
150,292
  
Less: Accumulated depreciation
    
83,007
      
79,379
  
     
68,097
      
70,913
  
Land
    
12,409
      
12,005
  
Operating properties, net
  
$
80,506
    
$
82,918
  
                 
Other Property and Equipment

In addition, the Company owned other property and equipment of $630,000 and $920,000, net of accumulated depreciation of $2,001,000 and $2,553,000, respectively, as of September 30, 2009 and December 31, 2008, respectively.  The balance at December 31, 2008 includes $22,000 which has been reallocated to property and related assets held for sale.

Depreciation

Total depreciation expense was $3,829,000 and $7,511,000 for the nine months ended September 30, 2009 and 2008, respectively.  For the nine months ended September 30, 2008, $3,656,000 has been reclassified as discontinued operations. Total depreciation expense was $1,249,000 and $2,469,000 for the three months ended
 
- 11 -
 
September 30, 2009 and 2008, respectively.  For the three months ended September 30, 2008, $1,337,000 has been reclassified as discontinued operations.
 
Impact of Recently Adopted Accounting Standards
 
In June 2009, the FASB made the FASB Accounting Standards Codification (“Codification”) (FASB ASC 105 / SFAS No. 168) the single source of authoritative literature for U.S. accounting and reporting standards. The Codification is not meant to change existing GAAP but rather provide a single source for all literature. FASB ASC was effective for the interim period ending September 30, 2009, and required us to change certain disclosures in our financial statements to reflect Codification references rather than references to FASB Statements, Staff Positions or Emerging Issues Task Force Abstracts. The adoption of FASB ASC did not have a material impact on our consolidated financial statements.
 
In September 2006, the FASB issued FASB ASC 820, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. FASB ASC 820 applies to accounting pronouncements that require or permit fair value measurements, except for share-based payments under FASB ASC 718, “Stock Compensation”( SFAS No. 123(R)). We adopted the recognition and disclosure provisions of FASB ASC 820 for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are re-measured at least annually effective January 1, 2008; the adoption did not have a material impact on our financial position, results of operations or cash flows. Effective January 1, 2009, we adopted the provisions for all other nonfinancial assets and nonfinancial liabilities which did not have a material impact on our financial position, results of operations or cash flows.
 
In December 2007, the FASB issued FASB ASC 810, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS 160") which replaces the concept of minority interest with noncontrolling interests in subsidiaries.  Noncontrolling interests are now reported as a component of equity in the consolidated statement of financial position.  Earnings attributable to noncontrolling interests will continue to be reported as a part of consolidated earnings; however, FASB ASC requires that income attributable to both controlling and noncontrolling interests be presented separately on the face of the consolidated income statement.  In addition, FASB ASC provides that when losses attributable to noncontrolling interests exceed the noncontrolling interest’s basis, losses continue to be attributed to the noncontrolling interest as opposed to being absorbed by the consolidating entity.  It requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of FASB ASC 810 shall be applied prospectively.   The Company adopted FASB ASC 810 on January 1, 2009.  The effect of adoption was a reclassification of Minority Interest, historically shown in liabilities, to a new line item, Noncontrolling Interests, included in shareholders’ equity, and the reclassification of Minority Interest from Retained Deficit as it represented distributions and losses in excess of basis.  

The following table illustrates the pro forma amounts of loss from continuing operations, discontinued operations and net income that would have been attributed to the Company’s shareholders for the nine and three months ended September 30, 2009, prior to their amendment by FASB ASC 810 (in thousands, except per unit amounts):

   
Nine months
    
Three Months
  
Loss from continuing operations
   $ (2,207 )   $ (1,211 )
Income from discontinued operations
     26,689       26,600  
Pro forma net income attributable to ACPT’s shareholders 
   $ 24,482     $ 25,389  
                 
Basic and diluted earnings (loss) per common share
                
Loss from continuing operations
   $ (0.41 )   $ (0.23 )
Income from discontinued operations
     5.02       5.01  
Pro forma net income attributable to ACPT’s shareholders
   $ 4.61     $ 4.78  
                 

The FASB issued FASB ASC 805, “Business Combinations” (“SFAS 141R”).  This statement changes the accounting for acquisitions specifically eliminating the step acquisition model, changing the recognition of contingent consideration from being recognized when it is probable to being recognized at the time of acquisition, disallowing the capitalization of transaction costs and delays when restructurings related to acquisitions can be recognized.  The Company adopted these changes on January 1, 2009, and it did not have a material impact on the Company’s results from operations.
 
