acpt10k_123107.htm
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

(Mark One)
/X/
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
 
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
American Stock Exchange
 

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Exchange Act.Yes / /No /x/

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act.Yes / /No /x/

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 report(s)), and (2) has been subject to such filing requirements for the past 90 days.Yes /x/No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.          / /

 
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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).    Yes  / /    No  /x/

As of June 30, 2007 the aggregate market value of the common shares held by non-affiliates of the registrant, based on the closing price reported on the American Stock Exchange on that day of $20.41, was $50,432,130.  As of March 1, 2008, there were 5,229,954 common shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of American Community Properties Trust to be filed with the Securities and Exchange Commission with respect to the 2008 Annual Meeting of Shareholders, to be held on June 4, 2008, are incorporated by reference into Part III of this report.

 
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AMERICAN COMMUNITY PROPERTIES TRUST

2007 Form 10-K Annual Report

TABLE OF CONTENTS



   
Page
 
 
 
Item 1.
4
Item 1A.
21
Item 1B.
25
Item 2.
25
Item 3.
25
Item 4.
26
Item 4A.
26
     
 
 
 
Item 5.
28
Item 6.
30
Item 7.
31
Item 8.
53
Item 9.
90
Item 9T.
90
Item 9B.
90
     
 
 
 
Item 10.
91
Item 11.
91
Item 12.
91
Item 13.
91
Item 14.
92
     
 
 
 
Item 15.
92
     
 
95


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 PART I

BUSINESS
References to "we," "us," "our" or the "Company" refer to American Community Properties Trust and our business and operations conducted through our subsidiaries.

GENERAL
On March 17, 1997, American Community Properties Trust ("ACPT" or the "Company"), a wholly owned subsidiary of Interstate General Company L.P. ("IGC" or "Predecessor"), was formed as a real estate investment trust under Title 8 of the Corporations and Associates Article of the Annotated Code of Maryland (the "Maryland REIT Law").  ACPT was formed to succeed to most of IGC's real estate assets.
On October 5, 1998, IGC transferred to ACPT the common shares of four subsidiaries that collectively comprised the principal real estate operations and assets of IGC.  In exchange, ACPT issued to IGC 5,207,954 common shares of ACPT, all of which were distributed to the partners of IGC.
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 have been passed through to ACPT’s shareholders.  A federal tax regulation has been proposed that could eliminate the pass through of these foreign tax credits to ACPT’s shareholders.  Comments on the proposed regulation are currently being evaluated with the final regulation expected to be effective for tax years beginning after the final regulation is ultimately published in the Federal Register.  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. multifamily rental properties flows through to ARPT.

ARPT
ARPT holds partnership interests in 21 multifamily rental properties ("U.S. Apartment Properties") indirectly through American Housing Properties L.P. ("AHP"), a Delaware limited partnership, in which ARPT has a 99% limited partner interest and American Housing Management Company, a wholly owned subsidiary of ARPT, has a 1% general partner interest.

ARMC
ARMC performs property management services in the United States for the U.S. Apartment Properties and for one other rental apartment not owned by ACPT.

ALD
ALD owns and operates the assets of ACPT's United States community development operations. These include the following:
1.  
a 100% interest in St. Charles Community LLC ("SCC LLC") which holds approximately 4,000 acres of land in St. Charles, Maryland;
2.  
the Class B interest in Interstate General Properties Limited Partnership S.E., a Maryland limited partnership ("IGP"), that represents IGP's rights to income, gains and losses associated with the balance of the residential land in Parque Escorial in Puerto Rico held by Land Development Associates, S.E. ("LDA"), a wholly owned subsidiary of IGP; and
3.  
a 50% interest, through SCC LLC, in a land development joint venture, St. Charles Active Adult Community, LLC (“AAC”).

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IGP Group
IGP Group owns and operates the assets of ACPT's Puerto Rico division indirectly through a 99% limited partnership interest and 1% general partner interest in IGP excluding the Class B IGP interest transferred to ALD. IGP's assets and operations include:
1.  
a 100% partnership interest in LDA, a Puerto Rico special partnership which holds 120 acres of land in the planned community of Parque Escorial and 490 acres of land in Canovanas;
2.  
general partner interests in 9 multifamily rental properties (“Puerto Rico Apartment Properties”), and a limited partner interest in 1 of the 9 partnerships;
3.  
a 100% ownership interest in Escorial Office Building I, Inc. (“EOBI”), through LDA and IGP, a Puerto Rico corporation that holds the operations of a three-story, 56,000 square foot office building;
4.  
a 100% ownership interest in ICP, an entity that holds the partnership interest in El Monte Properties S.E. (“EMP”);
5.  
a limited partnership interest in ELI, S.E. ("ELI"), that holds a 45.26% share in the future cash flow generated from a 30-year lease of an office building to the State Insurance Fund of the Government of Puerto Rico; and
6.  
an indirect 100% ownership interest, through LDA and IGP, in Torres del Escorial, Inc. ("Torres"), a  Puerto Rico corporation organized to build 160 condominium units.

In July 2007, J. Michael Wilson filed a Form 13 D/A announcing the Wilson family’s intentions to obtain an investor for a potential management buyout of the company. Accordingly, the Board of Trustees formed a Special Committee of Independent Trustees to take such actions on behalf of the Trust related to or airsing in connection with any such potential transactions.

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.  Set forth below is a brief description of these businesses within each of our segments.

U.S. SEGMENT:

INVESTMENT IN RENTAL PROPERTIES

Multifamily Rental Properties
ACPT, indirectly through ARPT and AHP, holds interests in 21 U.S. Apartment Properties that own and operate apartment facilities in Maryland and Virginia. The U.S. Apartment Properties include a total of 3,366 rental units. Each of the U.S. Apartment Properties is financed by a non-recourse mortgage whereby the owners are not jointly and severally liable for the debt.  The U.S. Department of Housing and Urban Development ("HUD") provides rent subsidies to the projects for residents of 973 apartment units. In addition, 110 units are leased pursuant to HUD's Low Income Housing Tax Credit ("LIHTC") program, and 139 other units are leased under income guidelines set by the Maryland Community Development Administration. The remaining 2,144 units are leased at market rates.

The Company continues to believe that its investments in suburban multifamily rental properties will provide long-term value.  Suburban multifamily capitalization rates decreased for the third consecutive year to 6.34%, down from 6.44% for 2006 and remain in the first position relative to other types of real estate investment.1

New Multifamily Rental Property Construction
Sheffield Greens Apartments, which began leasing efforts in the first quarter of 2006, completed the lease-up of the facility in the second quarter 2007. The 252-unit apartment project consists of nine, 3-story buildings and offers 1 and 2 bedroom units ranging in size from 800 to 1,400 square feet.  The complex was substantially complete as of January 31, 2007, with all units available for occupancy at that time.
The Company is currently planning the construction of a 184 unit luxury apartment complex within St. Charles, called Gleneagles Apartments.  Gleneagles Apartments is expected to consist of 1, 2 and 3 bedroom units ranging in size of 905 to 1840 square feet.  The Company currently anticipates average monthly rents of approximately $1,625 per unit.  Pre-leasing efforts are currently scheduled to commence during the second quarter of 2008, with delivery of the initial units within the complex during the first quarter of 2009.  The Company has submitted for building permits, and currently anticipates final approval from Charles County by the third quarter of 2008.  Construction of the project is expected to begin promptly after the permits are issued.  The Company is also currently in the process of obtaining a HUD insured loan for this project which is expected to close within 60 days of receiving the County’s approval of the plat.

1 Per Integra Realty Resources (“IRR”) Viewpoint 2008, “Real Estate Value Trends”
 
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Multifamily Rental Property Acquisitions
The following table sets forth the name of each entity owning U.S. Apartment Properties; the number of rental units in the property; the percentage of all units held by U.S. Apartment Properties; the project cost; the percentage of such units under lease; and the expiration date and maximum benefit for any subsidy contract:

   
Number of
         
12/31/2007
   
Occupancy
   
Expiration
   
Maximum
 
   
Apartment
   
Percentage of
   
Project Cost (A)
   
at
   
Of Subsidy
   
Subsidy
 
U.S. APARTMENTS PROPERTIES
 
Units
   
Portfolio
   
(in thousands)
   
12/31/2007
   
Contract
   
(in thousands)
 
Consolidated Partnerships
                                   
Bannister
    167       5 %   $ 9,736       94 %            N/A     $ -  
      41       1 %                  
2008
      521  
Coachman's
    104       3 %     7,997       97 %            N/A       -  
Crossland
    96       3 %     3,358       92 %            N/A       -  
Essex
    496       15 %     21,037       98 %  
2008
      4,488  
Fox Chase
    176       5 %     8,969       97 %            N/A       -  
Headen House
    136       4 %     8,582       97 %  
2008
      1,641  
Huntington
    204       6 %     10,115       96 %  
2008
      2,421  
Lancaster
    104       3 %     6,002       96 %            N/A    
(B)
 
Milford Station I
    200       6 %     13,165       91 %            N/A       -  
Milford Station II
    50       1 %     1,861       96 %            N/A       -  
New Forest
    256       8 %     15,412       93 %            N/A       -  
Nottingham South
    85       3 %     3,049       89 %            N/A       -  
Owings Chase
    234       7 %     15,749       95 %            N/A       -  
Palmer
    96       3 %     9,138       91 %            N/A       -  
      56       2 %                  
2008
      709  
Prescott Square
    73       2 %     4,738       92 %            N/A       -  
Sheffield Greens
    252       7 %     25,854       93 %            N/A       -  
Village Lake
    122       3 %     8,010       91 %            N/A       -  
Wakefield Terrace
    164       5 %     11,325       93 %            N/A       -  
      40       1 %                  
2011
      525  
Wakefield Third Age (Brookmont)
    104       3 %     5,552       95 %            N/A       -  
      3,256       96 %     189,649                       10,305  
Unconsolidated Partnerships
                                               
Brookside Gardens
    56       2 %     2,694       98 %            N/A    
(C)
 
Lakeside Apartments
    54       2 %     4,130       98 %            N/A    
(C)
 
      110       4 %     6,824                          
      3,366       100 %   $ 196,473                     $ 10,305  

(A)  
Project costs represent total capitalized costs for each respective property as per Schedule III "Real Estate and Accumulated Depreciation" in Item 8 of this 10-K.
(B)  
Not subsidized, however, 54 units are subject to household income restrictions set by the Maryland Community Development Administration (“MCDA”).
(C)  
Not subsidized, but all units are set aside for low to moderate income tenants over certain age limitations under provisions set by the LIHTC program.


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The following table sets forth the operating results, mortgage balances and our economic interest in the U.S. Apartment Properties by location ($ amounts in thousands, all other figures are actual):
U.S. APARTMENT PROPERTIES
 
Number of Apartment Units
   
Operating Revenues
   
Operating Expenses (a)
   
Non-Recourse Mortgage Outstanding
   
Economic Interest Upon Liquidation (b)
   
Consolidated Partnerships
                               
Charles County, Maryland
                               
 Bannister
    208     $ 2,561     $ 1,118     $ 12,501       100.0 %  
 Coachman's
    104       1,695       687       10,883       95.0 %  
 Crossland
    96       1,188       555       4,091       60.0 %  
 Fox Chase
    176       2,293       883       12,840       99.9 %  
 Headen House
    136       1,634       625       6,914       75.5 %  
 Huntington
    204       2,432       1,533       9,218       50.0 %  
 Lancaster
    104       1,462       683       8,491       100.0 %  
 New Forest
    256       3,971       1,520       22,717       99.9 %  
 Palmer
    152       1,874       789       6,746       75.5 %  
 Sheffield Greens
    252       3,700       1,871       26,945       100.0 %  
 Village Lake
    122       1,604       649       9,205       95.0 %  
 Wakefield Terrace
    204       2,283       1,085       10,041       75.5 %  
 Wakefield Third Age (Brookmont)
    104       1,280       558       7,295       75.5 %  
                                           
Baltimore County, Maryland
                                         
 Milford Station I
    200       1,907       1,036       10,491       100.0 %  
 Milford Station II
    50       399       284       1,345       100.0 %  
 Nottingham South
    85       639       478       2,560       100.0 %  
 Owings Chase
    234       2,427       1,302       12,376       100.0 %  
 Prescott Square
    73       785       479       3,590       100.0 %  
                                           
Henrico County, Virginia
                                         
 Essex
    496       4,282       2,757       14,025       50.0 %
(c)
      Total Consolidated
    3,256       38,416       18,892       192,274            
                                           
Unconsolidated Partnerships
                                         
Charles County, Maryland
                                         
Brookside Gardens
    56       318       271       1,241          
(d)
Lakeside
    54       493       262       1,952          
(e)
      Total Unconsolidated
    110       811       533       3,193            
Grand Total
    3,366     $ 39,227     $ 19,425     $ 195,467            
 
 
 
(a)  
Amounts exclude management fees eliminated in consolidation.
(b)  
Surplus cash from operations and proceeds from sale or liquidation are allocated based on the economic interest except those identified by additional description.
(c)  
Upon liquidation, the limited partners have a priority distribution equal to their unrecovered capital.  As of December 31, 2007, the unrecovered limited partner capital for Essex was $1,890,000.  The Company’s receivable of $2,958,000 is the second priority of proceeds from the sale or liquidation on the property.  Until the limited partners have recovered their capital contributions, any surplus cash is distributed first to the limited partners up to $100,000, then a matching $100,000 to the general partner, with any remaining split between the general partner and the limited partners.
(d)  
The allocation of profits and surplus cash, as per the partnership agreement, is based on a complex waterfall calculation.  The Company’s share of the economic ownership is immaterial.
(e)  
The allocation of profits and surplus cash, as per the partnership agreement, is based on a complex waterfall calculation.  The Company is currently eligible to receive $363,000 in distributions related to the payment of a development fee.  This amount receives priority over return of equity to the partners but is subordinate to a $3,000 per year preferred return to the minority partners.  Upon settlement of all priority items, balance is split 70% to the company and 30% to the minority partners.

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Government Regulation
HUD subsidies are provided principally under Section 8 of the National Housing Act. Under Section 8, the government pays to the applicable apartment partnership the difference between market rental rates (determined in accordance with government procedures) and the rate the government deems residents can afford.  In compliance with the requirements of Section 8, ARMC screens residents for eligibility under HUD guidelines. Subsidies are provided under contracts between the federal government and the owners of the apartment properties.
Subsidy contracts for ACPT's U.S. Apartment Properties are scheduled to expire between 2008 and 2011. ACPT currently intends to seek the renewal of expiring subsidy contracts for its properties based on the most advantageous options available at the time of renewal. Please refer to the table shown on page 7 for the expiration dates and amounts of subsidies for the respective properties. We initiate the HUD contract renewal process annually. For contracts where we have elected five-year terms, we are limited to increases based on an Operating Cost Adjustment Factor (“OCAF”).  At the end of the five-year term, or annually if a five-year term is not elected, we will have six options for renewing Section 8 contracts depending upon whether we can meet the eligibility criteria.  Historically, we have met the criteria necessary to renew our Section 8 contracts.
Cash flow from projects whose mortgage loans are insured by the Federal Housing Authority ("FHA"), or financed through the housing agencies in Maryland or Virginia (the "State Financing Agencies") are subject to guidelines and limits established by the apartment properties' regulatory agreements with HUD and the State Financing Agencies.
Our regulatory contracts with HUD and/or the mortgage lenders generally require that certain escrows be established as replacement reserves.  The balance of the replacement reserves are available to fund capital improvements as approved by HUD or the mortgage lender.  As of December 31, 2007, a total of $3.5 million was designated as replacement reserves for the consolidated U.S. Apartment Partnerships.
HUD has received congressional authority to convert expired contracts to resident-based vouchers. This would allow residents to choose where they wish to live, which may include the dwelling unit in which they currently reside.  If these vouchers result in our tenants moving from their existing apartments, this may negatively impact the income stream of certain properties. However, we intend to continue to maintain our properties in order to preserve their values and retain residents to the greatest extent possible.
The federal government has virtually eliminated subsidy programs for new construction of low and moderate income housing by profit-motivated developers such as ACPT.  Any new multifamily rental properties developed by ACPT in the U.S. are expected to offer market rate rents.