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In December 2008, the FASB issued FASB ASC 860, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (FSP No. FAS 140-4 and FIN 46(R)-8). This requires public entities to provide additional disclosures about transfers of financial assets and requires public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. See Note 3 for the required disclosures.

In April 2009, the FASB updated FASB ASC 820, “Fair Value Measurements and Disclosures” (“FSP FAS 157-4”) which provides additional guidance for determining the fair value of assets and liabilities when the volume and level of activity for the asset or liability have significantly decreased. The update also provides guidance on identifying circumstances that indicate an observed transaction used to determine fair value is not orderly and, therefore, is not indicative of fair value.  The Company adopted these updates effective April 1, 2009.  There was not a material impact on its results of operations, cash flows or financial condition.

In April 2009, the FASB also updated FASB ASC 820, “Fair Value Measurements and Disclosures”, (FSP FAS 107-1 and APB 28-1) to expand the fair value disclosure requirements to include interim periods and require these disclosures in summarized financial information in interim reporting periods. The Company adopted these updates effective April 1, 2009.  In August 2009, ASC No. 2009-05 was issued amending Subtopic 820-10, Fair Value Measurements and Disclosures, to provide clarity and guidance on the fair value measurement of liabilities.

The balance sheet carrying amounts of cash and cash equivalents, receivables and other current assets approximate fair value due to the short-term nature of these items and represents Level 1 under the fair value hierarchy in FASB ASC 820.

The fair value of our non-recourse and recourse debt is sensitive to fluctuations in interest rates.  As of September 30, 2009, the book value of long-term fixed rate debt was $242,231,000, and the fair value of total debt was $260,426,000.  As of December 31, 2008, the book value of long-term fixed rate debt was $294,721,000, and the fair value of total debt was $343,076,000.  Fair value was determined by discounting future cash flows using borrowing rates currently available to the Company for debt with similar terms and maturities.  This represents Level 3 under the fair value hierarchy FASB ASC 820.
 
In May 2009, the FASB updated FASB ASC 855, “Subsequent Events” (SFAS No. 165) to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued.  This statement details the period after the balance sheet date during which management shall evaluate events or transactions, the circumstances under which an entity shall recognize events or transactions in its financial statements, and the disclosures that an entity shall make about events and transactions that occurred after the balance sheet date.  We adopted these updates effective April 1, 2009.  See Note 13 for required disclosures.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”), which provides certain changes to the evaluation of a variable interest entity (“VIE”) including requiring a qualitative rather than quantitative analysis to determine the primary beneficiary of a VIE, continuous assessments of whether an enterprise is the primary beneficiary of a VIE, and enhanced disclosures about an enterprise’s involvement with a VIE. The statement is effective January 1, 2010, and is applicable to all entities in which an enterprise has a variable interest. We are currently evaluating the impact SFAS No. 167 will have on our consolidated financial statements.


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 (3)
INVESTMENT IN UNCONSOLIDATED REAL ESTATE ENTITIES

The Company accounts for investments in unconsolidated real estate entities that are not considered VIEs under FASB ASC 810 (FIN 46R) in accordance with FASB ASC 970, (SOP 78-9) and FASB ASC 323 (APB Opinion No. 18).  Under this guidance, an entity would be required to consolidate a VIE if it has (i) the power to direct the activities that most significantly impact the entity’s economic performance, and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE.  For the entities that are considered VIEs, the Company performs an assessment to determine the primary beneficiary of the entity based on a probability weighted cash flow analysis.  The Company accounts for VIEs 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.
 
Apartment Partnerships

The unconsolidated apartment partnerships as of September 30, 2009 and 2008 included Brookside Gardens Limited Partnership (“Brookside”) and Lakeside Apartments Limited Partnership (“Lakeside”) that collectively represent 110 rental units.  We have determined that these two entities are VIEs.  However, the Company is not required to consolidate the partnerships due to the fact that the Company is not the primary beneficiary and does not bear the majority of the risk of expected losses.  The Company holds an economic interest in Brookside and Lakeside but, as a general partner, we have significant influence over operations of these entities that is disproportionate to our economic ownership.  In accordance with FASB ASC, these investments are accounted for under the equity method.  The Company is exposed to losses consisting of our net investment, loans and unpaid fees for Brookside of $264,000 and $246,000 and for Lakeside of $135,000 and $165,000 as of September 30, 2009 and December 31, 2008, respectively.  All amounts are fully reserved and, accordingly, there is no carrying value associated with the Company’s investments in these unconsolidated real estate entities for the periods presented.  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.  The Company’s involvement with Brookside and Lakeside has not had a material affect on the Company’s financial position, financial performance and cash flows.