Competition
ACPT's investment properties that receive rent subsidies are not subject to the same market conditions as properties charging market rate rents. The Company's subsidized units average annual occupancy of approximately 98%.  ACPT's apartments in St. Charles that have market rate rents are impacted by the supply and demand for competing rental apartments in the area, as well as the local housing market. Our occupancy rates for our market rate properties typically range from 90% to 99%.  When for-sale housing becomes more affordable due to lower mortgage interest rates or softening home prices, this can adversely impact the performance of rental apartments. Conversely, when mortgage interest rates rise or home prices increase, the market for apartment rental units typically benefits.  With the recent subprime mortgage crisis, the Company has seen new homeowners who can no longer afford the increases in their adjustable rate mortgages return to the rental market.
The Company has historically been the only source for multifamily apartment living in the St. Charles and surrounding Waldorf areas.  In the spring of 2008, Archstone-Smith is expected to open “Westchester at the Pavilions,” a luxury apartment community in St. Charles.  We believe that rents within this new facility will be higher than those currently charged for the Company’s apartments.  However, it is unclear if and to what extent occupancy at our higher end fair market properties will be impacted by the addition of these units into the St. Charles market.

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PROPERTY MANAGEMENT
ACPT, indirectly through ARMC, operates a property management business in the Washington, D.C. metropolitan area, Baltimore, Maryland and in Richmond, Virginia. ARMC earns fees from the management of 3,654 rental apartment units. ACPT holds an ownership interest in 3,366 units managed by ARMC.  Management fees for these 3,366 units are based on a percentage of rents ranging from 4% to 6.5%. The management contracts for these properties have terms of one or two years and are automatically renewed upon expiration but, may be terminated on 30 days notice by either party. ARMC is entitled to receive an aggregate incentive management fee of $40,000 annually from two of the properties that it manages, as well as the potential to receive an incentive management fee of $100,000 from another property that it manages.  The payment of these fees is subject to the availability of surplus cash. Management and other fees earned from properties included within the consolidated financial statements are eliminated in consolidation. Management fees for the other managed apartment property owned by a third party equal 3% of rents. Effective February 28, 2007, the Company’s management agreement with one of these managed apartment properties, G.L. Limited Partnership, was terminated upon the sale of the apartment property to a third party.

COMMUNITY DEVELOPMENT
ACPT, indirectly through ALD, owns approximately 3,950 undeveloped acres in the planned community of St. Charles, which is comprised of a total of approximately 9,100 acres (approximately 14 square miles) located in Charles County, Maryland, 23 miles southeast of Washington, D.C.  The land in St. Charles is being developed by ACPT and its subsidiaries for a variety of residential uses, including single-family homes, townhomes, condominiums and apartments, as well as commercial and industrial uses.
St. Charles is comprised of five separate villages: Smallwood Village (completed), Westlake Village (substantially completed), Fairway Village (currently under development), Piney Reach (undeveloped except for certain infrastructure improvements) and Wooded Glen (undeveloped except for certain infrastructure improvements). Each of the developed villages consists of individually planned neighborhoods, and includes schools, churches, recreation centers, sports facilities, and a shopping center. Other amenities include parks, lakes, hiking trails and bicycle paths. St. Charles also has an 18-hole public golf course in its Fairway Village community. Each community is planned for a mix of residential housing, including detached single-family homes, townhomes, multiplex units and rental apartments. Typical lot sizes for detached homes range from 6,000 to 8,000 square feet.
The development of St. Charles as a planned unit development ("PUD") began in 1972 when Charles County approved a comprehensive PUD agreement for St. Charles. This master plan allows for the construction of 24,730 housing units and approximately 1,390 acres of commercial and industrial development. As of December 31, 2007, there were more than 11,000 completed housing units in St. Charles, including Carrington neighborhood, which began prior to 1972 and are not included in the PUD. In addition, there are schools, recreation facilities, commercial, office and retail space in excess of 4.4 million square feet in St. Charles.  ACPT, through outside planners, engineers, architects and contractors, obtains necessary approvals for land development, plans individual neighborhoods in accordance with regulatory requirements, constructs roads, utilities and community facilities. ACPT develops lots for sale for detached single-family homes, townhomes, apartment complexes, and commercial and industrial development.
Fairway Village, named for the existing 18-hole public golf course it surrounds, is under development. The master plan provides for 3,346 dwelling units on 1,612 acres, including a business park and a 68-acre village center. Opened in 1999, development of Fairway Village continues to progress as evidenced by the 78 lots settled in 2007 and the 129 completed lots in backlog as of December 31, 2007. All settlements made in 2007 were the result of the March 2004 agreement with Lennar Corporation (“Lennar”) discussed below.  Since inception of Fairway Village, builders have settled 628 fully developed lots in the first thirteen parcels.  In addition to lots in backlog, infrastructure construction has started on the next 68 single family lots and 148 townhome lots, with completion expected by the end of 2008.  Some of this lot development is being completed in order for the Company to have access to the parcel designated for our Gleneagles Apartment complexes. Additional parcels are in the engineering phase.
The last two villages, Wooded Glen and Piney Reach, comprise approximately 3,000 acres, and are planned for development near the completion of Fairway Village. The County Commissioners must approve the total number and mix of residential units before development can begin.  There can be no assurances that the total 24,730 units in St. Charles' master plan can be attained within the remaining acreage currently owned.
The Company continues to look for opportunities to purchase land for future development.  However, there can be no assurance that the Company will be able to locate additional land suitable for future development.
As of December 31, 2007, 35.66 acres of developed commercial land and 129 residential lots were available for delivery.

-9-

The following table is a summary of the land inventory available in St. Charles as of December 31, 2007:
   
Lot Type
Estimated Number of Lots
Approximate Acreage
Entitlements
Estimated Expected Date of Sale
Estimated Aggregate Sales Price
SMALLWOOD VILLAGE
           
 
Commercial, Retail, Office:
           
 
Henry Ford Circle
Commercial
8
8.89
A
2008 - 2009
$1.8 - $2.0 million
 
Industrial:
           
 
Industrial Park North Tract 21, Parcel F
Light Industrial
1
4.18
A
TBD
TBD
 
Industrial Park North Tract 23, Parcel A
Light Industrial
1
1.95
A
TBD
TBD
WESTLAKE VILLAGE
           
 
Commercial, Retail, Office:
           
 
Town Center Parcel A3
Restaurant, Office, Retail
4
7.76
A
2008 - 2012
 $6 million
 
Town Center Parcel A3 Lot 3
Restaurant, Office Retail
1
1.50
A
Internal Use
N/A
 
Parcel M
Office, Retail
1
2.61
A
2008
$300,000
 
Hampshire Commercial Parcel Q
Commercial
1
13.31
C
TBD
 $ 2.1 million
FAIRWAY VILLAGE
           
 
Residential Lots:
           
 
Sheffield Parcel I
SF Attached
8
20.12
A
2008
*
 
Sheffield Parcel G/M1
SF Detached
121
32.15
A
2008 – 2009
*
 
Sheffield Parcel J
SF Attached
148
34.30
B
2008 - 2010
*
 
Gleneagles Parcel A
Multi-Family
120
12.40
B
Internal Use
N/A
 
Gleneagles Parcel B
Multi-Family
184
13.00
B
Internal Use
N/A
 
Gleneagles Parcel D
SF Detached
68
28.40
B
2008 - 2009
*
 
Gleneagles Parcel E
SF Detached
117
53.70
B
2009 - 2010
*
 
Gleneagles Parcel C
SF Attached
128
21.20
B
2010 - 2011
*
 
Gleneagles Parcel F
SF Detached
84
31.00
B
2009 - 2010
*
 
Gleneagles South Neighborhood
SF Attached
194
25.00
C
2011 - 2013
*
 
Gleneagles South Neighborhood
SF Detached
642
224.40
C
2010 - 2013
*
 
Gleneagles South Neighborhood
Multi-Family
165
14.00
C
Internal Use
N/A
 
Commercial, Retail, Office:
           
 
Middle Business Park Parcel D
Office, Commercial
14
42.15
B
TBD
TBD
 
Fairway Village Center
Retail, Commercial
1
93.90
B
TBD
TBD
 
Middle Business Park Parcel B
Office, Commercial
4
32.85
B
TBD
TBD
 
Middle Business Park Parcel C
Office, Commercial
3
16.16
B
TBD
TBD
VILLAGE OF WOODED GLEN
           
 
Residential Parcels
TBD
7,155
1810.40
D
TBD
TBD
 
Wooded Glen Village Center
Retail, Commercial
1
30.00
C
TBD
TBD
VILLAGE OF PINEY REACH
           
 
Residential Parcels
TBD
2,921
666.60
D
TBD
TBD
 
Piney Reach Village Center
Retail, Commercial
1
37.30
C
TBD
TBD
 
Piney Reach Industrial Park
Industrial
1
76.18
C
2009
$13.0 million
 
Piney Reach Industrial Park
Industrial
66
506.59
C
TBD
TBD
(A) Sites are fully developed and ready for sale
       
(B) Completed master plan approval including all entitlements and received preliminary site plan approval for development   
(C) Completed master plan approval including all entitlements     
(D) Completed master plan approval including all entitlements excluding school allocations 
TBD means To Be Determined. 
*  Price determined as a percentage (generally 30%) of the "Base Selling Price" of the new home constructed and sold on the lot per the terms of the sales agreement with Lennar Corporation.
Customer Dependence
In March 2004, the Company executed development and purchase agreements with Lennar’s homebuilding subsidiary to develop and sell approximately 1,950 residential lots, consisting of approximately 1,359 single-family lots and 591 town home lots in Fairway Village (the “Lennar Agreements”).  The Lennar Agreements require the homebuilder to provide $20,000,000 of letters of credit to secure the purchase of the lots.  The letters of credit will be used as collateral for major infrastructure loans from the Charles County Commissioners of up to $20,000,000 and will be reduced as the Company repays the principal of these loans.  As security for the Company’s obligations to Lennar, a junior lien was placed on the residential portion of Fairway Village. For each lot sold in Fairway Village, the Company will deposit $10,300 in an escrow account to fund the principal payments due to the Charles County Commissioners at which time the lot is released from the junior lien.  Under the Lennar Agreements, the Company is responsible for making developed lots available to Lennar on a monthly basis, and subject to availability, the builder is required to purchase a minimum of 200 residential lots developed by the Company per year.  Based on 200 lot sales per year, it is estimated that settlements will take place through 2015; however, the continued slowing of the new homes sales market in the United States, and more specifically in the Washington D.C. suburban areas, has adversely impact Lennar’s willingness or ability to take down 200 lots per year.  In December 2007, the Company executed an amendment to the Lennar Agreements (the “December Amendment”) whereby the Company agreed to accept 51 lot settlements in December 2007 as satisfaction of Lennar’s lot takedown requirement for 2007, resulting in 78 total lots taken down by Lennar during 2007.
According to the terms of the Lennar Agreements, the final selling price of the lots will be calculated based on 30% of the base sales price of homes sold by the builder.  As part of the December Amendment to the Lennar Agreements, the Company agreed to temporarily reduce the final lot price for 100 lots (51 taken down in December 2007 and 49 which Lennar has agreed to take before June 1, 2008) from 30% to 22.5% of the base price of the home sold on the lot, with guaranteed minimum prices of $78,000 per single family lot and $68,000 per townhome lot.  Currently new townhomes in Fairway Village are priced between $330,000 and $400,000 while single family homes in Fairway Village are priced between $390,000 and $500,000.
In September 2004, the Company entered into a joint venture agreement with Lennar for the development of a 352-unit, active adult community located in St. Charles, Maryland; and transferred land to the joint venture in exchange for a 50% ownership interest and $4,277,000 in cash.  Lennar and the Company each have an equal interest in the cash, earnings and decision making concerning the joint venture. The joint venture's operating agreement calls for the development of 352 lots.  Delivery of these lots began in the fourth quarter of 2005.  The Company manages the project's development for a market rate fee pursuant to a management agreement.  However, the joint venture has ceased development activities for one year, as to date, lot development has outpaced sales.
Revenues from Lennar include residential land sales as well as certain management fees.  Total revenues from Lennar within our U.S. segment were $9,663,000 for the year ended December 31, 2007 which represents 18% of the U.S. segment's revenue and 11% of our total year-to-date consolidated revenue.  No other customers accounted for more than 10% of our consolidated revenue for the year ended December 31, 2007.  Loss of all or a substantial portion of our land sales, as well as the joint venture's land sales, to Lennar would have a significant adverse effect on our financial results until such lost sales could be replaced.  If such an event were to occur, there would be no assurance that the lost volume would be replaced timely and on comparable terms.

-11-

Government Approvals
The St. Charles master plan has been incorporated into Charles County's comprehensive zoning plan. In addition, the Charles County government (the “County”) has agreed to provide sufficient water and sewer connections for the balance of the housing units to be developed in St. Charles.  Specific development plans for each village in St. Charles are subject to approval of the County Planning Commission. Such approvals have previously been received for the villages of Smallwood, Westlake and Fairway. Approvals have not yet been sought on the final two villages.
In 2001, the Charles County Commissioners enacted the Adequate Public Facilities Policy.  This policy limits the number of residential building permits issued to the amount of school allocations calculated in a given period.
Under a settlement agreement reached between ACPT and the County in 2001, the County provided guaranteed school allocations to St. Charles for 898 new dwelling units.  The County subsequently granted allocations for an additional 200 dwelling units in 2005, 300 for 2006, 300 for 2007 and in January of 2008, the County granted us an additional 300 units for 2008.  To date, we have recorded 898 dwelling units with the County leaving us with a balance of 1,096 school allocations available for new dwelling units.  School allocations are used when the Company records the subdivision plats with the County.  The Company anticipates using 452 allocations in 2008 related to additional lot development and beginning construction of Gleneagles multifamily housing.
Under the settlement agreement, the County agreed to utilize a base line assumption of 200 school allocations per year, however, there are no guarantees that additional allocations will be granted in future years.  Under the settlement agreement, the County will also provide sewer connection for the next 2,000 units in Fairway Village at fees that will be $1,608 less per unit than the fee charged to builders outside of St. Charles.  As of December 31, 2007, approximately 1,425 of the 2,000 units remained.  Our agreement reached with the County also provides for the possibility of the Company's being allowed to annex additional contiguous land to St. Charles.
Pursuant to the settlement agreement the Company agreed to accelerate the construction of two major roadway links to the County’s road system. Also, as part of the agreement, the County agreed to issue general obligation public improvement bonds to finance $20,000,000 of this construction guaranteed by letters of credit provided by Lennar.  As of December 31, 2007, the Charles County Commissioners have issued three separate Consolidated Public Improvement Bonds (the “Bonds”) totaling $20,000,000 on behalf of the Company.  The Bonds bear an interest rate between 4% and 8% and call for semi-annual interest payments and annual principal payments and mature in fifteen years. The Bond Repayment agreements with the County stipulate the borrowing and repayment provisions for the funds advanced.  Total cost of the construction project is estimated at approximately $31,138,000.
 The complete terms of the settlement are contained in an Amended Order in Docket 90 before the County Commissioners of Charles County, a Consent Judgment in the Circuit Court, an Indenture, and a Settlement Agreement.
In August 2005, the Company signed a memorandum of understanding ("MOU") with the Charles County Commissioners regarding a land donation that is planned to house a minor league baseball stadium and entertainment 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. The County will be responsible for infrastructure improvements on the site of the complex. In return, the County will issue the general obligation bonds to finance the infrastructure improvements. In March 2006 and 2007, $4,000,000 and $3,000,000 of bonds were issued for this project, respectively.   In March 2008, we anticipate the issuance of an additional $3,000,000 will be issued related to completion of required stadium improvements.  As per the stipulations provided for in the Bond Repayment agreement with the County, the funds for this project will be repaid by ACPT over a 15-year period. In addition, the County agreed to increase the base line assumption from 200 to 300 school allocations per year commencing with the issuance of these bonds and continuing until such bonds are repaid in full.