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 a 27.82% ownership interest in the partnership's assets, equal to a 45.26% interest in cash flow generated by the 30 year lease of the building.

Land Development/Homebuilding Joint Ventures

In October 2008, the Company entered into an agreement with Surrey Homes, LLC (“Surrey Homes”) to contribute $2,000,000, which was paid as of September 30, 2009, in exchange for a 50% ownership interest of the Series A Units in Surrey Homes.  Surrey Homes’ business model is focused on providing affordable quality homes with the lowest ongoing cost of maintenance through energy efficiency and other green initiatives.  Surrey Homes is establishing itself as a low overhead, lot option home builder.

We have determined that our investment in Surrey Homes is a VIE under FASB ASC 810; however, we are not required to consolidate Surrey Homes as the Company is not the primary beneficiary and does not bear the majority of the risk of expected losses.  In accordance with FASB ASC, this investment is accounted for under the equity method, and as of September 30, 2009 and December 31, 2008, represented $1,778,000 and $489,000 of the Company’s investments in unconsolidated real estate entities, respectively.  The Company is exposed to total losses consisting of our cumulative initial investment of $2,000,000.  Other than funding the equity investment, the Company’s involvement in Surrey Homes has not materially affected the Company’s financial position, financial performance and cash flows.
 
- 14 -
 
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 and homebuilding operation, which are all accounted for as “investments in unconsolidated real estate entities” on the balance sheet.
 
   
Apartment
    
Commercial
              
   
Properties
    
Property
    
Homebuilding
    
Total
  
   
(in thousands)
  
Summary of Financial Position
                        
  Total Assets
                        
    September 30, 2009
  
$
4,688
    
$
27,411
    
$
4,035
    
$
36,134
  
    December 31, 2008
    
4,781
      
27,005
      
2,478
      
34,264
  
  Total Non-Recourse Debt
                                
    September 30, 2009
    
3,072
      
22,375
      
-
      
25,447
  
    December 31, 2008
    
3,123
      
22,380
      
-
      
25,503
  
  Total Other Liabilities
                                
    September 30, 2009
    
984
      
382
      
17
      
1,383
  
    December 31, 2008
    
960
      
153
      
-
      
1,113
  
  Total Equity
                                
    September 30, 2009
    
631
      
4,654
      
3,580
      
8,865
  
    December 31, 2008
    
698
      
4,472
      
2,478
      
7,648
  
  Company's Investment, net (1)
                                
    September 30, 2009
    
-
      
4,584
      
1,778
      
6,362
  
    December 31, 2008
    
-
      
4,632
      
489
      
5,121
  
                                 
Summary of Operations
                                
  Total Revenue
                                
    Nine months ended September 30, 2009
    
623
      
2,587
      
29
      
3,239
  
    Nine months ended September 30, 2008
    
620
      
2,653
      
-
      
3,273
  
    Three months ended September 30, 2009
    
206
      
850
      
5
      
1,061
  
    Three months ended September 30, 2008
    
202
      
864
      
-
      
1,066
  
  Net Income (Loss)
                                
    Nine months ended September 30, 2009
    
(66
)
    
1,301
      
(422
)
    
813
  
    Nine months ended September 30, 2008
    
(97
)
    
1,339
      
-
      
1,242
  
    Three months ended September 30, 2009
    
(16
)
    
425
      
(196
)
    
213
  
    Three months ended September 30, 2008
    
(30
)
    
430
      
-
      
400
  
  Company's recognition of equity in Earnings (Loss)
                                
    Nine months ended September 30, 2009
    
-
      
513
      
(211
)
    
302
  
    Nine months ended September 30, 2008
    
-
      
490
      
-
      
490
  
    Three months ended September 30, 2009
    
-
      
157
      
(98
)
    
59
  
    Three months ended September 30, 2008
    
-
      
159
      
-
      
159
  
                                 
Summary of Cash Flows
                                
  Cash flows from operating activities
                                
    Nine months ended September 30, 2009
    
130
      
1,595
      
(405
)
    
1,320
  
    Nine months ended September 30, 2008
    
61
      
1,627
      
42
      
1,730
  
    Three months ended September 30, 2009
    
24
      
646
      
(108
)
    
562
  
    Three months ended September 30, 2008
    
11
      
650
      
40
      
701
  

- 15 -
 
  Company's share of cash flows from operating activities
                                
    Nine months ended September 30, 2009
    
1
      
722
      
(202
)
    
521
  
    Nine months ended September 30, 2008
    
1
      
736
      
21
      
758
  
    Three months ended September 30, 2009
    
-
      
293
      
(103
)
    