Competition
Competition among residential communities in Charles County is intense. Currently, there are approximately 30 subdivisions competing for new homebuyers within a five-mile radius of St. Charles. The largest competing housing developments are Charles Crossing, a 451-unit project being developed by a local developer; Charles Retreat, approximately 400 active adult units being developed by Slenker Land Corporation; Avalon, a 264-unit project being developed by Centex Homes; and Autumn Hills, a 390-unit project being developed by Elm Street Development.  Smaller projects are being developed by more than 20 other developers. The marketplace attracts major national and regional homebuilders. In this very price sensitive market, ACPT continues to position St. Charles to provide affordable building lots and homes while offering more amenities than the competition.  A limited number of school allocation permits in Charles County has slowed the growth of new residential construction. We believe the guaranteed school allocations discussed above provide the Company with a competitive edge.

-12-

Environmental Impact
Management believes that the St. Charles master plan can be completed without material adverse environmental impact and in compliance with governmental regulations. In preparation for immediate and future development, Phase I Environmental Site Assessments have been prepared for substantially all of the undeveloped parcels. Historically, the land has been used for farming, sand and gravel mining and forestry and no significant environmental concerns were found. Jurisdictional determinations for wetlands have been approved by the Army Corps of Engineers for the Sheffield Neighborhood as well as parts of the Gleneagles Neighborhood in Fairway Village, the current phase of residential development.  Management has developed an Environmental Policy Manual and has established an Environmental Review Committee and an Environmental Coordination Officer to anticipate environmental impacts and avoid regulatory violations. However, development can be delayed while local, state and federal agencies are reviewing plans for environmentally sensitive areas.
The ongoing process of land development requires the installation, inspection and maintenance of erosion control measures to prevent the discharge of silt-laden runoff from areas under construction.  The capital expenditures for these environmental control facilities varies with the topography, proximity to environmental features, soil characteristics, total area denuded and duration of construction.
In 2007, we spent nearly $80,000 for these costs.  As land development continues, an annual cost of approximately $100,000 can be expected.

ECONOMIC AND DEMOGRAPHIC INFORMATION
Based on figures prepared by the Charles County Department of Planning and Growth Management ("DPGM"), the population of Charles County grew to 124,145 in 2000, up from 101,000 in 1990, and is projected to increase at a rate of 2% per year, reaching a total of 182,000 by 2020.  Charles County was the ninth fastest growing county in the state between the 1990 and 2000 census with an average annual growth rate during that period of 1.77%. The median household income in Charles County was $80,179 in 2006.  Building permit activity for new structures decreased 24% to 1,971 permits issued in Charles County in 2007 compared to 2,602 permits issued in 2006.

PUERTO RICO SEGMENT:

INVESTMENT IN RENTAL PROPERTIES

Multifamily Rental Properties
             ACPT, indirectly through IGP, holds interests in 9 Puerto Rico partnerships, which collectively own and operate a total of 12 multifamily rental facilities in Puerto Rico (“Puerto Rico Apartment Properties”). The Puerto Rico Apartment Properties own a total of 2,653 rental units, all of which receive rent subsidies from HUD and are financed by non-recourse mortgages.
 
-13-

    The table below sets forth the name of each property; the number of rental units in the property; the percentage of all units held by Puerto Rico Apartment Properties; the project cost; the percentage of such units under lease; and the expiration date and maximum benefit for any subsidy contract:
   
Number of
   
Percentage
   
12/31/2007
   
Occupancy
 
Expiration
 
Maximum
 
   
Apartment
   
of
   
Project Cost (B)
   
at
 
Of Subsidy
 
Subsidy
 
P. R. APARTMENTS PROPERTIES
 
Units
   
Portfolio
   
(in thousands)
   
12/31/2007
 
Contract
 
(in thousands)
 
Consolidated Partnerships
                               
San Anton
    184       7 %   $ 5,562       100 %
2010
  $ 1,316  
Monserrate Associates
    304       11 %     12,853       100 %
2009
    2,568  
Alturas del Senorial
    124       5 %     5,126       99 %
2009
    1,039  
Jardines de Caparra
    198       7 %     8,076       100 %
2010
    1,582  
Colinas de San Juan
    300       11 %     12,645       100 %
2011
    2,048  
Bayamon Garden
    280       11 %     14,200       100 %
2011
    2,022  
Vistas del Turabo
    96       4 %     3,560       100 %
2021
    704  
Monserrate Tower II (A)
    304       11 %     13,539       100 %
2020
    2,478  
Santa Juana (A)
    198       7 %     8,128       100 %
2020
    1,660  
Torre De Las Cumbres (A)
    155       6 %     7,102       99 %
2020
    1,310  
De Diego (A)
    198       8 %     8,086       100 %
2020
    1,618  
Valle del Sol
    312       12 %     15,853       100 %
2008
    2,463  
      2,653       100 %   $ 114,730               $ 20,808  

(A)  
This property is owned by Carolina Associates L.P., a Maryland limited partnership in which IGP holds a 50% interest.
(B)  
Project costs represent total capitalized costs for each respective property as per Schedule III "Real Estate and Accumulated Depreciation" in Item 8 of this 10-K.

 
-14-

The table below sets forth the operating results, mortgage balances and our economic interest in the Puerto Rico Apartment Properties by location ($ amounts in thousands, all other figures are actual):

P.R. APARTMENT PROPERTIES
 
Number of Apartment Units
   
Operating Revenues
   
Operating Expenses (a)
   
Non-Recourse Mortgage Outstanding
   
Economic Interest Upon Liquidation (b)
   
                                 
Consolidated Partnerships
                               
Carolina, Puerto Rico
                               
Monserrate Associates
    304     $ 2,624     $ 1,346     $ 7,110       52.50 %  
Monserrate Tower II (c)
    304       2,597       1,312       9,995       50.00 %
(e)
San Anton
    184       1,466       897       4,157       49.50 %  
                                           
San Juan, Puerto Rico
                                         
Alturas Del Senorial
    124       1,095       530       3,502       50.00 %  
Colinas San Juan
    300       2,090       845       9,499       50.00 %  
De Diego (c)
    198       1,715       845       5,531       50.00 %
(e)
Torre de Las Cumbres (c)
    155       1,381       661       5,135       50.00 %
(e)
                                           
Caguas, Puerto Rico
                                         
 Santa Juana (c)
    198       1,888       937       7,130       50.00 %
(e)
Vistas Del Turabo (f)
    96       688       343       961       50.00 %
(d) (e)
                                           
Bayamon, Puerto Rico
                                         
Bayamon Garden (f)
    280       2,106       839       9,289       50.00 %
(d) (e)
Jardines De Caparra
    198       1,694       847       6,328       50.00 %
(e)
Valle Del Sol
    312       2,501       835       10,578       50.00 %
(d) (f)
Total Consolidated
    2,653     $ 21,845     $ 10,237     $ 79,215            

(a)  
Amounts exclude management fees eliminated in consolidation.
(b)  
Surplus cash from operations and proceeds from sale or liquidation are allocated based on the economic interest except those identified by additional description
(c)  
Owned by Carolina Associates
(d)  
Upon liquidation, the limited partners have a priority distribution equal to their uncovered capital.  As of December 31, 2007, the unrecovered limited partner capital in Bayamon Garden, Valle Del Sol and Vistas Del Turabo were $952,000, $779,000, and $618,000 respectively.
(e)  
In addition to normal operating receivables between the Company and the Puerto Rico Apartment Properties, the Company has a receivable for incentive management fees of $59,000 for Bayamon Gardens, $12,000 for Jardines de Caparra, $22,000 for Torre de Las Cumbres, $28,000 for De Diego Apartments, $28,000 for Santa Juana Apartments and $42,000 for Monserrate Towers II.  The Company also has a receivable for working capital loan of $29,000 for Vistas del Turabo.  This receivable would receive priority upon liquidation of the interests of this partnership.
(f)  
In addition to the receivable noted in (c) above, the Company has a note receivable from Valle del Sol amounting $928,000.  This receivable is the result from unsecured development cost loans made to the Partnership to cover acquisition and construction costs of the rental property in excess of the permanent financing.  Pursuant to the terms of the Partnership agreement, the note is non-interest bearing and is payable only by proceeds from mortgage refinancing, partial condemnations, sales of easements or similar interests or proceeds from sale of the properties, but only after the payment of the debt and liabilities due to outsiders and expenses of liquidation.
(g)  
Distributions from these partnerships are limited to an annual amount of $10,000 and $118,000 for Vistas Del Turabo and Bayamon Gardens, respectively.
 
-15-

Commercial Rental Properties
In September 2005, the Company commenced the operations of its first commercial rental property in the community of Parque Escorial, known as Escorial Building One, in which it holds a 100% ownership interest.   Escorial Building One is a three-story building with approximately 56,000 square feet of office space for lease.  The Company moved its Puerto Rico corporate office to the new facility in the third quarter of 2005 and, as of December 31, 2007, leases approximately 20% of the building.  As of December 31, 2007, 38% of the office space was leased.  On December 10, 2007, the Company signed a letter of intent with a new tenant to lease 33% of Escorial Office Building One.  The lease will commence 10 days following completion of tenant improvements which is anticipated for the third quarter 2008.  The Company continues to focus on leasing the balance of available space in Escorial Office Building One.
In December 1998, LDA transferred title of a seven-acre site in Parque Escorial's office park to ELI on which a 150,000 square foot building was constructed. ELI is a special partnership in which LDA holds a 45.26% interest in future cash flow generated by the building lease.  The building is leased to the State Insurance Fund of Puerto Rico, a government agency, for 30 years, at the end of which the lessee can acquire it for $1.  For income tax and book purposes, the lease is considered a finance lease; therefore, the lease payments are treated as mortgage payments.  A significant portion of the lease payments consist of interest due from a government agency which, when received by ELI, is tax-free.  The tax-free status stays intact when ELI distributes its income to LDA.

Government Regulation
HUD subsidies are provided principally under Section 8 of the National Housing Act. Under Section 8, the government pays to the applicable apartment partnership the difference between market rental rates (determined in accordance with government procedures) and the rate the government deems residents can afford.  In compliance with the requirements of Section 8, IGP screens residents for eligibility under HUD guidelines. Subsidies are provided under contracts between the federal government and the owners of the Puerto Rico Apartment Properties.
Subsidy contracts for the Puerto Rico apartment properties are scheduled to expire between 2008 and 2021. HUD has in the past approved new subsidy contracts set at five-year terms, renewable annually.  Please refer to the tables shown above for the expiration dates and amounts of subsidies for the respective properties. We initiate the HUD contract renewal process annually. For contracts where we have elected five-year terms, we are limited to increases based on the OCAF factor.  At the end of the five-year term, or annually if a five-year term is not elected, we will have six options for renewing Section 8 contracts depending upon whether we can meet the eligibility criteria.  Historically, we have met the criteria necessary to renew our Section 8 contracts.
Cash flow from projects whose mortgage loans are insured by the FHA or financed through the housing agency in Puerto Rico (the "Puerto Rico Financing Agency,") is subject to guidelines and limits established by the apartment properties' regulatory agreements with HUD and the Puerto Rico Financing Agency.  Two of the regulatory agreements also require that if cash from operations exceeds the allowable cash distributions, the surplus must be deposited into restricted escrow accounts held by the mortgagee and controlled by HUD or the Puerto Rico Financing Agency. Funds in these restricted escrow accounts may be used for maintenance and capital improvements with the approval of HUD and/or the Puerto Rico Finance Agency.
Our regulatory contracts with HUD and/or the mortgage lenders generally require that certain escrows be established as replacement reserves and debt service reserves.  The balance of the replacement reserves are available to fund capital improvements as approved by HUD or the mortgage lender.  The balance of the debt service reserves is restricted for the purposes of making mortgage payments in limited circumstances.  As of December 31, 2007, a total of $3.4 million was designated as replacement reserves and $3.3 million as debt service reserves for the consolidated PR Apartment Partnerships.
Two of our partnerships are limited distribution partnerships in that annual distributions cannot exceed certain pre-determined amounts.  For Vistas Del Turabo, distributions are limited to $10,000 per year.  For Bayamon Gardens, distributions are limited to $118,000 per year.  Any surplus cash generated by these properties must be deposited in a residual receipts account, that with HUD approval, can be used for repairs to the property.
HUD has received congressional authority to convert expired contracts to resident-based vouchers. This would allow residents to choose where they wish to live, which may include the dwelling unit in which they currently reside.  If these vouchers result in our tenants moving from their existing apartments, this may negatively impact the income stream of certain properties. However, we intend to continue to maintain our properties in order to preserve their values and retain residents to the extent possible.
           The federal government has virtually eliminated subsidy programs for new construction of low and moderate income housing by profit-motivated developers such as ACPT. As a result, no new construction of multifamily rental properties is expected in Puerto Rico.

-16-

Competition
The Puerto Rico apartment properties all receive rent subsidies and are therefore not subject to the same market conditions as properties charging market rate rents.  Average annual occupancy for the Puerto Rico apartment properties is approximately 99%.

PROPERTY MANAGEMENT
IGP earns fees from the management of 2,653 rental apartment units in the Puerto Rico Apartment Properties that are based on a percentage of rents ranging from 2.85% to 9.25%.  The management contracts for these properties have terms of three years and are customarily renewed upon expiration.  IGP is also entitled to receive up to an aggregate of $192,000 annually in certain incentive management fees with respect to six properties owned by the Puerto Rico apartment partnerships.  The payment of these fees is subject to availability of surplus
cash. Management and other fees earned from properties included within the consolidated financial statements are eliminated in consolidation.
In addition, IGP currently manages 918 rental apartments owned by a non-profit entity, which acquired the units from IGP in 1996 under the provisions of the Low Income Housing Preservation and Resident Home Ownership Act (also known as "LIHPRHA").  The management agreements for these properties expire March 15, 2010.

COMMUNITY DEVELOPMENT
The Puerto Rico segment’s community development assets consist of more than 600 acres of developed and undeveloped land in the master planned communities of Parque Escorial in Carolina, Puerto Rico and Parque El Comandante in Canovanas, Puerto Rico. The land in Parque Escorial is being developed by the Company and its subsidiaries for a variety of residential uses, including condominiums as well as commercial and industrial uses.
The master plan for Parque Escorial was approved in 1994.  It includes the construction of 2,700 dwelling units of various types on 282 acres and the development of 145 acres for commercial, office and light industrial uses. The commercial site is anchored by a Wal-Mart and Sam's Club, each consisting of 125,000 square feet.  In April 2005, the Company sold 7.2 commercial acres of land to a third party developer who rezoned the land from commercial to residential use and is currently constructing condominium units on this parcel.  The rezoning has no impact on the number of units allowed under the Parque Escorial master plan.  LDA has developed and sold 255 acres in this community, and continues to own 120 acres of developed and undeveloped land.  Parque Escorial is located approximately six miles from the central business district in San Juan, Puerto Rico.
Site improvements for the first three residential phases, comprising 2,252 units, are substantially completed and either sold to third party homebuilders or used by the Company’s homebuilding operations for the construction of condominiums by the Company.  The next residential phase, at the Hill Top in Parque Escorial, comprising approximately of 216 units, is in the beginning stage of infrastructure development leaving the last phase of 232 units for development in the future.  There were no commercial land sales in backlog as of December 31, 2007.
ACPT indirectly holds a 100% interest in LDA, which in 1989 acquired the 427-acre site of the former El Comandante Race Track in Carolina, PR.  LDA also owns approximately 490 acres adjacent to the new El Comandante Race Track in Canovanas, PR.  At present, LDA is in the process of obtaining zoning approvals to convert the property into a master plan mixed-use community, Parque El Comandante, as we did in Parque Escorial. As part of the rezoning process in Parque El Commandante, in December 2007, a government agency requested the preparation of an Environmental Impact Statement which will be submitted during the first quarter of 2008.