190
  
    Three months ended September 30, 2008
    
-
      
294
      
20
      
314
  
  Operating cash distributions
                                
    Nine months ended September 30, 2009
            
1,115
      
-
      
1,115
  
    Nine months ended September 30, 2008
    
-
      
1,194
      
-
      
1,194
  
    Three months ended September 30, 2009
    
-
      
409
      
 -
      
409
  
    Three months ended September 30, 2008
    
-
      
421
      
-
      
421
  
  Company's share of operating
                                
  cash distributions
                                
    Nine months ended September 30, 2009
            
524
      
-
      
524
  
    Nine months ended September 30, 2008
    
-
      
541
      
-
      
541
  
    Three months ended September 30, 2009
    
-
      
186
      
-
      
186
  
    Three months ended September 30, 2008
    
-
      
191
      
-
      
191
  

Notes:
(1)  
Represents the Company's net investment, including assets and accrued liabilities in the consolidated balance sheet for unconsolidated real estate entities.
   
 (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, 2009 and December 31, 2008 (in thousands):

 
Maturity
Interest
Outstanding as of
 
Dates
Rates
September 30,
December 31,
 
From/To
From/To
2009
2008
     
(Unaudited)
(Audited)
Recourse Debt
        
  Community Development (a)(b)(c)(d)
03-31-10/06-01-23
3.25%/8%
   $         37,483
 $           39,232
  General obligations (e)
02-21-12/03-13-12
 Non-interest
    
   
bearing/8.55%
113
184
Total Recourse Debt
    
37,596
39,416
         
Non-Recourse Debt   (f)(g)(h)
        
  Investment Properties
12-01-13/07-01-50
4.95%/7.33%
180,148
168,221
  Held for Sale – Non-Recourse Debt
11-01-14/05-01-16
5.3%/5.9%
29,889
107,899
Total Non-Recourse Debt
    
210,037
276,120
    Total Debt
    
$       247,633
$         315,536

a.  
As of September 30, 2009, $25,948,000 of the community development recourse debt is owed to the Charles County Commissioners and relates to the general obligation bonds issued by the Charles County government, that have 15 year amortization of maturities with the earliest occurring in June, 2019, as described in detail under the heading "Financial Commitments" in Note 5.  As of September 30, 2009, the Company has a receivable balance related to the bonds of $2,525,000.
b.  
On April 14, 2006, the Company closed a three year, $14,000,000 revolving acquisition and development loan (“the Revolver”) secured by a first lien deed of trust on property located in St. Charles, Maryland.  During the first quarter of 2009, the Company renegotiated the terms of the agreement.  The loan bears interest at Prime plus 1.25% (4.5% at September 30, 2009) and matures on March 31, 2010.  As of September 30, 2009, $1,946,000 was outstanding on the Revolver.

- 16 -
 
c.  
 
Land Development Associates, S.E (“LDA”) had a $10,000,000 revolving line of credit that matured on August 31, 2009 but was extended to December 31, 2010.  As part of the extension, the Company agreed to reduce the overall facility limit to $7,500,000 with the available credit to be used to fund remaining Hilltop development, certain retainage due and  up to $500,000 to be used to fund future interest payments due under the facility.  In addition, the facility now bears interest at Prime plus 1.5% but not less than 5.5%.  The outstanding balance of this facility on September 30, 2009, was $6,247,000.
d.  
On April 2, 2008, the Company secured a two-year, $3,600,000 construction loan for the construction of a commercial restaurant/office building within the O’Donnell Lake Restaurant Park.  The facility is secured by the land along with any improvements constructed and bears interest at Wall Street Journal published Prime Rate (3.25% at September 30, 2009).  At the end of the two-year construction period, the Company may convert the loan to a 5-year permanent loan, amortized over a 30-year period at a fixed interest rate to be determined.  As of September 30, 2009, $3,342,000 was outstanding under this facility leaving $258,000 available to fund completion of the building.  However, the lender requested that the outstanding balance of the loan be reduced to 80% of the “as-is” value of the building, requesting a reduction of $782,000 before November 20, 2009.
e.  
The general recourse debt outstanding as of September 30, 2009 is made up of various capital leases outstanding within our U.S. and Puerto Rico operations, as well as installment loans for vehicles and other miscellaneous equipment.
f.  
The non-recourse debt related to the investment properties is collateralized by the multifamily rental properties and the office building in Parque Escorial.  As of September 30, 2009, approximately $76,279,000 of this debt was secured by the Federal Housing Administration ("FHA") or the Maryland Housing Fund.
g.  
On May 12, 2008, IGP agreed to provide a fixed charge and debt service guarantee related to the Escorial Office Building I, Inc. (“EOB”) mortgage.  The fixed charge and debt service guarantee requires IGP Group to contribute capital in cash in such amounts required to cause EOB to comply with the related financial covenants.  The guarantee will remain in full force until EOB has complied with the financial covenants for four consecutive quarters.
h.  
On January 28, 2009, the Company completed the initial closing of a 6.9%, $25,045,000 non-recourse construction loan to fund the construction costs for a new apartment property in St. Charles' Fairway Village (“Fairway Village”).  As of September 30, 2009, the balance on the loan was $13,654,000. 

The Company’s loans contain various financial, cross collateral, cross default, technical and restrictive provisions.  With the exception of a loan to value covenant related to the office building construction loan as noted in footnote d. above, as of September 30, 2009, the Company is in compliance with its financial covenants.
 
 
 (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.  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 Corporation (“Lennar”) as part of a residential lot sales contract for 1,950 lots in Fairway Village.  The Bonds were issued in three installments with the final $6,000,000 installment issued in March 2006.  The Bonds bear interest rates ranging from 4% to 8%, for a blended lifetime rate for total Bonds issued to date of 5.1%, and call for semi-annual interest payments and annual principal payments and mature in 15 years.  Under the terms of Bond repayment agreements between the Company and the County, the Company is obligated to pay interest and principal to the County based 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 will pay the County a monthly payment equal to one-sixth of the semi-annual interest payments and one-twelfth of the annual principal payment.  The County and the Lennar agreement require ACPT to fund an escrow account from lot sales to be used to repay the principal portion of these Bonds.

In August 2005, the Company signed a memorandum of understanding ("MOU") with the Charles County Commissioners regarding a land donation that is now the site of a minor league baseball stadium and entertainment
 
- 17 -
 
complex.  Under the terms of the MOU, the Company donated 42 acres of land in St. Charles to the 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.  In return, the County agreed to issue $12,000,000 of general obligation bonds to finance the infrastructure improvements.  In March 2006, $4,000,000 of bonds were issued for this project, with an additional $3,000,000 issued in both March 2007 and March 2008 and $2,000,000 in March 2009.  These bonds bear interest rates ranging from 4.9% to 8%, for a blended rate of 5.3%, call for semi-annual interest payments and annual principal payments, and mature in 15 years.  The terms of the bond repayment agreement are similar to those noted above.  In addition, the County agreed to issue an additional 100 school allocations a year to St. Charles commencing with the issuance of bonds.

During 2006, the Company reached an agreement with the County whereby the Company receives interest payments on any undistributed bond proceeds held in escrow by the County.  The agreement covers the period from July 1, 2005 through the last draw made by the Company.

As of September 30, 2009, ACPT had purchased $11,904,000 of surety bonds for the completion of land development projects with Charles County with maturity dates ranging from November 6, 2009 to November 8, 2010; substantially all of which are for the benefit of the Charles County Commissioners.

Consulting Agreements and Severance Arrangements

ACPT entered into a consulting agreement with Carlos Rodriguez, the former Executive Vice President and Chief Executive Officer for IGP Group, a wholly owned Puerto Rico subsidiary of ACPT, effective July 1, 2008.  Under the terms of this consulting agreement, the Company will pay Mr. Rodriguez $100,000 per year through June 2010.  Payments under this consulting agreement were fully accrued as of December 31, 2008.

On October 1, 2008, Mr. Edwin L. Kelly notified the Company that he would retire as the Company’s President and Chief Operating Officer effective December 1, 2008.  Pursuant to his employment agreement, Mr. Kelly received a severance payment of $1,500,000.  The Company has also agreed to enter into a consulting agreement with Mr. Kelly providing compensation for his services at a rate of $10,000 per month, for an initial term of one year.  Payments under this consulting agreement were fully accrued as of December 31, 2008.
 
Gleneagles Construction Contract
 
On January 28, 2009, the Company completed the initial closing of a 6.9%, $25,045,000 non-recourse construction loan to fund the construction costs for a new apartment property in Fairway Village.  As of September 30, 2009, the balance on the loan was $13,654,000.  The Company has entered into a construction contract valued at $18,291,000 to complete the construction of this property.
        