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The following table is a summary of the land inventory available in Puerto Rico as of December 31, 2007:

   
 
 
Current Zoning
 
 
Lot Type
 
Estimated Number of Units/Parcels
 
Approximate Acreage
 
 
Entitlements
 
Expected Date of Sale
 
Estimated Asking Sales Price
PARQUE ESCORIAL
             
 
Office Park:
             
 
   Lot IV-3b
Office
Office
1
2.7
A
To be held
N/A
 
Residential:
             
 
   Hilltop Phase I - 216 units
Residential
Residential
216
21.19
B
TBD
N/A
 
   Hilltop Phase II - 232 units
Residential
Residential
232
95.81
B
TBD
N/A
                 
PARQUE EL COMANDANTE
             
 
Mixed-use Lots:
             
 
   Phase I - Quarry Site
Residential
Mixed-use commercial
TBD
50.79
C
2008 – 2009
$25 million
 
   Phase II - Route 66 North
Agricultural
Mixed-use
TBD
165.83
C
TBD
TBD
 
Residential Lots:
             
 
   Phase I - Quarry Site
Commercial
Residential
TBD
26.11
C
TBD
TBD
 
   Phase III - Route 66 South
Agricultural
Residential
TBD
209.14
C
TBD
TBD
 
   Phase IV - Out-Parcel
Agricultural
Residential
TBD
38.85
C
2008 - 2009
 $3.0 - 4.0 million
                 
(A) Sites are fully developed and ready for sale           
(B) Completed master plan approval including all entitlements and received preliminary site plan approval for development 
(C) Proposed master plan
             

Government Approvals
Parque Escorial's master plan has been approved but specific site plans are subject to the planning board review and approval.  Recently, the Company obtained approval from the natural resources department of Puerto Rico for the infrastructure development of 216 Hill Top residential units.
Parque El Comandante is in the planning stage and will require significant government approvals throughout the development process.  The master plan approval process is generally an 18 to 24 month process and the Company is approximately halfway through this process.  However, there can be no assurance that approvals for such development will be obtained, or if obtained, that the Company will be able to successfully develop such land.

Competition
The Company believes that the scarcity of developable land in the San Juan metropolitan area creates a favorable market for condominium unit sales at Parque Escorial. Competition for condominium unit sales is expected primarily from condominium projects in areas that the Company believes to be similar or less desirable than Parque Escorial.  Nearby projects provide for larger units, which are more costly than our units.  There are no projects in Parque Escorial offering units that are the same size, quality and in the same price range as our units.  In addition, no other community developers are currently developing projects similar to Parque Escorial in the area.
 
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Environmental Impact
Management of ACPT believes that the Parque Escorial master plan can be completed without material adverse environmental impact and in compliance with government regulations.  All of the necessary agencies have endorsed Parque Escorial's environmental impact statement.  Wal-Mart has provided mitigation for 12 acres of wetlands impacted by its development of the shopping center site and other land.  An erosion and sedimentation control plan must be obtained prior to construction.  This plan specifies the measures to be taken to prevent the discharge of silt-laden runoff from areas under construction. In 2007, we did not incur any of these costs.  Once we begin development of the next phase, we expect to incur an estimated $10,000 per year during the development period.  We are in the planning stage of Parque El Comandante and will not have estimates for such costs until we are further in the design stage.
The Puerto Rico Department of Natural and Environment Resources (DNER) have enacted Regulation #25 whereas it requires the replacement of trees removed during land development of the proposed Escorial Hilltop Project on a two to one basis.  In February 2006, IGP's Agronomist submitted to DNER a tree mitigation plan.  On December 13, 2006, IGP received from DNER's the approval and permit, under certain conditions, to proceed with the tree mitigation plan.  As part of this mitigation plan, in September 2007, the Company signed a Mitigation Agreement which included planting 10,900 trees in the Parque Escorial community over the next three years.  In addition, the Company segregated and donated 44 acres of land to the Municipality of Carolina to get the final approval to begin the land development at the Hilltop.   In addition, the Company paid $275,000 to the Municipality for future maintenance costs of the urban forest.  These parcels of land will be a conservation area for an urban forest.

HOMEBUILDING
During the first quarter of 2004, IGP formed a wholly owned subsidiary, Torres del Escorial, a Puerto Rico corporation, to construct and sell a 160-unit residential project within the Parque Escorial master plan community.  The project consists of four towers with 40 units in each tower.  The construction of the four-tower condominium complex was completed in December 2006.  As of December 31, 2007, 139 units were delivered.  The rest of the project remains for sale in 2008.  There was 1 unit under contract as of December 31, 2007.  This option is backed by a $6,000 deposit and sales contract.  In 2007, the Puerto Rico real estate market suffered its worst year in the last three decades; however, we continued to sell units in Torres del Escorial at favorable prices, but at a slower than anticipated pace.

Competition
The Company believes that competition related to homebuilding is similar to competition related to community development.  Refer to previous discussion for details.

ECONOMIC AND DEMOGRAPHIC INFORMATION
Puerto Rico has a population of approximately 3.9 million, and the Puerto Rico Planning Board projects the population will continue to grow. Construction in the residential sector has shifted from single-family homes to multi-family dwellings such as walk-up condominiums. As of the date of filing this report, we were informed that the 2007 Economic Report to the Governor was not available.  As presented in the 2006 Economic Report to the Governor, for the fiscal year ended June 30, 2006, per capita personal income was $12,997 with an average family income of $41,592. The economy of Puerto Rico registered growth in constant dollars of 0.7% in 2006.

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GENERAL

Employees
ACPT had 252 full-time employees as of December 31, 2007, 114 in the United States and 138 in Puerto Rico.  In Puerto Rico, 34 employees, or 13% of the Company’s total workforce, were subject to a Collective Bargaining Agreement which expired in February 2007, and was currently under negotiations as of December 31, 2007. Employees performing non-supervisory services through the Company's property management operations receive salaries funded by the properties.

Available Information
ACPT files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). These filings are available to the public over the Internet at the SEC's web site at http://www.sec.gov. You may also read and copy any document the Company files at the SEC's public reference room located at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.
Our principal Internet address is www.acptrust.com. We make available, free of charge, on or through www.acptrust.com our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.  Copies of the Company's Annual Report or Code of Ethics for Senior Financial Officers can be requested at no cost by writing to the following address or telephoning us at the following telephone number:

American Community Properties Trust
222 Smallwood Village Center
St. Charles, MD  20602
Attention:  Director of Investor Relations
(301) 843-8600



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RISK FACTORS
You should carefully consider the risks described below. These risks are not the only ones that we may face. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occurs, our business, financial condition or results of operations could be materially and adversely affected.

National, regional and local economic and business conditions:
Risk of reduced demand for residential lots, commercial parcels and multifamily housing
The real estate industry is sensitive to changes in economic conditions such as the level of employment, consumer confidence, availability of financing and interest rate levels as well as other market conditions such as oversupply or reduction in demand for commercial, industrial or multifamily rental properties.  In addition, regulatory changes could possibly alter, among other things, the tax deductibility of interest paid on home loans.  Adverse changes in any of these conditions generally, or in the market regions where we operate, could decrease demand for our residential lots, commercial parcels and homes, which could adversely affect our revenues and earnings.

Risk that the real estate market would be unable to recover timely from an economic downturn in the general economy
· The real estate business is a cyclical business.  Currently, weak economic conditions in the United States and Puerto Rico have substantially slowed home sales and reduced home sale prices.  Continued significant declines in the prices for real estate could adversely affect our home and land sales revenues and margins.  In addition, adverse changes to key economic indicators such as unemployment rates and inflation could further reduce the willingness or ability of individuals to purchase new homes which could adversely affect our operations.

Lack of availability and creditworthiness of tenants
· We are exposed to customer risk. Our performance depends on our ability to collect rent from our customers. General economic conditions and an increase in unemployment rates could cause the financial condition of a large number of our tenants to deteriorate. While no tenant in our wholly owned portfolio accounted for a significant amount of the annualized rental revenue of these respective properties at December 31, 2007, our financial position may be adversely affected by financial difficulties experienced by our tenants, including bankruptcies, insolvencies or general downturns in business.

The risk of loss of available financing for both our customers and us
· Our business and earnings are also substantially dependent on the ability of our customers to finance the purchase of our land or homes.  The current credit crisis in the subprime mortgage markets has increased lender scrutiny and made it difficult for some potential homebuyers to obtain financing.  Continued or increasing limitations on the availability of financing or increases in the cost of such financing could adversely affect our operations.  Our business and earnings is also substantially dependent on our ability to obtain financing for our development activities as well as refinancing our properties' mortgages.  Increases in interest rates, concerns about the market or the economy, or consolidation or dissolution of financial institutions could increase our cost of borrowing, reduce our ability to obtain the funds required for our future operations, and limit our ability to refinance existing debt when it matures.  Changes in competition, availability of financing, customer trends and market conditions may impact our ability to obtain loans to finance the development of our future communities.

Adverse changes in the real estate markets, including, among other things:
Competition with other companies
· We operate in a very competitive environment, which is characterized by competition from a number of other land developers.  Actions or changes in plans by competitors may negatively affect us.

Reduction in demand for new construction homes
· The price received for residential lots in St. Charles and home sales in Puerto Rico are impacted by changes in the demand for new construction homes.  Continued softening of the demand for new homes in these areas will likely result in reductions in selling prices which would negatively impact our revenues and gross margins.

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Risks of real estate acquisition and development (including our ability to obtain governmental approvals for development projects and to complete our current development projects on time and within budget)
· Our plans for the future development of our residential communities can be affected by a number of factors including time delays in obtaining necessary government permits and approvals and legal challenges to our planned communities.
· The agreements we execute to acquire properties generally are subject to customary conditions to closing, including completion of due diligence investigations which may be unacceptable; acquired properties may fail to perform as we expected in analyzing our investments; our estimates of the costs or repositioning or redeveloping acquired properties may be inaccurate; the development opportunity may be abandoned after expending significant resources. In connection with our development occupancy rates and rents at the newly completed property may not meet the expected levels and could be insufficient to make the property profitable.
· The development of our residential communities may be affected by circumstances beyond our control, including weather conditions, work stoppages, labor disputes, unforeseen engineering, environmental or geological problems and unanticipated shortages of or increases in the cost of materials and labor. Any of these circumstances could give rise to delays in the completion of, or increase the cost of, developing one or more of our residential communities.
· The bulk of our operations are concentrated in Maryland and Puerto Rico, making us particularly vulnerable to changes in local economic conditions.  In addition, if weather conditions, or a natural disaster such as a hurricane or tornado, were to impact those regions, our results of operations could be adversely impacted.  Although insurance could mitigate some amount of losses from a catastrophe in those regions, it might not fully compensate us for our opportunity costs or our projected results of future operations in those regions, the market acceptance of which might be different after a catastrophe.

Risk of adverse changes in our relationship with significant customers, specifically Lennar Corporation:
Revenues from Lennar include residential land sales as well as certain management fees.  Total revenues from Lennar within our U.S. segment were $9,663,000 for the year ended December 31, 2007 which represents 18% of the U.S. segment's revenue and 11% of our total year-to-date consolidated revenue.  No other customers accounted for more than 10% of our consolidated revenue for the year ended December 31, 2007.  Loss of all or a substantial portion of our land sales, as well as the joint venture's land sales, to Lennar would have a significant adverse effect on our financial results until such lost sales could be replaced.  We cannot assure you that any lost sales could be replaced on comparable terms, or at all.
Although Lennar is contractually obligated to take 200 lots per year, the market is not currently sufficient to absorb this sales pace.  Accordingly, Lennar’s management requested and the Company granted a reduction of the 200 lot requirement for 2007.   Management agreed to accept a total of 78 lots as satisfaction of their lot takedown requirement for 2007.  In addition, the Company agreed to a temporary price reduction to 22.5% of the selling price of the home for 100 lots, 49 of which Lennar agreed purchase prior to June 1, 2008. Should  Lennar not comply with their obligations pursuant our amended contract or  there be a reduced demand for our commercial property our cash flow would be adversely impacted.

Risk that we would be unable to renew HUD subsidy contracts and the absence of federal funds on a timely basis to service these contracts
As of December 31, 2007, we owned an equity interest in and managed for third parties multifamily rental properties that benefit from governmental programs intended to provide housing to people with low or moderate incomes. These programs, which are usually administered by HUD or state housing finance agencies, typically provide mortgage insurance, favorable financing terms or rental assistance payments to the property owners.  Historically, there have been delays in the receipt of subsidy payments which generally occur upon contract renewal and HUD’s annual budget renewal process.  For those partnerships in which we serve as General Partner, we may be required to fund operating cash deficits when these delays occur.  General Partner advances or loans to the partnerships may then become subject to the repayment provisions required by the respective partnership agreements which may impede the timing of repayment.  Furthermore, as a condition of the receipt of assistance under these programs, the properties must comply with various requirements, which typically limit rents to pre-approved amounts. If permitted rents on a property are insufficient to cover costs, our cash flow from these properties will be negatively impacted, and our management fees may be reduced or eliminated.


-22-

Risk that we would be unable to obtain insurance at a reasonable cost
We may experience economic harm if any damage to our properties is not covered by insurance.  We carry insurance coverage on our properties of the type and in amounts that we believe is in line with coverage customarily obtained by owners of similar properties.  We believe all of our properties are adequately insured.  However, we cannot guarantee that the limits of our current policies will be sufficient in the event of a catastrophe to our properties.  We may suffer losses that are not covered under our comprehensive liability, fire, extended coverage and rental loss insurance policies.  If an uninsured loss or a loss in excess of insured limits should occur, we could lose capital invested in a property, as well as any future revenue from the property.  We would nevertheless remain obligated on any mortgage indebtedness or other obligations related to the property.

Risk of significant environmental and safety requirements could reduce our profitability
Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.  When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time.  Some molds may produce airborne toxins or irritants.  Concern about indoor exposure to mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions.  As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property.  In a similar manner, the existence of a significant amount of lead based paint at our properties could result in costly remediation efforts.  In addition, the presence of significant mold or lead based paint could expose us to liability from our tenants, employees of our tenants and others if property damage or health concerns arise.  In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties.  We may be required to make substantial capital expenditures to comply with those requirements and these expenditures could have a material adverse effect on our operating results and financial condition, as well as our ability to make distributions to shareholders.

Risk of loss of senior management and key employees
We could be hurt by the loss of key management personnel.  Our future success depends, to a significant degree, on the efforts of our senior management.  Our operations could be adversely affected if key members of senior management cease to be active in our company.

If the company were to be taxed as a corporation rather than a partnership, this would have adverse tax consequences for the company with respect to the income earned from our Puerto Rico operations.
The Internal Revenue Code provides that publicly traded partnerships like ACPT will, as a general rule, be taxed as corporations for U.S. federal income tax purposes, subject to certain exceptions.  We have relied in the past, and expect to continue to rely on an exception to this general rule for publicly traded partnerships that earn 90% or more of their gross income for every taxable year from specified types of “qualifying income,” including dividends. If we fail to meet this “qualifying income” exception or otherwise determine to be treated as a corporation for federal income tax purposes, the income we earn from our Puerto Rico operations would be subject to increased taxes.
We do not believe that there would be an increase in the U.S. income taxes that would be imposed on our U.S. operations if ACPT were not to qualify as a partnership for U.S. income tax purposes.  However, our classification as a partnership does permit us to reduce the overall taxes that the Company pays on the operations of our Puerto Rico subsidiary (because, in ACPT’s current partnership tax structure, ACPT is taxed in Puerto Rico, but not in the United States, on those operations).  If we were not to qualify as a partnership for U.S. tax purposes, the net result would be an incremental increase in ACPT’s total tax expense on income for operations in Puerto Rico, although it is not practicable to quantify that potential impact.

The tax liabilities of our shareholders may exceed the amount of the cash distributions we make to them.
A shareholder generally will be subject to U.S. federal income tax on his or her allocable share of our taxable income, whether or not we distribute that income to them.  We intend to make elections and take other actions so that, to the extent possible, our taxable income will be allocated to individual shareholders in accordance with the cash received by them.  In addition, we are generally required by our Declaration of Trust to make minimum aggregate distributions, in cash or property, each year to our shareholders equal to 45% of our net taxable income, reduced by the amount of Puerto Rico taxes we pay.
 
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If our income consists largely of cash distributions from our subsidiaries, as expected, it is likely that we will have sufficient cash to distribute to shareholders.  There can be no assurance, however, that our income allocations to the individual shareholders will be respected or that we will be able to make distributions in any given year that provide each individual shareholder with sufficient cash to meet his or her federal and state income tax liabilities with respect to his or her share of our income.  However, there is pending legislation which may affect the ability to claim foreign tax credits under Section 901 of the Code.  On November 19, 2007, Notice 2007-95 provided a delay of the effective date of proposed amendments to the foreign tax credit regulations.  The regulations, with or without changes, will be effective for tax years beginning after the final regulations are published in the Federal Register.