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, 2009, ACPT had guaranteed $37,483,000 of such debt.  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.   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
 
On September 25, 2009, the Company announced that it had entered into an agreement and plan of merger whereby FCP Fund I, L.P. (“FCP”) would acquire 100% of the outstanding common shares of the Company for a price of $7.75 per share, payable in cash, for aggregate consideration of approximately $43,600,000.  On October 2, 2009, Pennsylvania Avenue Funds, a purported Company shareholder, filed a class action complaint in the Circuit
 
- 18 -
 
Court for Charles County, Maryland, against the Company, the Board of Trustees and FCP.  The complaint alleges that the trustees breached their fiduciary duties in connection with the merger.  The complaint further alleges that FCP aided and abetted those breaches of fiduciary duty.  The complaint seeks to enjoin consummation of the merger and also seeks attorneys’ fees and expenses.  On October 23, 2009, Joseph M. Sullivan, a purported Company shareholder, filed a class action complaint in the Circuit Court for Charles County, Maryland, against the Company, the Board of Trustees, FCP and FCP/ACPT Acquisition Company, Inc. (“FCP/ACPT Acquisition Company”). The complaint alleges that the trustees breached their fiduciary duties in connection with the merger.  The complaint further alleges that FCP and FCP/ACPT Acquisition Company aided and abetted those breaches of fiduciary duty.  The complaint seeks to enjoin consummation of the merger and also seeks attorneys’ fees and expenses.

Due to the inherent uncertainties of the judicial process, we are unable to either predict the outcome of or estimate a range of potential loss associated with certain matters discussed above.  While we intend to vigorously defend these matters and believe we have meritorious defenses available to us, there can be no assurance that we will prevail.  If these matters are not resolved in our favor, we believe we are insured for potential losses unless otherwise stated.  Any amounts that exceed our insurance coverage could have a material adverse effect on our financial condition and results of operations.

In addition, 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 these 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 these ordinary course 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.

 (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 is reflected below (in thousands):

 
- 19-
                        
                         
 CONSOLIDATED STATEMENT OF INCOME:
    
Nine months Ended
September 30,
 
    
Three Months Ended
September 30,
 
  
     
2009
    
2008
    
2009
    
2008
  
Management and Other Fees
                          
  Unconsolidated subsidiaries with third party partners
   (A)
   $ 31     $ 32     $ 10     $ 11  
                                   
Rental Property Revenues
   (B)
   $ -     $ 36     $ -     $ 6  
                                   
Interest and Other Income
                                  
  Unconsolidated real estate entities with third party partners
     $ 7     $ 6     $ 2     $ 2  
                                   
General and Administrative Expense
                                  
  Reserve additions (reductions) and other write-offs-
                                  
    Unconsolidated real estate entities with third party partners
   (A)
   $ 5     $ (2 )   $ (3 )   $ 7  
    Reimbursement to IBC for ACPT's share of J. Michael Wilson's salary
       318       311       106       104  
  Reimbursement of administrative costs-
                                  
    Affiliates of J. Michael Wilson, Chairman
       (11 )     (14 )     (3 )     (4 )
  Consulting Fees-
                                  
    James J. Wilson, IGC Chairman and Director
  (C1)
     --       150       --       50  
    Thomas J. Shafer, Trustee
  (C2)
     5       45       --       15  
      $ 317     $ 490     $ 100     $ 172  
 
BALANCE SHEET:
    
Balance 
September 30,  2009
    
Balance December 31, 2008
  
Other Assets
              
Receivables – All unsecured and due on demand
              
  Unconsolidated subsidiaries
     $ 3     $ 10  
  Affiliate of J. Michael Wilson, Chairman
       3       2  
Total
     $ 6     $ 12  
                   
Additional Paid-in Capital
  (C3)
   $ 354     $ 95  
 
(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 collectability 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.

(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.  On February 25, 2008, CWT executed its rights under the lease and provided six months written notice of its intention to terminate the lease, effective August 24,
- 20 -
 
2008. 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)  
Represents fees paid to James J. Wilson pursuant to a consulting and retirement agreement.  At Mr. Wilson's request, payments are made to Interstate Waste Technologies, Inc. (“IWT”).
2)  
Represents fees paid to Thomas J. Shafer, a Trustee, pursuant to a consulting agreement.
3)  
A primary shareholder of the Company agreed in principle to provide the Company’s Chief Executive Officer with the economic benefit of 185,550 shares of their common stock as of October 1, 2008 in accordance with the five-year vesting schedule. According to FASB ASC 718, any share-based payments awarded to an employee of the reporting entity by a related party for services provided to the entity are share-based payment transactions unless the transfer is clearly for a purpose other than compensation for services to the reporting entity.  Therefore, in essence, the economic interest holder makes a capital contribution to the reporting entity, and the reporting entity makes a share-based payment to its employee in exchange for services rendered.   The Company recognized $354,000 and $95,000 in compensation expense in the nine and three months ended September 30, 2009, respectively, related to this grant.