A portion of the proceeds from the sale of our shares may be taxed as ordinary income.
A shareholder will generally recognize gain or loss on the sales of our shares equal to the difference between the amount realized and the shareholder’s tax basis in the shares sold.  Except as noted below, the gain or loss recognized by a shareholder, other than a “dealer” in our shares, on the sale or exchange of shares held for more than one year will generally be taxable as capital gain or loss.  Capital gain recognized by an individual on the sale of shares held more than 12 months will generally be taxed at a maximum rate of 15%.
A portion of this gain or loss, however, may be taxable as ordinary income under Section 751 of the Code to the extent attributable to so-called “unrealized receivables,” which term, for this purpose, includes stock in our Puerto Rico subsidiary to the extent that gain from our sale of that stock would be taxable to our shareholders as a dividend under Section 1248 of the Code.  The amount of ordinary income attributable to “unrealized receivables” related to stock in our Puerto Rico subsidiary will be determined based on the amount of earnings and profits accumulated by our Puerto Rico subsidiary.  We will provide to each selling shareholder, at the time we send the K-1 materials, a table showing the earnings and profits accumulated by our Puerto Rico subsidiary by year and the average number of our shares outstanding during the year, so that the shareholder may make a determination of the amount of earnings and profits allocable to him or her and the amount of ordinary income to be recognized on the sale.  Although there is no definitive authority on the question, we believe that it is reasonable to base the allocation on the earnings and profits accumulated during the period that the shareholder held the shares that are sold and the percentage of our average number of shares outstanding that those shares represented.
The amount of unrealized receivables may exceed the net taxable capital gain that a shareholder would otherwise realize on the sale of our shares, and may be recognized even if the shareholder would realize a net taxable capital loss on the sale.  Thus, a shareholder may recognize both ordinary income and capital loss upon a sale of our shares.  Accordingly, a shareholder considering the sale of our shares is urged to consult a tax advisor concerning the portion of the proceeds that may be treated as ordinary income.  In addition, the shareholder is required to report to us any sale of his or her shares, unless the broker effecting the transaction files a Form 1009-B with respect to the sale transaction.

Investors should be aware that tax rules relating to the tax basis and holding period of interests in a partnership differ from those rules affecting corporate stock generally, and these special rules may impact purchases and sales of our shares in separate transactions.
The IRS has ruled that an investor who acquires interests in an entity taxed as a partnership, like ACPT, in separate transactions must combine those interests and maintain a single adjusted tax basis for those interests.  Upon a sale or other disposition of less than all of the shares held by a shareholder, a portion of the shareholder’s tax basis in all of his or her shares must be allocated to the shares sold using an “equitable apportionment” method, which generally means that the tax basis allocated to the shares sold bears the same relation to the shareholder’s tax basis in all of the shares held as the value of the shares sold bears to the value of all of the Shares held by the shareholder immediately prior to the sale.  Furthermore, Treasury Regulations under Section 1223 of the Code generally provide that if a shareholder has acquired shares at different times, the holding period of the transferred shares shall be divided between long-term and short-term capital gain or loss in the same proportions as the long-term and short-term capital gain or loss that the shareholder would realize if the all of the shareholder’s shares were transferred in a fully taxable transaction immediately before the actual transfer.  The Regulations provide, however, a special rule that allows a selling shareholder who can identify shares transferred with an ascertainable holding period to elect to use the actual holding period of the shares transferred.
 
-24-

Thus, according to the ruling discussed above, a shareholder will be unable to select high or low basis shares to sell as would be the case with shares of entities treated as corporations for federal income tax purposes, but, according to the regulations, may designate specific shares for purposes of determining the holding period of the shares transferred.  A shareholder electing to use the actual holding period of shares transferred must consistently use that identification method for all subsequent sales or exchanges of shares.  A shareholder considering the purchase of additional shares or a sale of shares purchased in separate transactions is urged to consult his or her tax advisor as to the possible consequences of the ruling and the application of these Treasury Regulations.

UNRESOLVED STAFF COMMENTS
None

ITEM 2.
PROPERTIES

ACPT owns real property located in the United States and Puerto Rico.  As of December 31, 2007, the Company held investments in multifamily and commercial real estate properties, apartment properties under construction, community development land holdings, and homebuilding units.  Refer to the tables in Item 1 for additional information required under this Item 2.

LEGAL PROCEEDINGS

Below is a description of all material litigation that ACPT or any of its subsidiaries are a party to.

Comité Loiza Valley en Acción, Inc. vs. Cantera Hipódromo, Inc., Carlos Ortiz Brunet, his wife Frances Vidal; Land Development Associates, S.E.; Integrand Assurance Company; American International Insurance Company; Et als, No. FPE97-0759(406), Superior Court of Carolina, Puerto Rico.  On November 24, 1997, Comité Loiza Valley en Acción, Inc., resident owners of Urbanización Loiza Valley in Canovanas, Puerto Rico, a neighborhood consisting of 56 houses near the property owned by LDA, filed a claim in the Superior Court of Carolina, Puerto Rico against Cantera Hipodromo, Inc. (the “lessee” who operates a quarry on the land owned by LDA), the owners of the lessee, the lessee’s Insurance Companies and LDA.  The Plaintiffs allege that as a result of certain explosions occurring in the quarry, their houses have suffered different types of damages and they have also suffered physical injuries and mental anguish.  The damages claimed exceed $11,000,000.  The physical damage to the property is estimated at less than $1,000,000.  The lease agreement contains an indemnification clause in favor of LDA.  The lessee has public liability insurance coverage of $1,000,000 through Integrand Assurance Company and an umbrella insurance coverage of $2,000,000 through American International Insurance Company.  Integrand’s legal counsel has provided the legal defense for all parties to date but in September 2003 declared that the allegations in the complaint regarding public nuisance do not fall under their policy.  In November 2003, the lessee’s legal counsel filed a motion in opposition to such allegation.  On January 28, 2005, the appellate court in Puerto Rico confirmed that the trial court and Integrand is forced to provide coverage and pay attorneys’ fees to LDA and to Cantera Hipodromo.  On February 11, 2005, Integrand filed a reconsideration motion in the appellate court and on February 28, 2005 the same court dismissed the motion presented by Integrand. On March 17, 2005, Integrand filed a request of certiorari in the Supreme Court of Puerto Rico and on March 23, 2005, an opposition to the expedition of the certiorari was filed.  On June 6, 2005, the Supreme Court denied said request.  Hence, LDA is an added insured on the damage claims in the complaint.  The trial began in 2007 and is expected to continue during the first six months of 2008.

Jalexis, Inc. vs. LDA, Interstate, IGP, Constructora Santiago Corp; Et als, Civil no FDP060534 (404).
In late November 2006, several subsidiaries of the Company (LDA, IGP and IGP Group) were named in a lawsuit filed by Jalexis, Inc. (“Jalexis”).  The lawsuit claims damages for more than $15 million allegedly suffered due to faulty subsoil conditions in a piece of land within the master plan of Parque Escorial (“Lot I-13W”).  Settlement of Lot I-13W occurred on April 29, 2005 under an option agreement dated April 19, 2004.  Jalexis purchased Lot I-13W from LDA for approximately $7.5 million, which represented 12% of our total consolidated revenues for 2005.  In the settlement agreement, LDA did not make any representations or warranties with regard to the soil and subsoil conditions and stipulated Lot I-13W was sold to Jalexis “as is” and “where is”.  The Company believes that it has a strong defense in this case.  Depositions for all parties started in November 2007 and are expected to continue into the first six months of 2008.

-25-

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 this matter. While we intend to vigorously defend this matter and believe we have meritorious defenses available to us, there can be no assurance that we would prevail. If this matter is not resolved in our favor, we are insured for potential losses.  Any amounts that exceed our insurance coverage could have a material adverse effect on our financial condition and results of operations.
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.

There are no other proceedings required to be disclosed pursuant to Item 103 of Regulation S-K.

ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the fourth quarter of the fiscal year ended December 31, 2007.

EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of December 31, 2007 are as follows:
Name
Age
Position
     
J. Michael Wilson
42
Chairman and Chief Executive Officer
Edwin L. Kelly
66
Vice Chairman, President and Chief Operating Officer
Carlos R. Rodriguez
62
Executive Vice President
Cynthia L. Hedrick
55
Chief Financial Officer, Executive Vice President, Secretary and Treasurer
Paul A. Resnik
60
Senior Vice President and Assistant Secretary
Eduardo Cruz Ocasio
61
Senior Vice President and Assistant Secretary
Matthew M. Martin
32
Vice President and Chief Accounting Officer
Jorge Garcia Massuet
69
Vice President
Harry Chalstrom
47
Vice President
Mark L. MacFarland
38
Vice President
Rafael Velez
51
Vice President

Messrs. Wilson and Kelly are also members of our Board of Trustees.  Brief biographies of Messrs. Wilson and Kelly are incorporated by reference to the Company’s Proxy Statement to be filed with the Commission for its Annual Shareholder’s Meeting to be held in June 2008.  Biographical information for our other executive officers is as follows:

Carlos R. Rodriguez was appointed Executive Vice President of the Company in January 2002 after serving as Senior Vice President since June 1999.  Prior to that date, he served in various capacities with the predecessor company and its affiliates.

Cynthia L. Hedrick was appointed Executive Vice President in January 2006 after serving as Senior Vice President since June 2002.  She continues to serve the Company as the Chief Financial Officer and Secretary/Treasurer, a position that she has held since June 2002.  Ms. Hedrick served as Vice President of the Company from November 1998 to June 2002 and prior to that date she served as Vice President of the predecessor company.

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Paul A. Resnik was appointed Senior Vice President of the Company in July 1998.  He served as Senior Vice President of the predecessor company from 1993-1998.

Eduardo Cruz Ocasio was appointed Senior Vice President of the Company in June 2002 after serving as Vice President and Assistant Secretary of the Company since July 1998.  Prior to that date, he served in various capacities with the predecessor company.

Matthew M. Martin was appointed Vice President and Chief Accounting Officer in August of 2005.  Prior to joining the Company, he worked for FTI Consulting serving as a Manager in the Forensic and Litigation Consulting practice from 2002 to 2005.  Prior to joining FTI Consulting, he managed audits for Arthur Andersen.

Jorge Garcia Massuet was appointed Vice President of the Company in June 2002.  He has been Vice President of IGP since January 1999.  He served as Vice President and General Manager of Fountainebleu Plaza, S.E., a real estate development firm, from January 1994 to December 1998.

Harry Chalstrom was appointed Vice President of the Company in January 2004 after serving as Director of Rental Housing of the Company since November 2002.  Prior to that date, he worked for Bozzuto Construction Company from 1997 to 2002.  During his tenure at Bozzuto, he served as a Project Manager for apartment construction projects.

Mark L. MacFarland was appointed Vice President of the Company in January 2006 after serving as the Executive Director of Land Development for the Company since June 2003.  From June 2002 to June 2003, he worked as a consultant for the Charles County Government working on numerous capital improvement projects.  Before serving as a consultant, he worked as an engineer and developer in the power generation industry.

Rafael Vélez was appointed Vice President of the Company in January 2006.  Mr. Vélez has been with the Company since September of 2001 when he was hired as the Chief Accounting Officer of IGP LP, a wholly owned subsidiary of the Company.  In June 2002, Mr. Vélez was appointed as Vice President of IGP Group and in June 2003 was appointed and currently remains as Vice President, Secretary and Treasurer.  In June 2004, Mr. Vélez was appointed and currently remains as Senior Vice President, Chief Financial Officer, Secretary and Treasurer of IGP LP.  He has more than 30 years experience in public and private accounting in the Real Estate, Development, Construction and Property Management Industries.

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PART II

MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The principal market for our Company’s common shares is the American Stock Exchange under the symbol "APO. As of the close of business on March 3, 2008, there were 129 shareholders of record of ACPT’s common shares. On March 3, 2008 the closing price reported by the American Stock Exchange was $19.00.

The table below sets forth, for the periods indicated, the high and low closing prices of the Company’s shares as reported in the consolidated reporting system of the American Stock Exchange Composite, and the dividends declared per common share for such calendar quarter.

     
Price Range of ACPT Shares
   
Dividends
 
     
High
   
Low
   
Declared
 
                     
 
2007 Quarter
                 
 
Fourth
  $ 25.75     $ 17.50     $ -  
 
Third
    27.59       19.22       0.10  
 
Second
    20.33       18.58       0.10  
 
First
    19.47       17.64       0.10  
                           
 
2006 Quarter
                       
 
Fourth
  $ 20.24     $ 17.49     $ 0.10  
 
Third
    20.20       19.40       0.10  
 
Second
    22.25       19.75       0.10  
 
First
    23.25       19.48       0.53  

Minimum annual distributions
Under the terms of the Declaration of Trust of ACPT, the Board of Trustees will make minimum annual distributions to the shareholders equal to at least 45% of the net taxable income allocated to the shareholders, reduced by any Puerto Rico income tax paid by ACPT and any U.S. federal income taxes paid by ARPT with respect to undistributed capital gains.

Non-required dividend distributions to shareholders
Dividend distributions in addition to the required minimum distribution (as stated above) will be evaluated quarterly and made at the discretion of the Board of Trustees.  In making such determinations, the Board of Trustees will take into account various factors, including ACPT's anticipated needs for cash for future expansion and development, current and anticipated expenses, obligations and contingencies, and other similar working capital requirements.

Dividend Distribution related to our IRS matter
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 was able to maintain its publicly traded partnership (“PTP”) status for U.S. federal income tax purposes.  The details of the closing agreement with the IRS required that the Company report approximately $5.0 million to shareholders as taxable income on March 29, 2006.  Under the terms of the Company’s governing documents, it 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, $2,230,000 in the aggregate. The dividend was paid on April 12, 2006 to shareholders of record on March 29, 2006.

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The following graph compares the cumulative 5-year total return to shareholders on American Community Properties Trust's common stock relative to the cumulative total returns of the S & P 500 index and the NAREIT Equity index. The graph assumes that the value of the investment in the company's common stock and in each of the indexes (including reinvestment of dividends) was $100 on December 31, 2002 and tracks it through December 31, 2007.

 
Five-Year Stock Performance Graph
 
               
   
12/02
12/03
12/04
12/05
12/06
12/07
               
American Community Properties Trust
 
100.00
149.00
228.46
374.83
387.95
395.82
S&P 500
 
100.00
128.68
142.69
149.70
173.34
182.87
NAREIT Equity
 
100.00
137.13
180.44
202.38
273.34
230.45

The stock price performance included in this graph is not necessarily indicative of future stock price performance.
 
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SELECTED FINANCIAL DATA
 
            The following table sets forth selected consolidated financial and operating data of the Company for the five years ended December 31, 2007. The information in the following table should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
 
   
Year Ended December 31,
 
                   2007 *                 2006 **  
2005
   
2004
   
2003
 
   
(In thousands, except per share and operating data)
 
Income Statement Data:
                                 
Total operating revenues
  $ 85,376     $ 98,163     $ 62,313     $ 49,011     $ 55,506  
Total operating expenses
    69,294       73,168       51,207       40,932       47,720  
  Operating income
    16,082       24,995       11,106       8,079       7,786  
Income (loss) before provision (benefit) for income taxes
    (848 )     7,485       6,855       4,331       3,901  
Income tax provision (benefit)
    (307 )     2,894       (690 )     1,500       1,596  
      Net income (loss)
    (541 )     4,591       7,545       2,831       2,305  
Earnings per share
                                       
      Basic
  $ (0.10 )   $ 0.88     $ 1.45     $ 0.55     $ 0.44  
      Diluted
  $ (0.10 )   $ 0.88     $ 1.45     $ 0.55     $ 0.44  
                                         
Balance Sheet Data:
                                       
Total assets
  $ 360,724     $ 346,699     $ 217,085     $ 184,027     $ 142,497  
     Recourse debt
    25,589       29,351       32,818       27,192       24,634  
     Non-recourse debt
    279,981       270,720       119,865       98,879       70,979  
     Other liabilities
    42,708       30,774       29,912       29,065       19,031  
Total liabilities
    348,278       330,845       182,595       155,136       114,644  
Shareholders' equity
    12,446       15,854       34,490       28,891       27,853  
Cash dividends declared and paid per common share
  $ 0.30     $ 0.83     $ 0.40     $ 0.35     $ -  
                                         
Operating Data:
                                       
Rental apartment units managed at end of period
    7,225       7,693       7,491       7,406       7,747  
Residential lots sold
    78       135       94       70       88  
Residential lots transferred to homebuilding
    -       -       -       160       -  
Residential lots transferred to joint venture
    -       -       -       352       -  
Joint venture lots delivered
    48       61       25       -       -  
Residential lots transferred to investment property division
    -       -       252       -       -  
Commercial and business park acres sold
    12       15       11       3       8  
Homes sold
    29       78       32       55       124  


* The financial statements as of and for the year ended December 31, 2007 reflect the adoption of  Financial Accounting Standards Board Interpretation No. 48 “Account for Uncertainty in Income Taxes” (“FIN 48”) on January 1, 2007 (Refer to Note 2 and 10 of the Consolidated Financial Statements).

**The financial statements as of and for the year ended December 31, 2006 reflect the adoption of Emerging Issues Task Force 04-05, “Determining Whether a General Partner 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 of the Consolidated Financial Statements).

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

FORWARD LOOKING STATEMENTS
 The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing in Item 8 of this report. Historical results set forth in Selected Financial Information, Management's Discussion and Analysis of Financial Condition and Results of Operation and the Financial Statements and Supplemental Data included in Items 6, 7 and 8 should not be taken as indicative of our future operations.
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements about our business outlook, assessment of market and economic conditions, strategies, future plans, anticipated costs and expenses, capital spending, and any other statements that are not historical. The accuracy of these statements is subject to a number of unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements of the Company to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.   Those items are discussed under “Risk Factors” in Item 1A to this annual report on Form 10-K.

GENERAL
American Community Properties Trust ("ACPT" or the "Company") is a self managed holding company that is primarily engaged in investment in multifamily rental properties, property management services, community development, and homebuilding through its consolidated subsidiaries. The operations are managed out of three primary offices: St. Charles, Maryland, Orlando, Florida, and San Juan, Puerto Rico.
The U.S. operations are managed through American Rental Management Company ("ARMC"). This includes the management of apartment properties in which we have an ownership interest, apartment properties owned by a third party, as well as our community development operations. American Land Development U.S. Inc. ("ALD") and its subsidiary own and develop our land holdings in St. Charles, Maryland. St. Charles is a 9,000 acre planned community consisting of residential, commercial, recreational and open space land. It has provided the Company and its predecessor with inventory for the last three decades with expectations of another three decades. With the aid of outside consultants, we plan, design and develop the land for sale or use in our own investment portfolio. ALD also has a 50% interest in a land development joint venture formed to develop land for an active adult community in St. Charles.  American Rental Properties Trust ("ARPT") and its subsidiaries hold the general and limited partnership interests in our U.S. apartment property portfolio. The apartment properties are individually organized into separate entities. ARPT's ownership in these entities ranges from 0.1% to 100%. We expect to retain the land identified for future apartment units in St. Charles to expand our apartment investment portfolio through construction of new multifamily apartment complexes. We also remain open to construction and acquisition of additional properties that will add value to our existing investment assets.
The Puerto Rico operations are managed through Interstate General Properties Limited Partnership S.E. ("IGP"), a wholly owned subsidiary of IGP Group Corp which is a wholly owned subsidiary of ACPT. IGP provides property management services to multifamily rental properties in Puerto Rico in which we have an ownership interest (“Puerto Rico Apartments”), apartment properties owned by third parties, our commercial properties, and home-owner associations related to our planned communities.  IGP also provides management services for our homebuilding and community development operations. IGP holds the ownership interests in the Puerto Rico Apartments and two commercial properties. The Puerto Rico apartments are organized into separate partnerships and receive HUD subsidies. IGP's ownership in these partnerships ranges from 1% to 52.5%. IGP's ownership in the commercial properties ranges from 28% to 100%.  Our community development assets in Puerto Rico, consisting of two planned communities, are owned by Land Development Associates, S.E. ("LDA").  The first planned community, Parque Escorial, is currently under development and consists of residential, commercial and recreation land similar to our U.S. operations but on a smaller scale.  Our second planned community, Parque El Commandante is currently in the planning stages.  Our homebuilding operation builds condominiums for sale on land located in its planned communities.  Each homebuilding project is organized into separate entities, all wholly owned by IGP and LDA.  LDA also retained a limited partnership interest in two commercial buildings in Parque Escorial opened in 2001 and 2005 which were built on land contributed by LDA.
 
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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 have been passed through to ACPT’s shareholders. A federal tax regulation has been proposed that could eliminate the pass through of these foreign tax credits to ACPT’s shareholders.  Comments on the proposed regulation are currently being evaluated with the final regulation expected to be effective for tax years beginning after the final regulation is ultimately published in the Federal Register.   ACPT’s federal taxable income consists of certain passive income from IGP Group, a controlled foreign corporation, distributions from IGP Group 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 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.

EXECUTIVE SUMMARY OF CURRENT YEAR RESULTS
Consolidated operating revenues are derived primarily from rental revenue, community development land sales and home sales.  For the year ended December 31, 2007, our consolidated rental revenues increased 12% as compared to the year ended December 31, 2006.  The increase was primarily attributable to construction of new units in our United States segment as well as overall rent increases at comparable properties in both the United States and Puerto Rico segments.
Community development land sales for the year ended December 31, 2007 decreased 31% as compared to the year ended December 31, 2006.  Land sales revenue in any one period is affected by the mix of lot sizes and, to a greater extent, the mix between residential and commercial sales.  Land sales, currently sourced from the United States segment, result in large part from a sales agreement with Lennar Corporation.  In March 2004, the Company executed development and purchase agreements with Lennar Corporation to develop and sell 1,950 residential lots (1,359 single family lots and 591 town home lots) in Fairway Village in St. Charles, Maryland. The agreements require the homebuilder to provide $20,000,000 in letters of credit to secure the purchase of the lots.  A junior lien was placed on the residential portion of Fairway Village.  The agreements require Lennar to purchase 200 residential lots per year, provided that they are developed and available for delivery as defined by the development agreement.  The junior lien is released when the lots are sold and $10,300 of each lot sales proceeds are placed in an escrow account to repay the principal of the bonds. In December 2007, the Company reached an agreement with Lennar allowing for a reduction in their lot takedown requirements for 2007, resulting in 78 lots purchased by Lennar in 2007 as compared to 135 lots taken in 2006.  In addition to the reduction in number of lots, the December 2007 amendment temporarily reduced the final selling price of 100 lots (51 taken down in December 2007 and 49 which Lennar has agreed to take before June 1, 2008) from 30% to 22.5% of the base price of the home sold on the lot, with guaranteed minimum price of $78,000 per single family lot and $68,000 per town home lot.
Home sales for year ended December 31, 2007 decreased 62% as compared to the year ended December 31, 2006.  Home sales, currently sourced from the Puerto Rico segment, are impacted by the local real estate market.  The Puerto Rico real estate market has slowed substantially.  The reduction of new contracts and the reduced pace of sales has impacted the Company somewhat, but not to the same extent as the overall Puerto Rico market decline.  The Company settled 29 units during 2007 as compared to 78 units closed during 2006.  As of December 31, 2007, 21 completed units remain within inventory, of which we currently have 1 unit under contract.  At the current sales pace, the Company anticipates that the remaining units in Torres will be sold throughout 2008.  We believe that our current pricing remains competitive.
On a consolidated basis, the Company reported a net loss of $541,000 for the year ended December 31, 2007.  The net loss includes a $307,000 benefit for income taxes, resulting in a consolidated effective tax rate of approximately 36%.  The consolidated effective rate was impacted by accrued penalties on uncertain tax positions, certain nondeductible permanent items and a change in the statutory tax rate in the United States segment and double taxation on a certain non-recurring gain for our Puerto Rico segment.  For further discussion of these items, see the provision for income taxes discussion within the United States and Puerto Rico segment discussion.
Please refer to the Results of Operations section of Management’s Discussion and Analysis for additional details surrounding the results of each of our operating segments.

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NEW ACCOUNTING PRONOUNCEMENTS AND CHANGE IN BASIS OF PRESENTATION
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.  We adopted the provisions of FIN 48 on January 1, 2007.  As a result of the implementation of FIN 48, we recorded a $1,458,000 increase in the net liability for unrecognized tax positions, which was recorded as a cumulative effect of a change in accounting principle, reducing the opening balance of retained earnings on January 1, 2007.  See Notes 2 and 10 to the consolidated financial statements for further discussion.
In June 2005, the FASB ratified 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," or EITF 04-05.  EITF 04-05 provides an accounting model to be used by a general partner, or group of general partners, to determine whether the general partner(s) controls a limited partnership or similar entity in light of certain rights held by the limited partners.  In accordance with the provisions of EITF 04-05, beginning January 1, 2006 we have included the following partnerships in our consolidated group: 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, Turabo Limited Dividend Partnership and Valle del Sol Associates Limited Partnership.  Historically, our interests in these partnerships were recorded using the equity method of accounting.
The impact of consolidating the financial statements of these partnerships increased our operating assets and liabilities by $78.5 million and $97.7 million, respectively, as of January 1, 2006.  The addition to assets is primarily related to real estate at historical cost, net of accumulated depreciation of approximately $53.3 million, and the addition to liabilities is primarily related to non-recourse debt of approximately $98.6 million held by these limited partnerships.  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 in consolidation.
With respect to our accounting for minority interest in our consolidated partnerships, when consolidated real estate partnerships make cash distributions or allocate losses to partners in excess of the minority partners' basis in the property, we generally record a charge equal to the amount of such excess distribution.

CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission defines critical accounting policies as those that are most important to the portrayal of our financial condition and results.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States, which we refer to as GAAP, requires management to use judgment in the application of accounting policies, including making estimates and assumptions.  These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods.  If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of our financial statements.  Below is a discussion of accounting policies which we consider critical in that they may require complex judgment in their application or require estimates about matters which are inherently uncertain.

Sales, Profit Recognition and Cost Capitalization
Community development land 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 SFAS 66, related to condominium sales, revenues and costs are 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 revenue and costs upon settlement with the homebuyer which doesn’t occur until after we receive use and occupancy permits for the building.
 
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    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. The costs of 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 for these condominiums is determined by the percentage of completion method, which relies on total estimated costs and sales values.  Residential and commercial land sales can be highly cyclical.  Once development is undertaken, no assurances can be given that the Company will be able to sell the various developed lots or condominiums in a timely manner.  Failure to sell such lots and homes in a timely manner could result in significantly increased carrying costs and erosion or elimination of profit with respect to any development.  Even though our cost estimates are based on outside engineers' cost estimates, construction contracts and historical costs, our actual development and construction costs can exceed estimates for various reasons, including but not limited to unknown site conditions, rising prices and changes in government regulations.  Any estimates of such costs may differ substantially from the actual results of such costs and reduce or eliminate the future profits with respect to any development.
The Company considers all debt and related interest expense 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.

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.

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.

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Depreciation of Investments in Real Estate
The Company's operating real estate is stated at cost and includes all costs related to acquisitions, development and construction. We are required to make 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. Our assessments, all of which are judgmental determinations, of our investments in our real estate assets 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 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.

Income Taxes
The Company's complex tax structure involves foreign source income and multiple entities that file separate returns.  Due to the complex nature of tax regulations affecting our entities, our income tax expense and related balance sheet amounts involve significant management estimates and judgments.

Contingencies
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are frequently covered by insurance. If it has been determined that a loss is probable to occur, the estimated amount of the loss is expensed in the financial statements. While the resolution of these matters cannot be predicted with certainty, we rely on the advice of our outside counsel as to the potential and probable outcome of these proceedings when evaluating any financial statement impact.

Recent Accounting Pronouncements

SFAS 157 and 159
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements” and in February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.”  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.
SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value.  The fair value election is designed to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  SFAS 159 is effective for fiscal years beginning after November 15, 2007.  The Company believes that the implementation of SFAS 157 and 159 will not have a material impact on our financial statements.

SFAS 141R
On December 4, 2007, the FASB issued Statement No. 141R, “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 standard is effective for fiscal years ending after December 15, 2008 and will only impact the accounting for acquisitions we make after its adoption.

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SFAS 160
On December 4, 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”).  SFAS 160 replaces the concept of minority interest with noncontrolling interests in subsidiaries.  Noncontrolling interests will now be 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, SFAS 160 requires that income attributable to both controlling and noncontrolling interests be presented separately on the face of the consolidated income statement.  In addition, SFAS 160 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.  SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively.  SFAS 160 is effective for the first annual reporting period beginning on or after December 15, 2008.  The Company is currently evaluating the impact of the adoption of SFAS 160 on its consolidated financial statements.  However, the provisions of SFAS 160 are directly applicable to the Company’s currently reported minority interest in consolidated entities and, accordingly, will change the presentation of the Company’s financial statements when implemented.

EITF Issue No. 06-08
In November 2006, the Emerging Issues Task force of the FASB (“EITF”) reached a consensus on EITF Issue No. 06-08, “Applicability of a Buyer’s Continuing Investment under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales of Condominiums” (“EITF 06-08”).  EITF 06-08 will require condominium sales to meet the continuing investment criterion in FAS No. 66 in order for profit to be recognized under the percentage-of-completion method.  EITF 06-08 will be effective for annual reporting periods beginning after March 15, 2007.  The cumulative effect of applying EITF 06-08, if any, is to be reported as an adjustment to the opening balance of retained earnings in the year of adoption.  The Company believes that the implementation of EITF 06-08 will not have a material impact on our financial statements.

RESULTS OF OPERATIONS
The following discussion is based on the consolidated financial statements of the Company. It compares the components of the results of operations of the Company by segment for each of the three years ended December 31, 2007, 2006 and 2005.  Historically, the Company’s financial results have been significantly affected by the cyclical nature of the real estate industry.  Accordingly, the Company’s historical financial statements may not be indicative of future results. This discussion should be read in conjunction with the accompanying consolidated financial statements and notes included elsewhere in this report.

Results of Operations - U.S. Operations:
     For the year ended December 31, 2007, our U.S. segment generated $9,009,000 of operating income compared to $15,299,000 of operating income generated by the segment for the same period in 2006 and $8,287,000 in 2005.  Additional information and analysis of the U.S. operations can be found below.

Rental Property Revenues and Operating Expenses - U.S. Operations:
As of December 31, 2007, nineteen U.S.-based apartment properties, representing 3,256 units, in which we hold an ownership interest qualified for the consolidation method of accounting.  The rules of consolidation require that we include within our financial statements the consolidated apartment properties' total revenue and operating expenses.
As of December 31, 2007, thirteen of the consolidated properties were market rent properties, representing 1,856 units, allowing us to determine the appropriate rental rates.  Even though we can determine the rents, 54 of our units at one of our market rent properties must be leased to tenants with low to moderate income. HUD subsidizes three of the properties representing 836 units and the three remaining properties are a mix of 137 subsidized units and 427 market rent units. HUD dictates the rents of the subsidized units.
Beginning January 1, 2006, two additional properties, Huntington Associates Limited Partnership (“Huntington”) and Essex Apartments Associates Limited Partnership (“Essex”) qualified for consolidation under the new provisions of EITF 04-05.

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Apartment Construction and Acquisition
A summary of our significant apartment construction and acquisition activities in 2007, 2006 and 2005 is as follows.  All of the constructed and acquired properties are operating as market rate properties.

·  
On January 31, 2007, the Company completed the construction of the newest addition to our rental apartment properties in St. Charles' Fairway Village, the Sheffield Greens Apartments (“Sheffield Greens”).  The nine building, 252-unit apartment project offers 1 and 2 bedroom units ranging in size from 800 to 1,400 square feet.  Construction activities were started in the fourth quarter of 2005 and leasing efforts began in the first quarter of 2006. The first five buildings became available for occupancy during the fourth quarter of 2006 and the final four buildings were ready for occupancy in January 2007.  Leasing efforts have been successful and the property was approximately 93% occupied as of December 31, 2007.
·  
On April 28, 2006, the Company acquired two multifamily rental properties, Milford Station I LLC and Milford Station II LLC, in Baltimore, Maryland containing a combined total of 250 units for approximately $14,300,000.
·  
On May 23, 2005, the Company acquired the assets of Nottingham Apartments LLC, in Baltimore, Maryland containing 85 units for approximately $3,000,000.