(7)
INCOME TAXES

ACPT’s subsidiaries, ARMC, ALD and ARPT, are subject to federal and state income tax.  ACPT is subject to Puerto Rico income tax on its Puerto Rico source income.

The United States effective tax rates for the nine months ended September 30, 2009 and 2008 were 36% and 30%, respectively.  The United States effective tax rates for the three months ended September 30, 2009 and 2008 were 22% and 37%, respectively.  The statutory tax rate is 40%.  The difference in the statutory tax rate and the effective tax rate for the pre-tax loss during the nine and three months ended September 30, 2009 was primarily due to accrued taxes and penalties on uncertain tax positions, certain non-deductible compensation expenses and the change in the deferred tax asset valuation allowance.  The difference in the statutory tax rate and the effective tax rate for the pre-tax loss during the nine and three months ended September 30, 2008 was primarily due to a relatively small net loss reported, the related benefit for which was partially offset by accrued taxes and penalties on uncertain tax positions.

The effective tax rates on the Puerto Rico source income for the nine months ended September 30, 2009 and 2008 were 28% and (71%), respectively. The effective tax rates on the Puerto Rico source income for the three months ended September 30, 2009 and 2008 were 29% and 21%, respectively.  The statutory tax rate is 29%.   The difference in the statutory tax rate and the effective tax rate for the pre-tax income during the nine and three months ended September 30, 2009, was primarily due to tax exempt income and the change in the deferred tax asset valuation allowance offset in part by deferred items for which no current benefit may be recognized.  The difference in the statutory tax rate and the effective tax rate for the pre-tax loss during the nine and three months ended September 30, 2008, was primarily due to tax exempt income offset in part by the double taxation on the earnings of our wholly-owned corporate subsidiary, ICP, and deferred items for which no current benefit may be recognized. 
 
     Due to the potential variability in the anticipated effective tax rate on non-discrete activity and/or discrete taxable events, the company has computed its intraperiod income tax provision for the discrete taxable events and non-discrete activity using a discrete period computation.
 
The total amount of unrecognized tax benefits as of September 30, 2009, was $13,920,000.  Included in the balance at September 30, 2009, were $40,000 of tax positions that, if recognized, would affect the effective tax rate.  A reconciliation of the beginning and ending amount of unrecognized tax benefit (in thousands) is as follows:

       Unrecognized tax benefit at December 31, 2008
  
$
15,543
  
       Change attributable to tax positions taken during a prior period
    
(1,600
)
       Change attributable to tax positions taken during the current period
    
-
  
       Decrease attributable to settlements with taxing authorities
    
-
  
       Decrease attributable to lapse of statute of limitations
    
(23)
  
       Unrecognized tax benefit at September 30, 2009
  
$
13,920
  
- 21 -
 
In accordance with our accounting policy, we present accrued interest related to uncertain tax positions as a component of interest expense and accrued penalties as a component of income tax expense on the Consolidated Statement of Income.  Our Consolidated Statements of Income for the nine months ended September 30, 2009 and 2008, included interest expense of $932,000 and $1,031,000, respectively, and penalties of ($41,000) and $58,000, respectively.  Our Consolidated Statements of Income for the three months ended September 30, 2009 and 2008, included interest expense of $287,000 and $298,000, respectively, and penalties of ($15,000) and $20,000, respectively.  Our Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008, included accrued interest of $5,148,000 and $3,844,000, respectively, and accrued penalties of $1,073,000 and $1,143,000, respectively.

The Company currently does not have any tax returns under audit by the United States Internal Revenue Service or the Puerto Rico Treasury Department.  However, the tax returns filed in the Unites States for the years ended December 31, 2006 through 2008 remain subject to examination.  For Puerto Rico, the tax returns for the years ended December 31, 2005 through 2008 remain subject to examination.  Within the next twelve months, the Company does not anticipate any payments related to settlement of any tax examinations.  There is a reasonable possibility within the next twelve months the amount of unrecognized tax benefits will decrease by $608,000 when the related statutes of limitations expire and certain payments are recognized as taxable income.

Additionally, as a result of holding our partnership interests in certain U.S. multifamily apartment properties over many years there is approximately $45,000,000 of distributions in excess of our partnership basis, related to these holdings.   Should a triggering event take place, such as sale or liquidation of the underlying partnership assets or interests, the Company would be required to recognize taxable income related to this low basis and pay tax accordingly.

 (8)
HELD FOR SALE ASSETS

A real estate investment held for sale is carried at the lower of its carrying amount or estimated fair value, less the cost of a potential sale.  Depreciation is suspended during the period the property is held for sale.  The Company has binding agreements for two of the five properties (Milford I and II) subject to loan assumption and continues to market Nottingham, Owings Chase and Prescott Square.  The Company intends to sell all five of these properties and accordingly, believes that held for sale presentation is appropriate.

On August 31, 2009, the Company completed the sale of its wholly-owned subsidiary, Interstate General Properties, LP (“IGP”) to Partners Business Equities, LLC (“PBE”) and its associates for $14,300,000 which was a significant portion of the Company’s Puerto Rican Operating Real Estate segment.  Prior to the sale, IGP was restructured to include only the Company’s general and limited partnership interests in nine partnerships which own twelve properties with 2,653 subsidized apartments in Puerto Rico, as well as the Section 8 affordable housing management contracts.  Included in the sale was $39,805,000 in investments in real estate and $81,051,000 in non-recourse debt as of August 31, 2009.  The Company realized a net gain on the transaction of approximately $25,351,000 and deferred revenues of $1,224,000.  $974,000 in notes receivable has been deferred until paid as the receivable is contingent on PBE refinancing the apartment mortgages, and $250,000 has been deferred as it represents monies held in escrow to cover warranties.  In accordance with FASB ASC 360 (SFAS 144), the Puerto Rican Properties’ assets and related liabilities had been classified as “held for sale” on the Company’s consolidated balance sheet as of December 31, 2008.

As of September 30, 2009, the major classes of assets related to the Baltimore properties included in assets held for sale are $34,674,000 in investments in real estate, $1,130,000 in restricted cash and escrow balances, and $1,149,000 in deferred charges and other assets.  Liabilities related to assets held for sale includes $29,889,000 in non-recourse debt.
 
In addition, the properties’ results of operations have been classified as “discontinued operations” for all periods presented in the consolidated statements of operations.  The following is a summary of the components of income from discontinued operations for the nine and three months ended September 30, 2009 and 2008, respectively:

- 22 -

 
For the nine months ended September 30,
 
2009
    
2008
  
Revenues
            
  Rental property revenues
  
$
19,794
    
$
21,267
  
  Management and other fees
    
273
      
360
  
    Total revenues
    
20,067
      
21,627
  
                 
Expenses
                
  Rental property operating expenses
    
9,756
      
10,794
  
  General, administrative, selling, and marketing
    
1,153
      
1,590
  
  Write-down of assets
    
882
      
-
  
  Depreciation expense
    
-
      
3,656
  
    Total expenses
    
11,791
      
16,040
  
                 
Operating income
    
8,276
      
5,587
  
                 
Other income (expense)
                
  Gain on sale of discontinued operations (less applicable taxes of $10,453)
    
25,351
      
-
  
   Other expenses
    
(4,914
)
    
(5,319
)
   Total income (expense)
    
20,437
      
(5,319
)
                 
Income before provision for income taxes
    
28,713
      
    268
  
Provision for income taxes
    
797
      
44
  
Income from discontinued operations
    
  27,916
      
224
  
  Noncontrolling interest in consolidated entities
    
      (1,227)
      
(1,306
) 
 Income (loss) from discontinued operations attributable to ACPT
  
$ 
    26,689
    
$ 
(1,082
) 
 
For the three months ended September 30,
 
2009
    
2008
  
Revenues
            
  Rental property revenues
  
$
5,388
    
$
7,210
  
  Management and other fees
    
30
      
119
  
    Total revenues
    
5,418
      
7,329
  
                 
Expenses
                
  Rental property operating expenses
    
2,812
      
3,595
  
  General, administrative, selling, and marketing
    
584
      
611
  
  Write-down of assets
    
43
      
-
  
  Depreciation expense
    
-
      
1,337
  
    Total expenses
    
3,439
      
5,543
  
                 
Operating Income
    
1,979
      
1,786
  
                 
Other income (expense)
                
  Gain on sale of discontinued operations (less applicable income taxes of
     $10,453)
    
25,351
      
-
  
   Other expenses
    
(1,524
)
    
(1,760
)
   Total other income (expense)
    
23,827
      
(1,760
)
                 
Income before provision for income taxes
    
25,806
      
    26
  
Provision for income taxes
    
178
      
319
  
Income (loss) from discontinued operations
    
  25,628
      
(293
)
  Noncontrolling interest in consolidated entities
    
(1,227
)
    
(370