2007 compared to 2006
For year ended December 31, 2007, rental property revenues increased $5,911,000 or 18% to $38,416,000 compared to $32,505,000 for the same period in 2006.  The increase in rental revenues was primarily the result of additional revenues for Sheffield Greens Apartments, Milford Station I and Milford Station II which accounted for approximately $4,470,000 of the difference.  The increase was also attributable to an overall 4% increase in rents between periods which is net of a $472,000 increase in vacancies between 2006 and 2007.  The increase in vacancies was primarily attributable to the lease up of Sheffield.  Now that the lease up is complete and certain incentive programs at Sheffield are over, occupancy at the other fair market properties is increasing.
Rental property operating expenses increased $3,163,000 or 20% for the year ended December 31, 2007 to $19,235,000 compared to $16,072,000 for the same period of 2006.  The overall increase in rental property operating expenses was primarily the result of additional expenses for Sheffield Greens Apartments, Milford Station I and Milford Station II, which accounted for approximately $2,044,000 of the difference.  The remainder of the increase resulted from overall inflationary adjustments as well as specific above inflation increases noted in advertising, concessions granted to residents, office and maintenance salaries, office expenses, utilities, security expense, snow removal, rehabilitation of apartment units and real estate taxes.  We are currently working to reduce all our controllable rental property operating expenses within our US portfolio.  Specific emphasis includes reducing advertising and concessions expenses now that Sheffield Greens is leased and occupancy rates at other our competing properties are increasing, implementing measures to reduce security expenditures, as well as the cost benefit of a reduction in management staff.

2006 compared to 2005
For the year ended December 31, 2006, rental property revenues increased $9,997,000 to $32,505,000 compared to $22,508,000 for the year ended December 31, 2005.  The increase is primarily due to the impact of EITF 04-05 requiring us to include the results of operations for two apartment properties, Huntington and Essex, in our consolidation beginning January 1, 2006.  The revenues earned within these two properties in 2006 were consistent with revenues earned in the prior year.  The increase in our rental property revenue during 2006 was also the result of our apartment acquisitions in May 2005 and April 2006 which added $1,693,000 of rental property revenues.  Other increases in rental property revenues during 2006 included a 6% increase in overall average rents resulting in an additional $1,329,000 of rental property income, which includes the additional revenue earned from the January 2006 conversion of one of our subsidized apartment properties to a market rent property.  The average increase in rents in 2006 for properties in the Washington DC and Baltimore suburban areas ranged from 3% to 4%.
The increase in revenue was also the result of a benefit of $274,000 resulting from the completion of the amortization of acquired intangible leases for Owings Chase and Prescott Square purchased in 2004, and the recognition of $200,000 of rent revenue earned from Sheffield Greens, our newest apartment complex under construction as of December 31, 2006.
For the year ended December 31, 2006, rental property operating expenses increased $5,943,000 to $16,072,000 compared to $10,129,000 for the year ended December 31, 2005.  The increase is primarily the result of the impact of EITF 04-05, which added an additional $3,936,000 in 2006.  The increase in our rental property operating expenses during 2006 is also the result of our apartment acquisitions in May 2005 and April 2006 which increased our operating expenses by $1,010,000 as well as operating expenses of $280,000 incurred by Sheffield Greens.  Overall, during 2006, our rental property expenses generally increased approximately 7% on a comparative basis.  The average increase in expenses in 2006 for properties in the Washington DC and Baltimore suburban areas was 3%.  The increase in excess of general inflationary adjustments was attributable to the rehabilitation of our apartment units, project wide cleaning, grounds and maintenance and utility rates.

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Community Development - U.S. Operations:
Land sales revenue in any one period is affected by the mix of lot sizes and, to a greater extent, the mix between residential and commercial sales. In March 2004, the Company executed Development and Purchase Agreements with Lennar Corporation (the “Lennar Agreements”) to develop and sell 1,950 residential lots (1,359 single-family lots and 591 town home lots) in Fairway Village in St. Charles, Maryland.  The Lennar Agreements requires the homebuilder to provide $20,000,000 in letters of credit to secure the purchase of the lots. As security for the Company’s obligation to develop the lots, a junior lien was placed on the residential portion of Fairway Village.  The agreements require Lennar to purchase 200 residential lots per year, provided that they are developed and available for delivery as defined by the Development Agreement.  For each lot sold in Fairway Village, the Company must deposit $10,300 in an escrow account to fund the principal payments due to Charles County, at which time the lots are released from the junior lien.  As of December 31, 2007, 1,565 lots remained under the provisions of the Lennar Agreements.   Assuming a sales pace of 200 lots per year, it is estimated that lot settlements will take place through 2015; however, the continued slowing of the new homes sales market in the United States, and more specifically in the Washington D.C. suburban areas, has adversely impact Lennar’s willingness or ability to take down 200 lots per year.  In December 2007, the Company executed an amendment to the Lennar Agreements whereby the Company agreed to accept 51 lot settlements in December 2007 as satisfaction of Lennar’s lot takedown requirement for 2007, resulting in a total of 78 lots taken down by Lennar during 2007.  This compares to the 135 lots taken down by Lennar in 2006.
Sales are closed on a lot by lot basis at the time when the builder purchases the lot. The final selling price per lot sold to Lennar may exceed the guaranteed minimum price recognized at closing since the final lot price is based on a percentage of the base price of the home sold on the lot but not less than the guaranteed minimum price.  As part of the December amendment to the Lennar Agreements, the Company agreed to temporarily reduce the final lot price for 100 lots, as previously discussed, from 30% to 22.5% of the base price of the home sold on the lot, with guaranteed minimum prices of $78,000 per single family lot and $68,000 per townhome lot. Additional revenue exceeding the guaranteed minimum take down price per lot will be recognized upon Lennar's settlement with the respective homebuyers.
Residential lots vary in size and location resulting in pricing differences. Gross margins are calculated based on the total estimated sales values for all remaining lots within a neighborhood as compared to the total estimated costs.
Commercial land is typically sold by contract that allows for a study period and delayed settlement until the purchaser obtains the necessary permits for development. The sales prices and gross margins for commercial parcels vary significantly depending on the location, size, extent of development and ultimate use. Commercial land sales are cyclical and usually have a noticeable positive effect on our earnings in the period they reach settlement.

2007 compared to 2006
Community development land sales revenue decreased $6,481,000 to $14,486,000 for the year ended December 31, 2007 compared to $20,967,000 for the year ended December 31, 2006.  The 31% decrease in our community development land sales within our U.S. segment in 2007 is primarily the result of a decrease in delivery of residential lots to Lennar, offset by an increase in the commercial land sales.

Residential Land Sales
For the year ended December 31, 2007, we delivered 34 single-family lots and 44 town-home lots to Lennar, resulting in the recognition of revenues ranging from $121,000 to $78,000 per single family lot and $85,000 to $65,000 per town-home lot plus $2,600 per lot of water and sewer fees, road fees and other off-site fees.  The total revenue recognized at initial settlement was $5,964,000 for the year ended December 31, 2007. For the year ended December 31, 2006, we delivered 70 single-family lots and 65 town-home lots to Lennar, resulting in the recognition of revenues ranging from $100,000 to $125,000 per single family lot and $70,000 to $85,000 per town-home lot plus water and sewer fees, road fees and other off-site fees.  The total revenue recognized at initial settlement was $13,130,000 for the year ended December 31, 2006. As of December 31, 2007, we had 121 developed single-family lots and 8 finished town-home lots in backlog and ready for delivery.
During the years ended December 31, 2007 and 2006, we also recognized $2,295,000 and $3,434,000, respectively, of additional revenue for lots that were previously sold to Lennar.  This additional revenue is based on the final settlement price of the homes as provided by our agreement with Lennar. Currently new town-homes in Fairway Village are priced between $330,000 and $400,000 while single-family homes in Fairway Village are priced between $390,000 and $500,000.
 
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The homes sold by Lennar to the homebuyer in 2007 resulted in a total average final lot price of $120,000 per single family lot and $94,000 per townhome lot.  For 2006, the homes sold by Lennar to the homebuyer resulted in a total average final lot price of $135,000 per single family lot.  No townhomes were sold to homebuyers in 2006.

Commercial Land Sales
For the year ended December 31, 2007, we sold 12.0 commercial acres in St. Charles for $5,333,000 compared to 14.9 commercial acres for $2,903,000 for the year ended December 31, 2006. Sales in 2007 included two parcels within the O’Donnell Lake Restaurant Park, our latest commercial development project located near the St. Charles Towne Center.  These two parcels, totaling approximately 5 acres, were sold for $3.2 million.  However, a portion of this revenue was deferred related to certain ongoing development activities.  In addition, 2007 commercial sales included three lots, totaling approximately 3 acres, from Town Center Parcel G for approximately $1.4 million.  The Parcel G lots were previously developed commercial parcels and also surround St. Charles Town Center.  The 2007 lot sales also included four previously developed lots within Henry Ford Circle, totaling approximately 4 acres, for $771,000.  As of December 31, 2007, our backlog contained 95.68 commercial acres in St. Charles under contract for a total of $17,097,000.

St. Charles Active Adult Community, LLC - Land 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 September 2006, again in December 2006, and again in October 2007.  Most recently, the development loan was modified to provide a one year delay in development of the project, as to date, lot development has outpaced sales.  Per the terms of the loan, both the Company and Lennar provided development completion guarantees.
The joint venture sold 48 lots to Lennar’s homebuilding division during 2007 compared to 61 lots delivered in 2006.  As a result, the Company recognized $1,063,000 in deferred revenue, management fees and off-site fees and $358,000 of deferred costs for the year ended December 31, 2007 compared to $1,294,000 in deferred revenue, management fees and offsite fees and $419,000 of deferred costs for the year ended December 31, 2006.

Gross Margin on Land Sales
The gross margin on land sales was 23% for the year ended December 31, 2007 as compared to 45% for the year ended December 31, 2006.  Our gross margins on land sales in the U.S. can fluctuate based on changes in the mix of residential and commercial land sales. The reduction in gross margin between 2007 and 2006 was primarily the result of decreasing our estimate of relative sales values for our residential lots as a result of the downturn in the real estate market and the reduced pricing granted to Lennar during 2007.  The revised sales values reduced our estimated gross margins on the residential lot sales to approximately 31% from approximately 50%. In addition, gross margins on commercial sales in 2007 ranged between 49% and 1% with an overall weighted average of approximately 27%.  The average gross margins on commercial sales were negatively impacted by increased costs estimates related to the development of certain amenities included within the O’Donnell Lake Restaurant Park.

Customer Dependence
Revenues from Lennar include residential land sales as well as certain management fees.  Total revenues from Lennar within our U.S. segment were $9,663,000 for the year ended December 31, 2007 which represents 18% of the U.S. segment's revenue and 11% of our total year-to-date consolidated revenue.  No other customers accounted for more than 10% of our consolidated revenue for the year ended December 31, 2007.  Loss of all or a substantial portion of our land sales, as well as the joint venture's land sales, to Lennar would have a significant adverse effect on our financial results until such lost sales could be replaced.

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2006 compared to 2005
Community development land sales revenue increased $8,564,000 to $20,967,000 for the year ended December 31, 2006 compared to $12,403,000 for the year ended December 31, 2005.  The 69% increase in our community development land sales within our U.S. segment in 2006 is the result of our significant investment in residential lot development and delivery of residential lots to Lennar.

Residential Land Sales
For the year ended December 31, 2006, we delivered 70 single-family lots and 65 town-home lots to Lennar, resulting in the recognition of revenues ranging from $100,000 to $125,000 per single family lot and $70,000 to $85,000 per town-home lot plus water and sewer fees, road fees and other off-site fees. For the year ended December 31 2005, we delivered 94 residential lots to Lennar at an initial selling price of $100,000 per lot plus water and sewer fees, road fees and other off-site fees.
During the years ended December 31, 2006 and 2005, we also recognized $3,434,000 and $2,000,000, respectively, of additional revenue for lots that were previously sold to Lennar.  This additional revenue is based on the final settlement price of the homes as provided by our agreement with Lennar.

Commercial Land Sales
For the year ended December 31, 2006, we sold 14.9 commercial acres in St. Charles for $2,800,000 compared to 1.34 commercial acres for $200,000 for the year ended December 31, 2005.

St. Charles Active Adult Community, LLC - Land Joint Venture
The joint venture sold 61 lots to Lennar’s homebuilding division during the third and fourth quarters of 2006 compared to 25 lots delivered in the fourth quarter of 2005.  As a result, the Company recognized $1,294,000 in deferred revenue, management fees and off-site fees and $419,000 of deferred costs for the year ended December 31, 2006 compared to $610,000 in deferred revenue, management fees and offsite fees and $176,000 of deferred costs for the year ended December 31, 2005.

Gross Margin on Land Sales
The gross margins on land sales for the years ended December 31, 2006 and 2005 remained consistent at 45%.

Management and Other Fees - U.S. Operations:
We earn monthly management fees from all of the apartment properties that we own as well as our management of apartment properties owned by third parties and affiliates of J. Michael Wilson.  Effective February 28, 2007, the Company’s management agreement with G.L. Limited Partnership was terminated upon the sale of the apartment to a third party.  Effective April 30, 2006, the Company’s management agreement with Chastleton Associates LP terminated when the apartment property was sold to a third party, however, we received an agreed-upon management fee for administrative services through the end of the second quarter 2006. These two properties were previously owned by an affiliate.  Management fees generated by each of these properties accounted for less than 1% of the Company’s total revenue.
We receive an additional fee from the properties that we manage for their use of the property management computer system and a fee for vehicles purchased by the Company for use on behalf of the properties. The cost of the computer system and vehicles are reflected within depreciation expense.
The Company manages the project development of the joint venture with Lennar for a market rate fee pursuant to a management agreement.  These fees are based on the cost of the project and a prorated share is earned when each lot is sold.
This section includes only the fees earned from the non-consolidated properties; the fees earned from the consolidated properties are eliminated in consolidation.

2007 compared to 2006
Management fees decreased $327,000 to $336,000 for the year ended December 31, 2007 as compared to $663,000 for the year ended December 31, 2006.  The decrease was primarily the result of the Company no longer providing management services to G.L. Limited Partnership and Chastleton Associates LP.

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2006 compared to 2005
Management fees decreased $451,000 to $663,000 for the year ended December 31, 2006 as compared to $1,114,000 for the year ended December 31, 2005.  The decrease was primarily the result of implementation of EITF 04-05, resulting in an additional $375,000 eliminated related to the newly consolidated properties.  Excluding the impact of EITF 04-05, management and other fees were relatively consistent with the prior periods.

General, Administrative, Selling and Marketing Expense - U.S. Operations:
The costs associated with the oversight of our U.S. operations, accounting, human resources, office management and technology, as well as corporate and other executive office costs are included in this section. ARMC employs the centralized office management approach for its property management services for our properties located in St. Charles, Maryland, our properties located in the Baltimore, Maryland area and the property in Virginia and, to a lesser extent, the other properties that we manage. Our unconsolidated and managed-only apartment properties reimburse ARMC for certain costs incurred at the central office that are attributable to the operations of those properties. In accordance with EITF Topic 01-14, “Income Statement Characterization of Reimbursements Received for Out of Pocket Expenses Incurred,” the cost and reimbursement of these costs are not included in general and administrative expenses, but rather they are reflected as separate line items on the consolidated income statement.

2007 compared to 2006
General, administrative, selling and marketing costs incurred within our U.S. operations increased $1,711,000 to $8,081,000 for the year ended December 31, 2007 compared to $6,370,000 for the same period of 2006.  The 27% increase is primarily attributable to a $902,000 increase in consulting expenses and $727,000 related to fees associated with an evaluation of a recapitalization of the Company.  The increases in consulting expenses including $408,000 of fees related to a consultant hired to assist the Company with an overall strategic plan. Other increases in consulting included consulting services provided for our FIN 48 implementation during the first quarter of 2007 and consulting services for Sarbanes-Oxley Section 404 (“SOX 404”) internal control compliance testing.  Other increases included salaries and benefits related to executive retention agreements with our COO and CFO executed in the third quarter of 2007.  The salaries and benefits increase was partially offset by reduced bonus accruals for 2007 as bonuses were not awarded to executive management for 2007.  Other decreases in general, administrative, selling and marketing costs include decreases in audit and accounting expenses as 2006 amounts included non-recurring fees related to the closing agreement reached with the IRS and a decrease in share appreciation rights expense resulting from the decrease in our share price between periods.
We anticipate additional costs will be incurred as part of the company’s strategic planning activities noted above.  These costs include, but are not limited to, legal fees, consulting fees, and fees paid to the Special Committee to the Board of Trustees.

2006 compared to 2005
General, administrative, selling and marketing costs incurred within our U.S. operations decreased $537,000 to $6,370,000 for the year ended December 31, 2006, compared to $6,907,000 for the year ended December 31, 2005.  The 8% decrease in general, administrative, selling and marketing costs is primarily attributable to a decrease in the expense associated with our outstanding share incentive rights, as a result of a reduction of shares outstanding due to prior year exercises, coupled with a significant increase in the share price during 2005.  The decrease was partially offset by an increase in salaries and benefits, and legal fees related to the closing agreement reached with the IRS earlier this year.
 
Depreciation Expense - U.S. Operations:
2007 compared to 2006
Depreciation expense increased $957,000 to $5,744,000 for the year ended December 31, 2007 compared to $4,787,000 for the same period in 2006.  The increase in depreciation is primarily the result of depreciation related to the acquisitions of Milford Station I and Milford Station II and the depreciation related to Sheffield Greens Apartments, all of which accounted for $609,000 of the variance.  The balance of the increases relate to the recent refinancings of several properties at the end of 2006 and beginning of 2007.  The Company used part of the proceeds to make significant investments in capital improvements at these properties resulting in increased depreciation expense for 2007.
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2006 compared to 2005
Depreciation expense increased $958,000 to $4,787,000 for the year ended December 31, 2006 compared to $3,829,000 for the year ended December 31, 2005.  As a result of adopting EITF 04-05 in 2006, we added an additional $540,000 of depreciation expense to our 2006 consolidation.  The remainder of the increase is attributable to the acquisitions in May 2005 and April 2006 as well as capital improvements made to the existing properties.

Interest Income – U.S. Operations:
2007 compared to 2006
Interest income increased $105,000 to $1,073,000 for the year ended December 31, 2007, as compared to $968,000 for the same period of 2006.  The increase was primarily attributable to interest income received on investments of cash received from the various apartment refinancings at the end of 2006 and beginning of 2007.  This increase was offset in part by a reduction of the interest income received on the county bond receivables during the year.  During 2006, the Company negotiated a written agreement with the County to receive interest income on bond proceeds held in escrow by the County beginning July 1, 2005.  Accordingly, 2006 amounts included the recognition of 6 quarters of interest income from the County as the Company.
 
2006 compared to 2005
Interest income for the year ended December 31, 2006 was $968,000 compared to $145,000 for the year ended December 31, 2005.  The $823,000 increase in interest income in 2006 is the result of the recognition of $855,000 of interest income in 2006 related to the Charles County bonds for the period from July 1, 2005 through December 31, 2006, an 18 month period, with no comparable amounts recognized in 2005.  During 2006, the Company reached an agreement with Charles County whereby the Company receives interest payments on any undistributed bond proceeds held in escrow by the County.  As development activities specified by the bond agreement are completed, the Company draws down the escrowed bond proceeds.  The interest agreement is expected to remain effective through the last draw made by the Company, and the Company expects to receive future annual interest payments from the County.

Equity in Earnings from Unconsolidated Entities - U.S. Operations:
2007 compared to 2006
Equity in earnings from unconsolidated entities was the same for the year ended December 31, 2007 as compared to the year ended December 31, 2006.  In both periods, the Company recognized a loss of $1,000 from its investment in its unconsolidated real estate entities.  We continue to account for our investments in two apartment partnerships, Brookside and Lakeside, using equity accounting, but due to our limited ownership in these partnerships, our recognition of the partnerships’ earnings is immaterial.

2006 compared to 2005
For the year ended December 31, 2006, the Company recognized a loss of $1,000 from its investment in its unconsolidated real estate entities compared to the recognition of earnings of $135,000 for the year ended December 31, 2005.  With the implementation of the EITF 04-05, effective January 1, 2006, the Company has consolidated the operational results of Huntington and Essex which resulted in the overall decrease in our equity in earnings.

Interest Expense - U.S. Operations:
The Company considers interest expense on all U.S. 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 of the U.S. segment is applied.  Any excess interest is reflected as interest expense.  For 2007, 2006 and 2005, the excess interest primarily relates to the interest incurred on the non-recourse debt from our investment properties.

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2007 compared to 2006
Interest expense increased $2,769,000 for the year ended December 31, 2007, to $12,621,000, as compared to $9,852,000 for the same period of 2006.  The increase in interest expense was primarily attributable to interest expense incurred at new properties, including Sheffield Greens Apartments, Milford Station I and Milford Station II all of which accounted for $1,608,000 of the increase.  In addition, the refinancing of several apartment mortgages during the fourth quarter of 2006 and early first quarter 2007 increased interest expense at Fox Chase Apartments, LLC, New Forest Apartments, LLC, Coachman’s Apartments LLC and Village Lake Apartments, LLC $1,318,000 for 2007.  Additionally, interest expense increased $1,253,000 as a result of accrued interest on uncertain tax positions associated with our implementation of FIN 48 beginning January 1, 2007.
For the year ended December 31, 2007, $1,271,000 of interest was capitalized in the U.S. operations compared to $1,504,000 of interest capitalized during 2006.

2006 compared to 2005
Interest expense for the year ended December 31, 2006 increased $3,055,000 to $9,852,000 compared to $6,797,000 for the year ended December 31, 2005.  The increase is primarily the result of EITF 04-05, which added $1,263,000 of interest expense in 2006.  Excluding the impact of EITF 04-05, the increase is the result of additional interest expense of $599,000 recognized as a result of the conversion of one of our properties from an interest subsidized property to a market rent property in December 2005, $554,000 on the mortgages of the properties acquired in May 2005 and April 2006, and $200,000 of the write off of pre-payment penalties and other fees from the refinancing of two of our properties mortgages in the fourth quarter of 2006 with no comparable amounts for 2005. The remainder of the increase is related to reduced amounts of capitalized interest for 2006 as completed lots in Fairway Village and completed units in Sheffield Greens were no longer eligible for capitalization.
For the year ended December 31, 2006, $1,504,000 of interest was capitalized in the U.S. operations compared to $944,000 of interest capitalized during 2005.

Minority Interest in Consolidated Entities - U.S. Operations:
Minority interest in consolidated entities includes the minority partner's share of the consolidated partnerships’ earnings and distributions to minority partners in excess of their basis in the consolidated partnership. Losses charged to the minority interest are limited to the minority partner's basis in the partnership.  Because the minority interest holders in most of our partnerships have received distributions in excess of their basis, we anticipate volatility in minority interest expense.  Although this allows us to recognize 100 percent of the income of the partnerships up to accumulated distributions and losses in excess of the minority partner’s basis previously required to be recognized as our expense, we will be required to recognize as expense 100 percent of future distributions to minority partners and any subsequent losses.

2007 compared to 2006
Minority interest decreased $280,000 or 45% to $336,000 for the year ended December 31, 2007 compared to $616,000 for the same period in 2006.  The decrease was primarily the result of decreased surplus cash distributions in excess of basis made to the limited partners during 2007 as compared to 2006.

2006 compared to 2005
Minority interest for the year ended December 31, 2006 was $616,000 compared to $926,000 for the year ended December 31, 2005.  The $310,000 decrease in minority interest expense in 2006 is the result of distributions provided to third party owners in excess of their basis after the refinancing of Terrace in the fourth quarter of 2005 with no comparable distributions made in 2006.  This was offset by distributions in excess of basis made to the limited partners of Huntington for which we are now required to consolidate as a result of the implementation of EITF 04-05.

Provision for Income Taxes – U.S. Operations:
The effective tax rates for the years ended December 31, 2007, 2006, and 2005 were 41%, 41% and 54%, respectively.  The statutory rate is 40%.  The effective tax rate for 2007 differs from the statutory rate as a result of the impact of a statutory rate change effective for 2008 on our net deferred tax assets.   This was partially offset by penalties accrued on uncertain tax positions as well as certain nondeductible expenses creating permanent differences.  The effective tax rates for 2006 and 2005 differ from the statutory rate due to certain permanent differences and taxation of foreign source interest income without a corresponding foreign tax credit.

Results of Operations - Puerto Rico Operations:
For the year ended December 31, 2007, our Puerto Rico segment generated $7,074,000 of operating income compared to $9,696,000 of operating income generated by the segment for the same period in 2006 and $2,659,000 in 2005.  Additional information and analysis of the Puerto Rico operations can be found below.

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Rental Property Revenues and Operating Expenses - Puerto Rico Operations:
As of December 31, 2007, nine Puerto Rico-based apartment properties, representing twelve apartment complexes totaling 2,653 units, in which we hold an ownership interest (“Puerto Rico Apartments”) qualified for the consolidation method of accounting.  The rules of consolidation require that we include within our financial statements the consolidated apartment properties' total revenue and operating expenses. The portions of net income attributable to the interests of the outside owners of these properties and any losses and distributions in excess of the minority owners’ basis in those properties are reflected as minority interest expense.  As of December 31, 2007, all of the Puerto Rico Apartments were HUD subsidized projects with rental rates governed by HUD.
Prior to January 1, 2006, the Puerto Rico apartments were not included in the Company’s consolidated results.  Effective January 1, the Company included the Puerto Rico Apartments in their consolidated results as part of the implementation of the provisions of EITF 04-05.
Our Puerto Rico rental property portfolio also includes the operations of a commercial rental property in the community of Parque Escorial, known as Escorial Building One.  The company constructed and holds a 100% ownership interest in Escorial Building One, which commenced operations in September 2005.  Escorial Building One is a three-story building with approximately 56,000 square feet of offices space for lease.  The Company moved the Puerto Rico Corporate Office to the new facilities in the third quarter of 2005 and leases approximately 20% of the building.

2007 compared to 2006
Rental property revenues increased $782,000 or 4% to $22,306,000 for the year ended December 31, 2007 compared to $21,524,000 for the same period of 2006.  The increase in our rental property revenues was primarily the result of an overall rent increase of 3% from HUD on our multifamily apartment properties.  In addition, rents for our commercial rental property, EOB, increased 35% for the year as a result of lease up efforts and new tenants.
Rental property operating expenses increased $469,000 or 4% to $11,432,000 for the year ended December 31, 2007 compared to $10,963,000 for the same period of 2006.  The increase was the result of a 4% increase to our multifamily apartment properties operating expenses driven by overall inflationary adjustments as well as specific above inflation increases noted in utilities, repairs and painting.  In addition, operating expenses for our commercial rental property, EOB, increased 6% for the year as a result of amortized concessions related to new tenants as well as a reserve for bad debts.

2006 compared to 2005
Rental property revenues increased $21,466,000 to $21,524,000 for the year ended December 31, 2006 compared to $58,000 for the year ended December 31, 2005.  The consolidation of the Puerto Rico Apartments as a result of EITF 04-05, increased rental property revenues by $21,168,000 for the year ended December 31, 2006.  Although not included in the consolidated results for the same periods in 2005, rental property revenues from the Puerto Rico Apartments were $20,589,000.  The 2.8% increase for the year ended December 31, 2006 was primarily related to increases in rents in such period.
Rental property operating expenses increased $10,302,000 to $10,963,000 for the year ended December 31, 2006 compared to $661,000 for the year ended December 31, 2005.  The consolidation of the Puerto Rico Apartments as a result of EITF 04-05 increased rental property operating expenses by $9,862,000 for the year ended December 31, 2006.  Although not included in the consolidated results for the same periods in 2005, rental property revenues from the Puerto Rico Apartments were $9,742,000.  The 1.2% increase for the year ended December 31, 2006, was primarily due to increases in utilities and other operating expenses, partially offset by a reduction in repairs, painting and rehabilitation of units in such period.

Community Development - Puerto Rico Operations:
Total land sales revenue in any one period is affected by commercial sales which are cyclical in nature and usually have a noticeable positive impact on our earnings in the period in which settlement is made.  There were no community development land sales during the years ended December 31, 2007 and 2006.  Community land sales were $10,397,000 for the year ended December 31, 2005.  In April 2005, the Company sold 7.2 commercial acres for the $7,448,000 and in February 2005, sold 2.5 commercial acres for $2,949,000 in the master-planned community of Parque Escorial.  The gross margin on land sales for the year ended December 31, 2005, was 28%.  There were no commercial contracts for commercial sales in backlog at December 31, 2007.

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Homebuilding – Puerto Rico Operations:
The Company organizes corporations as needed to operate each individual homebuilding project.  In April 2004, the Company commenced the construction of a 160-unit mid-rise condominium complex known as Torres del Escorial (“Torres”).  The condominium units were offered to buyers in the market in January 2005 and delivery of the units commenced in the fourth quarter of 2005.

2007 compared to 2006
For the year ended December 31, 2007, homebuilding revenues decreased $12,258,000 or 62% to $7,580,000 as compared to $19,838,000 for the year ended December 31, 2006.  The decrease in homebuilding revenues was impacted by the slow housing market resulting in a decrease in the number of units sold in the respective periods.  For the year ended December 31, 2007, the company sold 29 units at an average selling price of $261,000 as compared to 78 units at an average selling price of $254,000 per unit for the same period of 2006.  The gross margins on home sales for the years ended December 31, 2007 and 2006 were 27% and 25%, respectively.  The slight increase in gross profit percentages between periods results from the increased sales prices for the units sold during 2007.
As of December 31, 2007, 1 unit of Torres was under contract at a selling price of $239,000.  The sales contract is backed by a $6,000 deposit.  For the year ended December 31, 2007, the Company had 22 new contracts and 8 canceled contracts.  For the year ended December 31, 2006, the Company had 68 new contracts and 42 canceled contracts.  The Puerto Rico real estate market has slowed substantially from 2006 to 2007.  The reduced pace of sales has impacted the Company somewhat, but not to the same extent as the overall Puerto Rico market decline.  The Company currently anticipates that the remaining 21 units in Torres will be sold in 2008 and that its current pricing remains competitive.

2006 compared to 2005
Within the Torres project and during the years ended December 31, 2006 and 2005, 78 and 32 units, respectively, were closed at an average selling price of approximately $254,000 and $ 232,000 per unit, respectively, generating aggregate revenues of $19,838,000 and $7,424,000, respectively.  The gross margins on home sales for the years ended December 31, 2006 and 2005 were 25% and 18%, respectively.    The increase in the gross profit margin is primarily attributable to two factors.  First, the cost of sales in 2005 included certain deferred commission expenses charged as period costs when sales began in 2005.  Secondly, the market has allowed for an increase in the selling prices for the units sold within each subsequent building which has improved the gross margins for this project.

Management and Other fees – Puerto Rico Operations:
We earn monthly fees from our management of four non-owned apartment properties and four home-owner associations operating in Parque Escorial.  This section currently includes only the fees earned from the non-owned managed entities.  For 2005, this section also included fees earned from our previously unconsolidated Puerto Rico Apartments.  However, these fees are now eliminated in consolidation.

2007 compared to 2006
Total management fees increased $42,000 or 7%, to $634,000 for the year ended December 31, 2007, as compared to $592,000 for the year ended December 31, 2006.  The increase in our management fees resulted from increases in the annual rents, antenna rents and other miscellaneous income in the non-owned apartment properties as well as increases in the management fees received from Parque Escorial Associations during the year.

2006 compared to 2005
Total management fees decreased $1,536,000 to $592,000 for the year ended December 31, 2006, as compared to $2,128,000 for the year ended December 31, 2005.  The decrease was primarily the result of the implementation of EITF 04-05 and the elimination of $2,358,000 of management fees in consolidation.  On a comparative basis, the management fees decreased $114,000 to $592,000 for the year ended December 31, 2006, as compared to $706,000 for the year ended December 31, 2005.  The decrease was primarily due to a broker’s fee of $139,000 earned in the sale of a property owned by the Wilson family which was sold to a third party in April 2005, with no comparable fees earned in 2006.  This decrease was offset in part during the year 2006 by an increase in management fees from Parque Escorial Association.

General, Administrative, Selling and Marketing Expenses – Puerto Rico Operations: