acpt10q_93008.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
 
(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008, OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _________________
 
Commission file number 1-14369

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

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x                                No o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “an accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
 
Yes o No x
 
 
As of November 8, 2008, there were 5,229,954 Common Shares, par value $0.01 per share, issued and outstanding

 
-1-


AMERICAN COMMUNITY PROPERTIES TRUST
FORM 10-Q
SEPTEMBER 30, 2008
TABLE OF CONTENTS
   
Page Number
     
PART I
FINANCIAL INFORMATION
 
     
Item 1.
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
8
     
Item 2.
22
     
Item 4T.
33
     
PART II
 
     
Item 1.
34
     
Item 1A.
34
     
Item 2
34
     
Item 3.
34
     
Item 4.
34
     
Item 5.
34
     
Item 6.
34
     
 
Signatures
35




AMERICAN COMMUNITY PROPERTIES TRUST
 
CONSOLIDATED STATEMENTS OF INCOME
 
 
(In thousands, except per share amounts)
 
(Unaudited)
 
             
             
   
2008
   
2007
 
             
Revenues
           
  Rental property revenues
  $ 46,673     $ 45,249  
  Community development-land sales
    6,457       8,032  
  Homebuilding-home sales
    3,476       6,113  
  Management and other fees, substantially all from related entities
    568       756  
  Reimbursement of expenses related to managed entities
    1,106       1,307  
    Total revenues
    58,280       61,457  
                 
Expenses
               
  Rental property operating expenses
    22,291       22,901  
  Cost of land sales
    5,218       5,930  
  Cost of home sales
    2,694       4,399  
  General, administrative, selling and marketing
    8,969       8,600  
  Depreciation and amortization
    7,511       7,009  
  Expenses reimbursed from managed entities
    1,106       1,307  
    Total expenses
    47,789       50,146  
                 
Operating income
    10,491       11,311  
                 
Other income (expense)
               
  Interest and other income
    497       1,178  
  Equity in earnings from unconsolidated entities
    489       2,020  
  Interest expense
    (12,780 )     (14,037 )
  Minority interest in consolidated entities
    (1,691 )     (1,750 )
                 
Loss before provision for income taxes
    (2,994 )     (1,278 )
Benefit for income taxes
    (993 )     (19 )
                 
Net loss
  $ (2,001 )   $ (1,259 )
                 
Loss per share
               
    Basic and Diluted
  $ (0.38 )   $ (0.24 )
Weighted average shares outstanding
               
    Basic and Diluted
    5,215       5,205  
Cash dividends per share
  $ -     $ 0.30  
The accompanying notes are an integral part of these consolidated statements.
         
                 




AMERICAN COMMUNITY PROPERTIES TRUST
 
 
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
 
(In thousands, except per share amounts)
 
(Unaudited)
 
             
             
   
2008
   
2007
 
             
Revenues
           
  Rental property revenues
  $ 15,736     $ 15,417  
  Community development-land sales
    460       2,063  
  Homebuilding-home sales
    494       899  
  Management and other fees, substantially all from related entities
    188       250  
  Reimbursement of expenses related to managed entities
    344       414  
    Total revenues
    17,222       19,043  
                 
Expenses
               
  Rental property operating expenses
    7,374       7,787  
  Cost of land sales
    493       1,574  
  Cost of home sales
    394       583  
  General, administrative, selling and marketing
    2,920       3,232  
  Depreciation and amortization
    2,469       2,428  
  Expenses reimbursed from managed entities
    344       414  
    Total expenses
    13,994       16,018  
                 
Operating income
    3,228       3,025  
                 
Other income (expense)
               
  Interest and other income
    135       288  
  Equity in earnings from unconsolidated entities
    158       175  
  Interest expense
    (4,224 )     (4,700 )
  Minority interest in consolidated entities
    (370 )     (193 )
                 
Loss before benefit for income taxes
    (1,073 )     (1,405 )
Benefit for income taxes
    (443 )     (307 )
                 
Net loss
  $ (630 )   $ (1,098 )
                 
Loss per share
               
    Basic and Diluted
  $ (0.12 )   $ (0.21 )
Weighted average shares outstanding
               
    Basic and Diluted
    5,222       5,207  
Cash dividends per share
  $ -     $ 0.10  
The accompanying notes are an integral part of these consolidated statements.
         
                 



 
AMERICAN COMMUNITY PROPERTIES TRUST
 
 
(In thousands, except share and per share amounts)
 
   
As of September 30, 2008
(Unaudited)
   
As of December 31, 2007
(Audited)
 
ASSETS
           
ASSETS:
           
Investments in real estate:
           
  Operating real estate, net of accumulated depreciation
  $ 159,631     $ 164,352  
    of $157,494 and $150,292, respectively
               
  Land and development costs
    99,652       84,911  
  Condominiums under construction
    1,917       4,460  
  Rental projects under construction or development
    3,719       853  
    Investments in real estate, net
    264,919       254,576  
                 
Cash and cash equivalents
    19,303       24,912  
Restricted cash and escrow deposits
    20,414       20,223  
Investments in unconsolidated real estate entities
    6,476       6,528  
Receivable from bond proceeds
    2,162       5,404  
Net accounts receivable
    1,959       2,676  
Deferred tax assets
    34,778       34,075  
Property and equipment, net of accumulated depreciation
    967       1,045  
Deferred charges and other assets, net of amortization of
               
  $3,389 and $2,764 respectively
    10,840       11,285  
    Total Assets
  $ 361,818     $ 360,724  
                 
 LIABILITIES AND SHAREHOLDERS' EQUITY
               
LIABILITIES:
               
Non-recourse debt
  $ 277,118     $ 279,981  
Recourse debt
    33,814       25,589  
Accounts payable and accrued liabilities
    22,675       24,874  
Deferred income
    3,017       3,214  
Accrued current income tax liability
    14,581       14,620  
    Total Liabilities
    351,205       348,278  
                 
SHAREHOLDERS' EQUITY:
               
Common shares, $.01 par value, 10,000,000 shares
  authorized, 5,229,954 shares issued and outstanding
  as of September 30, 2008 and December 31, 2007
    52       52  
Treasury stock, 67,709 shares at cost
    (376 )     (376 )
Additional paid-in capital
    17,545       17,377  
Retained deficit
    (6,608 )     (4,607 )
    Total Shareholders' Equity
    10,613       12,446  
Total Liabilities and Shareholders' Equity
  $ 361,818     $ 360,724  
The accompanying notes are an integral part of these consolidated balance sheets.
 
                 






AMERICAN COMMUNITY PROPERTIES TRUST
 
 
(In thousands, except share amounts)
 
                                     
                                     
                                     
   
Common Shares
         
Additional
             
         
Par
   
Treasury
   
Paid-in
   
Retained
       
   
Number
   
Value
   
Stock
   
Capital
   
Deficit
   
Total
 
Balance December 31, 2007 (Audited)
    5,229,954     $ 52     $ (376 )   $ 17,377     $ (4,607 )   $ 12,446  
  Net loss
    -       -       -       -       (2,001 )     (2,001 )
  Amortization of Trustee Restricted Shares
    -       -       -       168       -       168  
Balance September 30, 2008 (Unaudited)
    5,229,954     $ 52     $ (376 )   $ 17,545     $ (6,608 )   $ 10,613  
   
The accompanying notes are an integral part of this consolidated statement.
 



 
AMERICAN COMMUNITY PROPERTIES TRUST
 
 
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
 
(In thousands)
 
(Unaudited)
 
             
             
   
2008
   
2007
 
             
Cash Flows from Operating Activities
           
  Net loss
  $ (2,001 )   $ (1,259 )
  Adjustments to reconcile net loss to net cash used in
               
    operating activities:
               
      Depreciation and amortization
    7,511       7,009  
      Distribution to minority interests in excess of basis
    1,587       1,988  
      Benefit for deferred income taxes
    (703 )     (5,019 )
      Equity in earnings-unconsolidated entities
    (489 )     (2,020 )
      Distribution of earnings from unconsolidated entities
    490       521  
      Cost of land sales
    5,251       5,930  
      Cost of home sales
    2,694       4,399  
      Stock based compensation expense
    91       190  
      Amortization of deferred loan costs
    633       643  
      Changes in notes and accounts receivable
    717       1,806  
      Additions to community development assets
    (19,992 )     (23,180 )
      Right of way easement
    -       2,000  
      Homebuilding-construction expenditures
    (151 )     (547 )
      Deferred income
    (197 )     (479 )
      Changes in accounts payable, accrued liabilities
    (2,161 )     (1,050 )
  Net cash used in operating activities
    (6,720 )     (6,968 )
                 
Cash Flows from Investing Activities
               
  Investment in office building and apartment construction
    (2,866 )     (452 )
  Change in investments - unconsolidated entities
    51       1,538  
  Change in restricted cash
    (191 )     (1,841 )
  Additions to rental operating properties, net
    (2,561 )     (6,298 )
  Other assets
    (339 )     (221 )
  Net cash used in investing activities
    (5,906 )     (7,274 )
                 
Cash Flows from Financing Activities
               
  Cash proceeds from debt financing
    6,386       23,339  
  Payment of debt
    (2,888 )     (19,678 )
  County Bonds proceeds, net of undisbursed funds
    5,106       5,301  
  Payments of distributions to minority interests
    (1,587 )     (1,988 )
  Dividends paid to shareholders
    -       (1,548 )
  Net cash provided by financing activities
    7,017       5,426  
                 
Net Decrease in Cash and Cash Equivalents
    (5,609 )     (8,816 )
Cash and Cash Equivalents, Beginning of Period
    24,912       27,459  
Cash and Cash Equivalents, End of Period
  $ 19,303     $ 18,643  
The accompanying notes are an integral part of these consolidated statements.
 
 
-7-

AMERICAN COMMUNITY PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(Unaudited)
(1)
ORGANIZATION
 
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, 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, losses or gains on the residential land sold in Parque Escorial passes through to ALD.  ALD, ARMC, and ARPT are taxed as U.S. corporations.  The taxable income from the U.S. apartment properties flows through to ARPT.

(2)
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
The accompanying consolidated financial statements include the accounts of American Community Properties Trust and its majority owned subsidiaries and partnerships, after eliminating all intercompany transactions.  All of the entities included in the consolidated financial statements are hereinafter referred to collectively as the "Company" or "ACPT."
The Company consolidates entities that are not variable interest entities as defined by Financial Accounting Standard Board (“FASB”) Interpretation No. 46 (revised December 2003) (“FIN 46 (R)”) in which it owns, directly or indirectly, a majority voting interest in the entity.  In addition, the Company consolidates entities, regardless of ownership percentage, in which the Company serves as the general partner and the limited partners do not have substantive kick-out rights or substantive participation rights in accordance with Emerging Issues Task Force Issue 04-05, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights," (“EITF 04-05”).  The assets of consolidated real estate partnerships not 100% owned by the Company are generally not available to pay creditors of the Company.
    The consolidated group includes ACPT and its four major subsidiaries, American Rental Properties Trust, American Rental Management Company, American Land Development U.S., Inc., and IGP Group Corp.  In addition, the consolidated group includes the following other entities:
 
Alturas del Senorial Associates Limited Partnership
Land Development Associates S.E.
American Housing Management Company
LDA Group, LLC
American Housing Properties L.P.
Milford Station I, LLC
Bannister Associates Limited Partnership
Milford Station II, LLC
Bayamon Garden Associates Limited Partnership
Monserrate Associates Limited Partnership
Carolina Associates Limited Partnership S.E.
New Forest Apartments, LLC
Coachman's Apartments, LLC
Nottingham South, LLC
Colinas de San Juan Associates Limited Partnership
Owings Chase, LLC
Crossland Associates Limited Partnership
Palmer Apartments Associates Limited Partnership
Escorial Office Building I, Inc.
Prescott Square, LLC
Essex Apartments Associates Limited Partnership
St. Charles Community, LLC
Fox Chase Apartments, LLC
San Anton Associates S.E.
Gleneagles Apartments, LLC
Sheffield Greens Apartments, LLC
Headen House Associates Limited Partnership
Torres del Escorial, Inc.
Huntington Associates Limited Partnership
Turabo Limited Dividend Partnership
Interstate Commercial Properties, Inc.
Valle del Sol Associates Limited Partnership
Interstate General Properties Limited Partnership, S.E.
Village Lake Apartments, LLC
Jardines de Caparra Associates Limited Partnership
Wakefield Terrace Associates Limited Partnership
Lancaster Apartments Limited Partnership
Wakefield Third Age Associates Limited Partnership
   
    The Company's investments in entities that it does not control are recorded using the equity method of accounting.  Refer to Note 3 for further discussion regarding Investments in Unconsolidated Real Estate Entities.
 
Interim Financial Reporting
These unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.  The Company has no items of other comprehensive income for any of the periods presented.  In the opinion of management, these unaudited financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present a fair statement of results for the interim period.  While management believes that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report filed on Form 10-K for the year ended December 31, 2007.  The operating results for the nine and three months ended September 30, 2008, and 2007, are not necessarily indicative of the results that may be expected for the full year.  Net income (loss) per share is calculated based on weighted average shares outstanding.
 
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements, and accompanying notes and disclosures.  These estimates and assumptions are prepared using management's best judgment after considering past and current events and economic conditions. Actual results could differ from those estimates and assumptions.
 
Sales, Profit Recognition and Cost Capitalization
In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 66, “Accounting for Sales of Real Estate,” community development land sales are recognized at closing only when sufficient down payments have been obtained and initial and continuing investment criteria have been met, 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 to be recognized when construction is beyond the preliminary stage, the buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit, sufficient units in the project have been sold to ensure that the property will not be converted to rental property, the sales proceeds are collectible and the aggregate sales proceeds and the total cost of the project can be reasonably estimated.  Accordingly, we recognize revenues and costs upon settlement with the homebuyer which doesn’t occur until after we receive use and occupancy permits for the building.
    The costs of developing the land are allocated to our land assets and charged to cost of sales as the related inventories are sold using the relative sales value method which rely on estimated costs and sales values.   In accordance with SFAS 67 "Accounting for Costs and Initial Rental Operations of Real Estate Projects", the costs of acquiring and developing land are allocated to these assets and charged to cost of sales as the related inventories are sold. Within our homebuilding operations, the costs of acquiring the land and constructionof the condominiums are allocated to these assets and charged to cost of sales as the condominiums are sold.  The cost of sales is determined by the percentage of completion method.  The Company considers interest expense on all debt available for capitalization to the extent of average qualifying assets for the period.  Interest specific to the construction of qualifying assets, represented primarily by our recourse debt, is first considered for capitalization.  To the extent qualifying assets exceed debt specifically identified, a weighted average rate including all other debt is applied.  Any excess interest is reflected as interest expense.

Impairment of Long-Lived Assets
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.  There have been no impairment charges for the nine and three months ended September 30, 2008 and 2007.
 
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.  There have been no impairment charges for the nine and three months ended September 30, 2008 and 2007.
 
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, unrestricted deposits with financial institutions and short-term investments with original maturities of three months or less.  Restricted cash and escrow deposits include funds held in restricted escrow accounts used for maintenance and capital improvements with the approval of HUD and/or the State Finance Agency.  The account also includes tenant security deposits as well as deposits collected within our homebuilding operations as well as funds in an escrow account that are restricted for the repayment of the County bonds.
As of September 30, 2008, the Company had cash and cash equivalents of $19,303,000 and $20,414,000 in restricted cash.  Included in the Company’s cash and cash equivalents are $8,756,000 of cash located within multifamily apartment entities, and to which the Company does not have direct control.  Cash flow from our consolidated apartment properties whose mortgage loans are insured by the Federal Housing Authority ("FHA"), or financed through the housing agencies in Maryland, Virginia or Puerto Rico (the "Financing Agencies,") are subject to guidelines and limits established by the apartment partnerships' regulatory agreements with HUD and the State Financing Agencies. For two of our Puerto Rico partnerships, 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 applicable Financing Agency.
 
Depreciable Assets and Depreciation
The Company's operating real estate is stated at cost and includes all costs related to acquisitions, development and construction.  The Company makes assessments of the useful lives of our real estate assets for purposes of determining the amount of depreciation expense to reflect on our income statement on an annual basis.  The assessments, all of which are judgmental determinations, are as follows:

·  
Buildings and improvements are depreciated over five to forty years using the straight-line or double declining balance methods,
·  
Furniture, fixtures and equipment are depreciated over five to seven years using the straight-line method,
·  
Leasehold improvements are capitalized and depreciated over the lesser of the life of the lease or their estimated useful life,
·  
Maintenance and other repair costs are charged to operations as incurred.

Operating Real Estate
The table below presents the major classes of depreciable assets as of September 30, 2008 and December 31, 2007 (in thousands):
 
 
September 30,
 
December 31,
 
 
2008
 
2007
 
 
(Unaudited)
 
(Audited)
 
         
Building
$ 265,816   $ 265,115  
Building improvements
  10,606     10,414  
Equipment
  15,191     13,603  
    291,613     289,132  
Less: Accumulated depreciation
  157,494     150,292  
    134,119     138,840  
Land
  25,512     25,512  
Operating properties, net
$ 159,631   $ 164,352  
 
Other Property and Equipment
In addition, the Company owned other property and equipment of $967,000 and $1,045,000, net of accumulated depreciation of $2,480,000 and $2,294,000 respectively, as of September 30, 2008 and December 31, 2007 respectively.

Depreciation
Total depreciation expense was $7,511,000 and $7,009,000 for the nine months ended September 30, 2008 and 2007, respectively, and $2,469,000 and $2,428,000 for the three months ended September 30, 2008 and 2007, respectively.
Impact of Recently Issued Accounting Standards

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.  On February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which amends FAS No. 157 by delaying its effective date by one year for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Therefore, beginning on January 1, 2008, this standard applies prospectively to new fair value measurements of financial instruments and recurring fair value measurements of non-financial assets and non-financial liabilities.  On January 1, 2009, the standard will also apply to all other fair value measurements.
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 was effective for the Company beginning January 1, 2008.  The implementation of SFAS 157 and 159 did 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, except for certain amendments related to income taxes related to acquisitions which will apply to business combinations with acquisition dates before the effective dates of SFAS 141R.

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 requires 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 was effective for the Company beginning January 1, 2008.  The implementation of EITF 06-08 did not have a material impact on our financial statements.
 
(3)
INVESTMENT IN UNCONSOLIDATED REAL ESTATE ENTITIES

The Company accounts for investments in unconsolidated real estate entities that are not considered variable interest entities under FIN 46(R) in accordance with SOP 78-9 "Accounting for Investments in Real Estate Ventures" and APB Opinion No. 18 "The Equity Method of Accounting for Investments in Common Stock".  For entities that are considered variable interest entities under FIN 46(R), the Company performs an assessment to determine the primary beneficiary of the entity as required by FIN 46(R).  The Company accounts for variable interest entities in which the Company is not a primary beneficiary and does not bear a majority of the risk of expected loss in accordance with the equity method of accounting.
The Company considers many factors in determining whether or not an investment should be recorded under the equity method, such as economic and ownership interests, authority to make decisions, and contractual and substantive participating rights of the partners.  Income and losses are recognized in accordance with the terms of the partnership agreements and any guarantee obligations or commitments for financial support.  The Company's investments in unconsolidated real estate entities accounted for under the equity method of accounting currently consists of general partnership interests in two limited partnerships which own apartment properties in the United States; a limited partnership interest in a limited partnership that owns a commercial property in Puerto Rico; and a 50% ownership interest in a joint venture formed as a limited liability company.
 
Apartment Partnerships
The unconsolidated apartment partnerships as of September 30, 2008 and 2007 included Brookside Gardens Limited Partnership (“Brookside”) and Lakeside Apartments Limited Partnership (“Lakeside”) which collectively represent 110 rental units.  We have determined that these two entities are variable interest entities under FIN 46(R).  However, the Company is not required to consolidate the partnerships due to the fact that it is not the primary beneficiary and does not bear the majority of the risk of expected losses.  The Company holds a nominal (1% or less) economic interest in Brookside and Lakeside but, as a general partner, we have significant influence over operations of these entities that is disproportionate to our economic ownership.  In accordance with SOP 78-9 and APB No. 18, these investments are accounted for under the equity method.  The Company is exposed to losses consisting of our net investment, loans and unpaid fees for Brookside of $246,000 and $231,000 and for Lakeside of $160,000 and $172,000 as of September 30, 2008 and December 31, 2007, respectively.  All amounts are fully reserved.  Pursuant to the partnership agreement for Brookside, the Company, as general partner, is responsible for providing operating deficit loans to the partnership in the event that it is not able to generate sufficient cash flows from its operating activities.

Commercial Partnerships
The Company holds a limited partner interest in a commercial property in Puerto Rico that it accounts for under the equity method of accounting.  ELI, S.E. ("ELI"), is a partnership formed for the purpose of constructing a building for lease to the State Insurance Fund of the Government of Puerto Rico.  ACPT contributed the land in exchange for $700,000 and a 27.82% ownership interest in the partnership's assets, equal to a 45.26% interest in cash flow generated by the thirty-year lease of the building.
On April 30, 2004, the Company purchased a 50% limited partnership interest in El Monte Properties, S.E. ("El Monte") from Insular Properties Limited Partnership ("Insular") for $1,462,500.  Insular is owned by the J. Michael Wilson Family, a related party.  In December 2004, a third party buyer purchased El Monte for $20,000,000, $17,000,000 in cash and $3,000,000 in notes.  The net cash proceeds from the sale of the real estate were distributed to the partners.  As a result, the Company received $2,500,000 in cash and recognized $986,000 of income in 2004.  The gain on sale was reduced by the amount of the seller's note, which is subject to future subordination.  In January 2005, El Monte distributed the notes to the partners whereby the Company received a $1,500,000 note.  The Company determined that the cost recovery method of accounting was appropriate for this transaction and accordingly, deferred revenue recognition on this note until cash payment was received.  In January 2007, the Company received $1,707,000, equal to the full principal amount due plus all accrued interest outstanding and, accordingly, recognized $1,500,000 of equity in earnings from unconsolidated entities and $207,000 of interest income.  The Company has no required funding obligations and management expects to wind up El Monte’s affairs during 2009.
 
Land Development Joint Venture
In September 2004, the Company entered into a joint venture agreement with Lennar Corporation for the development of a 352-unit, active adult community located in St. Charles, Maryland.  The Company manages the project's development for a market rate fee pursuant to a management agreement.  In September 2004, the Company transferred land to the joint venture in exchange for a 50% ownership interest and $4,277,000 in cash.  The Company's investment in the joint venture was recorded at 50% of the historical cost basis of the land with the other 50% recorded within our deferred charges and other assets.  The proceeds received are reflected as deferred revenue.  The deferred revenue and related deferred costs will be recognized into income as the joint venture sells lots to Lennar.  In March 2005, the joint venture closed a non-recourse development loan, which was amended in June 2006, December 2006 and again in October 2007.  Included within these amendments, the maximum borrowings outstanding on the facility were reduced to $5.0 million.  For the October 2007 amendment, 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.  In the nine and three months ended September 30, 2008, the joint venture did not sell any lots.  In the nine and three months ended September 30, 2007, the joint venture sold 48 and 18 lots to Lennar and recognized $1,063,000 and $408,000 in deferred revenue, off-site fees and management fees and $358,000 and $140,000 of deferred costs, respectively.
The following table summarizes the financial data and principal activities of the unconsolidated real estate entities, which the Company accounts for under the equity method.  The information is presented to segregate the apartment partnerships from the commercial partnerships as well as our 50% ownership interest in the land development joint venture, which are all accounted for as “investments in unconsolidated real estate entities” on the balance sheets.
 
               
 Land
       
               
Development
       
   
Apartment
   
Commercial
   
Joint
       
   
Properties
   
Property
   
Venture
   
Total
 
   
(in thousands)
 
                         
Summary Financial Position:
                       
  Total Assets
                       
    September 30, 2008
  $ 4,822     $ 27,867     $ 12,714     $ 45,403  
    December 31, 2007
    4,980       27,379       12,397       44,756  
  Total Non-Recourse Debt
                               
    September 30, 2008
    3,136       22,960       4,998       31,094  
    December 31, 2007
    3,189       22,960       4,722       30,871  
  Total Other Liabilities
                               
    September 30, 2008
    967       490       783       2,240  
    December 31, 2007
    976       147       741       1,864  
  Total Equity
                               
    September 30, 2008
    719       4,417       6,933       12,069  
    December 31, 2007
    815       4,272       6,934       12,021  
   
 
 
  Company's Investment, net (1)
                               
    September 30, 2008
    -       4,649       1,828       6,477  
    December 31, 2007
    (1 )     4,701       1,828       6,528  
                                 
Summary of Operations:
                               
  Total Revenue
                               
    Nine Months Ended September 30, 2008
    620       2,653       -       3,273  
    Nine Months Ended September 30, 2007
    604       2,730       5,560       8,894  
    Three Months Ended September 30, 2008
    202       864       -       1,066  
    Three Months Ended September 30, 2007
    203       909       1,951       3,063  
  Net Income (Loss)
                               
    Nine Months Ended September 30, 2008
    (97 )     1,339       -       1,242  
    Nine Months Ended September 30, 2007
    (155 )     1,407       2       1,254  
    Three Months Ended September 30, 2008
    (30 )     430       -       400  
    Three Months Ended September 30, 2007
    (58 )     470       -       412  
  Company's recognition of equity in earnings
                               
    Nine Months Ended September 30, 2008
    -       490       -       490  
    Nine Months Ended September 30, 2007 (2)
    (1 )     521       -       520  
    Three Months Ended September 30, 2008
    -       159       -       159  
    Three Months Ended September 30, 2007
    -       175       -       175  
                                 
 
 



               
Land
       
               
Development
       
   
Apartment
   
Commercial
   
Joint
       
   
Properties
   
Property
   
Venture
   
Total
 
   
(in thousands)
 
Summary of Cash Flows:
                       
  Cash flows provided by (used in) operating activities
                       
    Nine Months Ended September 30, 2008
   $ 61      $ 1,627      $ 42      $ 1,730  
    Nine Months Ended September 30, 2007
    38       1,710       5,508       7,256  
    Three Months Ended September 30, 2008
    11       650       40       701  
    Three Months Ended September 30, 2007
    (12 )     865       2,359       3,212  
  Company's share of cash flows from operating activities
                               
    Nine Months Ended September 30, 2008
    1       736       21       758  
    Nine Months Ended September 30, 2007
    -       774       2,754       3,528  
    Three Months Ended September 30, 2008
    -       294       20       314  
    Three Months Ended September 30, 2007
    -       392       1,179       1,571  
  Operating cash distributions
                               
    Nine Months Ended September 30, 2008
    -       1,194       -       1,194  
    Nine Months Ended September 30, 2007
    -       1,236       -       1,236  
    Three Months Ended September 30, 2008
    -       421       -       421  
    Three Months Ended September 30, 2007
    -       442       -       442  
  Company's share of operating cash distributions
                               
    Nine Months Ended September 30, 2008
    -       541       -       541  
    Nine Months Ended September 30, 2007
    -       560       -       560  
    Three Months Ended September 30, 2008
    -       191       -       191  
    Three Months Ended September 30, 2007
    -       200       -       200  
                                 
                                 

Notes:
(1)  Represents the Company's net investment, including assets and accrued liabilities in the consolidated balance sheet for unconsolidated real estate entities.
(2)  Excludes collection of the El Monte note receivable, resulting in recognition of $1.5 million as Equity in Earnings, see Note 6.
 
-14-

 
 
(4)
DEBT

The Company's outstanding debt is collateralized primarily by land, land improvements, receivables, investment properties, investments in partnerships, and rental properties.  The following table summarizes the indebtedness of the Company at September 30, 2008 and December 31, 2007 (in thousands):
 
   
Maturity
 
Interest
 
Outstanding as of
 
   
Dates
 
Rates
 
September 30,
 
December 31,
 
   
From/To
 
From/To
 
2008
 
2007
 
           
(Unaudited)
 
(Audited)
 
Recourse Debt
                 
  Community Development (a), (b), (c), (d)
    05-01-09/03-01-23     4%/8%   $ 33,620   $ 25,490  
  General obligations (e)
    06-01-09/03-03-12  
Non-interest
             
         
bearing/8.55%
    194     99  
Total Recourse Debt
                33,814     25,589  
                           
Non-Recourse Debt
                         
  Investment Properties (f)(g)
    04-30-09/08-01-47     4.95%/10%     277,118     279,981  
    Total debt
              $ 310,932   $ 305,570  
a)  
As of September 30, 2008, $25,629,000 of the community development recourse debt relates to the general obligation bonds issued by the Charles County government as described in detail under the heading "Financial Commitments" in Note 5. 
b)  
On April 14, 2006, the Company closed a three year $14,000,000 revolving acquisition and development line of credit loan (“the Revolver”) secured by a first lien deed of trust on property located in St. Charles, MD.  The maximum amount of the loan at any one time is $14,000,000, bears interest at Prime plus 0.75% (5.75% at September 30, 2008) and matures on May 1, 2009.  The facility includes various sub-limits on a revolving basis for amounts to finance apartment project acquisitions and land development in St. Charles.  The terms require certain financial covenants to be calculated annually as of December 31, including a tangible net worth to senior debt ratio for ALD and a minimum net worth test for ACPT.  As of September 30, 2008 $3,026,000 was outstanding on the Revolver.
c)  
LDA has a $10,000,000 revolving line of credit facility that bears interest at a fluctuating rate equivalent to the LIBOR Rate plus 225 basis points (5.038% at September 30, 2008).  The facility is to be used to fund the development of infrastructure in Parque Escorial and Parque El Comandante and matures on August 31, 2009.  The outstanding balance of this facility on September 30, 2008, was $2,754,000.
d)  
On April 2, 2008, the Company secured a two-year, $3,600,000 construction loan for the construction of a commercial restaurant/office building within the O’Donnell Lake Restaurant Park.  The facility is secured by the land along with any improvements constructed and bears interest at Wall Street Journal published Prime Rate (5.0% at September 30, 2008).  At the end of the two-year construction period, the Company may convert the loan to a 5-year permanent loan, amortized over a 30 year period at a fixed interest rate to be determined.  As of September 30, 2008, $2,211,000 was outstanding under this facility leaving $1,389,000 available to fund completion of the building.
e)  
The general recourse debt outstanding as of September 30, 2008, is made up of various capital leases outstanding within our U.S. and Puerto Rico operations, as well as installment loans for vehicles and other miscellaneous equipment.
f)  
The non-recourse debt related to the investment properties is collateralized by the multifamily rental properties and the office building in Parque Escorial.  As of September 30, 2008, approximately $73,913,000 of this debt is secured by the Federal Housing Administration ("FHA") or the Maryland Housing Fund.
g)  
On May 12, 2008, IGP agreed to provide a fixed charge and debt service guarantee related to the Escorial Office Building I, Inc (“EOB”) mortgage.  The fixed charge and debt service guarantee requires IGP to contribute capital in cash in such amounts required to cause EOB to comply with the related financial covenants.  The guarantee will remain in full force until EOB has complied with the financial covenants for four consecutive quarters.
 
The Company’s loans contain various financial, cross collateral, cross default, technical and restrictive provisions.  As of September 30, 2008, the Company was in compliance with the financial covenants and the other provisions of its loan agreements.

(5)
COMMITMENTS AND CONTINGENT LIABILITIES

Financial Commitments
Pursuant to an agreement reached between ACPT and the Charles County Commissioners in 2002, the Company agreed to accelerate the construction of two major roadway links to the Charles County (the "County") road system.  As part of the agreement, the County agreed to issue general obligation public improvement bonds to finance $20,000,000 of this construction guaranteed by letters of credit provided by Lennar as part of a residential lot sales contract for 1,950 lots in Fairway Village.  These bonds were issued in three installments with the final $6,000,000 installment issued in March 2006.  The bonds bear interest rates ranging from 4% to 8%, for a blended lifetime rate of 5.1%, call for semi-annual interest payments and annual principal payments and mature in fifteen years.  Under the terms of bond repayment agreements between the Company and the County, the Company is obligated to pay interest and principal on the full amount of the bonds; as such, the Company recorded the full amount of the debt and a receivable from the County representing the undisbursed bond proceeds to be advanced to the Company as major infrastructure development within the project occurs.  As of September 30, 2008, all of the bond proceeds had been used to fund the specified development.  As part of the agreement, the Company will pay the County a monthly payment equal to one-sixth of the semi-annual interest payments and one-twelfth of the annual principal payment due on the Bonds.  The County also requires ACPT to fund an escrow account from lot sales that will be used to repay this obligation.
In August 2005, the Company signed a memorandum of understanding ("MOU") with the Charles County Commissioners regarding a land donation that is now the site of a minor league baseball stadium and entertainment complex which opened in May of 2008.  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 agreed to issue additional general obligation bonds to finance the infrastructure improvements.  In March 2006, $4,000,000 of bonds were issued for this project, with an additional $3,000,000 issued in both March 2007 and March 2008.  These bonds bear interest rates ranging from 4.9% to 5.75%, for a blended lifetime rate of 5.2%, call for semi-annual interest payments and annual principal payments and mature in fifteen years.  The terms of the bond repayment agreement are similar to those noted above.  As of September 30, 2008, $2,162,000 of these bond proceeds are recorded as a receivable and available to fund the related infrastructure.  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.  In addition, the County agreed to issue an additional 100 school allocations a year to St. Charles commencing with the issuance of bonds.
As of September 30, 2008, ACPT is guarantor of $23,777,000 of surety bonds for the completion of land development projects with Charles County; substantially all are for the benefit of the Charles County Commissioners.

Consulting Agreement and Arrangement
ACPT entered into a consulting and retirement compensation agreement with Interstate General Company L.P.’s (“IGC”) founder and Chief Executive Officer, James J. Wilson, effective October 5, 1998 (the "Consulting Agreement").  IGC was the predecessor company to ACPT.  Under the terms of the Consulting Agreement, the Company paid Mr. Wilson $200,000 per year through September 2008, and accordingly, no more payments are due under this agreement.
 
Guarantees
ACPT and its subsidiaries typically provide guarantees for another subsidiary's loans.  In many cases more than one company guarantees the same debt.  Since all of these companies are consolidated, the debt or other financial commitment made by the subsidiaries to third parties and guaranteed by ACPT, is included within ACPT's consolidated financial statements.  As of September 30, 2008, ACPT has guaranteed $25,629,000 of outstanding debt owed by its subsidiaries.  IGP has guaranteed $2,754,000 of its subsidiaries' outstanding debt.  The guarantees will remain in effect until the debt service is fully repaid by the respective borrowing subsidiary.  The terms of the debt service guarantees outstanding range from one to fifteen years.  In addition to debt service guarantees, both the Company and Lennar provided development completion guarantees related to the St. Charles Active Adult Community Joint Venture.  We do not expect any of these guarantees to impair the individual subsidiary or the Company's ability to conduct business or to pursue its future development plans.
 
Legal Matters
    In 2006, a group of approximately 60 tenants of Capital Park Towers Apartments (“Capital Park”) a property managed, but not owned by ARMC and located at 301 G Street, S.W., Washington, D.C. filed a tenant petition with the Rent Administrator for the District of Columbia challenging increases in rent implemented with respect to said tenants units during the previous three year period (“Initial Case”).  The Company's Chairman has an economic interest in the property related to a note receivable from Capital Park.  Following the initial petition, a group of 60 additional tenants filed a similar petition in May of 2008.  The Initial Case is set for an initial hearing on the merits on November 7, 2008.  While the Company has numerous defenses to the claims asserted in both cases, at this time management believes that potential exposure to damages in these cases is probable and estimates the loss at approximately $230,000.  Generally, these types of losses are covered by our insurance policies.  However, the Company has recently been informed that our insurance carrier intends to deny these claims.  We intend to vigorously defend against the claims asserted and will continue to pursue coverage under our insurance policies.  Given the current circumstances, the Company accrued $230,000 in the third quarter 2008 related to the potential losses.  However, absent a settlement of the case, it will likely take a number of years before the case is concluded and a final determination rendered.
 
There have been no other material changes to the legal proceedings previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.
The Company and/or its subsidiaries have been named as defendants, along with other companies, in tenant-related lawsuits. The Company carries liability insurance against certain types of claims that management believes meets industry standards.  To date, payments made to the plaintiffs of the settled cases were covered by our insurance policy.  The Company believes it has strong defenses to the claims, and intends to continue to defend itself vigorously in these matters.
In the normal course of business, ACPT is involved in various pending or unasserted claims.  In the opinion of management, these are not expected to have a material impact on the financial condition or future operations of ACPT.
 
(6)
RELATED PARTY TRANSACTIONS

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

CONSOLIDATED STATEMENT OF INCOME:
       
Nine Months Ended
   
Three Months Ended
 
         
September 30,
   
September 30,
 
         
2008
   
2007
   
2008
   
2007
 
Management and Other Fees
                             
  Unconsolidated subsidiaries with third party partners
 
(A)
    $ 32     $ 32     $ 11     $ 11  
  Affiliates of J. Michael Wilson, CEO and Chairman
          -       43       -       -  
          $ 32     $ 75     $ 11     $ 11  
                                       
Rental Property Revenues
 
(B)
    $ 36     $ 43     $ 6     $ 15  
                                       
Interest and Other Income
                                     
  Unconsolidated real estate entities with third party partners
        $ 6     $ 6     $ 2     $ 2  
                                       
General and Administrative Expense
                                     
  Reserve additions (reductions) and other write-offs-
                                     
    Unconsolidated real estate entities with third party partners
 
(A)
    $ (2 )   $ 25     $ 7     $ 14  
    Reimbursement to IBC for ACPT's share of J. Michael Wilson's compensation
          311       293       104       98  
  Reimbursement of administrative costs-
                                     
    Affiliates of J. Michael Wilson, CEO and Chairman
          (14 )     (18 )     (4 )     (5 )
    Reimbursement of legal fees to attorney for J. Michael Wilson
    (C1 )             188               140  
  Consulting Fees
                                       
    James J. Wilson, IGC Chairman and Director
    (C2 )     150       150       50       50  
    Thomas J. Shafer, Trustee
    (C3 )     45       45       15       15  
            $ 490     $ 683     $ 172     $ 312  
                                         
BALANCE SHEET:
         
Balance
   
Balance
                 
           
September 30,
   
December 31,
                 
           
2008
   
2007
                 
Other Assets
                                       
Receivables - All unsecured and due on demand
                                       
  Unconsolidated Subsidiaries
          $ 5     $ -                  
  Affiliate of J. Michael Wilson, CEO and Chairman
            -       5                  
Total
          $ 5     $ 5                  
                                         
Other Liabilities
                                       
Payable due to Affiliate of J. Michael Wilson, CEO and Chairman
          $ 13     $ -                  
(A)         Management and Other Services
The Company provides management and other support services to its unconsolidated subsidiaries and other affiliated entities in the normal course of business.  The fees earned from these services are typically collected on a monthly basis, one month in arrears.  Receivables are unsecured and due on demand.  Certain partnerships experiencing cash shortfalls have not paid timely.  Generally, receivable balances of these partnerships are fully reserved, until satisfied or the prospect of collectibility improves.  The collectibility of management fee receivables is evaluated quarterly.  Any increase or decrease in the reserves is reflected accordingly as additional bad debt expenses or recovery of such expenses.
At the end of February 2007, G.L. Limited Partnership, which was owned by affiliates of J. Michael Wilson, was sold to a third party.  Accordingly, we are no longer the management agent for this property effective March 1, 2007.  Management fees generated by this property accounted for less than 1% of the Company’s total revenue.

(B)          Rental Property Revenue
On September 1, 2006, the Company, through one of its Puerto Rican subsidiaries, Escorial Office Building I, Inc. (“Landlord”), executed a lease with Caribe Waste Technologies, Inc. (“CWT”), a company owned by the J. Michael Wilson Family.  The lease provides for 1,842 square feet of office space to be leased by CWT for five years at $19.00 per rentable square foot.  The company provided CWT with an allowance of $9,000 in tenant improvements which are being amortized over the life of the lease.  On February 25, 2008, CWT exercised its rights under the lease and provided six months written notice of its intention to terminate the lease, effective August 24, 2008.  The lease agreement is unconditionally guaranteed by Interstate Business Corporation (“IBC”), a company owned by the J. Michael Wilson Family.

(C)          Other
Other transactions with related parties are as follows:
1)  
In second quarter 2007, The Independent Trustees concluded that certain legal fees and expenses incurred by J. Michael Wilson related to seeking a strategic partner would be reimbursed by the Company.  The Independent Trustees authorized the Company to fund up to $225,000 of such costs, $188,000 of which were incurred through the third quarter of 2007.
2)  
Represents fees paid to James J. Wilson pursuant to a consulting and retirement agreement.  At Mr. Wilson's request, payments are made to Interstate Waste Technologies, Inc.
3)  
Represents fees paid to Thomas J. Shafer, a trustee, pursuant to a consulting agreement.

Related Party Acquisitions

El Monte
On April 30, 2004, the Company purchased a 50% limited partnership interest in El Monte Properties S.E. ("El Monte") from Insular Properties Limited Partnership ("Insular") for $1,462,500.  Insular is owned by the J. Michael Wilson Family.  Per the terms of the agreement, the Company was responsible to fund $400,000 of capital improvements and lease stabilization costs, and had a priority on cash distributions up to its advances plus accrued interest at 8%, investment and a 13% cumulative preferred return on its investment.  The purchase price was based on a third party appraisal of $16,500,000 dated April 22, 2003.  The Company's limited partnership investment was accounted for under the equity method of accounting.
In December 2004, a third party buyer purchased El Monte for $20,000,000: $17,000,000 in cash and $3,000,000 in two notes of $1,500,000 each that bear an interest rate of prime plus 2%, with a ceiling of 9%, and mature on December 3, 2009.  The net cash proceeds from the sale of the real estate were distributed to the partners.  As a result, the Company received $2,500,000 in cash and recognized $986,000 of income in 2004.  El Monte distributed a $1,500,000 note to the Company in January 2005.  On January 24, 2007, the Company received $1,707,000 as payment in full of the principal balance and all accrued interest related to the El Monte note receivable.  Accordingly, in 2007 the Company recorded $1,500,000 as equity in earnings and $207,000 as interest income.
 
(7)
INCOME TAXES

The total amount of unrecognized tax benefits as of September 30, 2008, was $15,095,000.  Included in the balance at September 30, 2008, were $41,000 of tax positions that, if recognized, would affect the effective tax rate.  A reconciliation of the beginning and ending amount of unrecognized tax benefit (in thousands) is as follows:
 
Unrecognized tax benefit at beginning of period (December 31, 2007)
$ 14,869  
Change attributable to tax positions taken during a prior period
  252  
Change attributable to tax positions taken during the current period
  -  
Decrease attributable to settlements with taxing authorities
  -  
Decrease attributable to lapse of statute of limitations
  (26 )
Unrecognized tax benefit at end of period (September 30, 2008)
$ 15,095  
 
 
In accordance with our accounting policy, we present accrued interest related to uncertain tax positions as a component of interest expense and accrued penalties as a component of income tax expense on the Consolidated Statement of Income.  Our Consolidated Statements of Income for the nine months ended September 30, 2008 and 2007, included interest expense of $1,031,000 and $855,000, respectively and penalties of $58,000 and $143,000, respectively.  Our Consolidated Statements of Income for the three months ended September 30, 2008 and 2007, included interest expense of $298,000 and $304,000, respectively and penalties of $20,000 and $71,000, respectively.  Our Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007, included accrued interest of $3,844,000 and $2,814,000, respectively and accrued penalties of $1,143,000 and $1,085,000, respectively.
The Company currently does not have any tax returns under audit by the United States Internal Revenue Service or the Puerto Rico Treasury Department.  However, the tax returns filed in the United States for the years ended December 31, 2005 through 2007 remain subject to examination.  For Puerto Rico, the tax returns for the years ended December 31, 2004 through 2007 remain subject to examination.  Within the next twelve months, the Company does not anticipate any payments related to settlement of any tax examinations.  There is a reasonable possibility within the next twelve months the amount of unrecognized tax benefits will decrease by $577,000 when the related statutes of limitations expire and certain payments are recognized as taxable income.
 
(8)
SEGMENT INFORMATION

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

Customer Dependence
Residential land sales to Lennar within our U.S. segment were $5,903,000 for the nine months ended September 30, 2008, which represents 16% of the U.S. segment's revenue and 10% of our total year-to-date consolidated revenue.  No other customers accounted for more than 10% of our consolidated revenue for the nine months ended September 30, 2008.
Residential land sales to Lennar within our U.S. segment were $5,131,000 for the nine months ended September 30, 2007 which represented 14% of the U.S. segment's revenue and 8% of our total year-to-date consolidated revenue.  No customers accounted for more than 10% of our consolidated revenue for the nine months ended September 30, 2007.
The following presents the segment information for the nine and three months ended September 30, 2008 and 2007 (in thousands):

 
United
 
Puerto
 
Inter-
     
 
States
 
Rico
 
Segment
 
Total
 
Nine Months Ended September 30, 2008 (Unaudited):
         ($)
 
             ($)
 
                ($)
 
     ($)
 
Rental property revenues
  29,676     16,997   -   46,673  
Rental property operating expenses
  13,736     8,571   (16 ) 22,291  
Land sales revenue
  6,457     -   -   6,457  
Cost of land sales
  5,218     -   -   5,218  
Home sales revenue
  -     3,476   -   3,476  
Cost of home sales
  -     2,694   -   2,694  
Management and other fees
  117     471   (20 ) 568  
General, administrative, selling and marketing expense
  7,045     1,928   (4 ) 8,969  
Depreciation and amortization
  4,684     2,827   -   7,511  
Operating income
  5,567     4,924   -   10,491  
Interest income
  300     29   (14 ) 315  
Equity in earnings from unconsolidated entities
  (1 )   490   -   489  
Interest expense
  8,506     4,288   (14 ) 12,780  
Minority interest in consolidated entities
  456     1,235   -   1,691  
(Loss) income before benefit for income taxes
  (3,081 )   87   -   (2,994 )
Income tax benefit
  (931 )   (62 ) -   (993 )
Net (loss) income
  (2,150 )   149   -   (2,001 )
Gross profit on land sales
  1,239     -   -   1,239  
Gross profit on home sales
  -     782   -   782  
Total assets
  262,446     99,741     (369 ) 361,818  
Additions to long lived assets
  4,633     794   -   5,427  
                     

 
United
 
Puerto
 
Inter-
     
 
States
 
Rico
 
Segment
 
Total
 
Nine Months Ended September 30, 2007 (Unaudited):
        ($)
 
      ($)
 
          ($)
 
      ($)
 
Rental property revenues
  28,529   16,720   -   45,249  
Rental property operating expenses
  14,376   8,543   (18 ) 22,901  
Land sales revenue
  8,032   -   -   8,032  
Cost of land sales
  5,930   -   -   5,930  
Home sales revenue
  -   6,113   -   6,113  
Cost of home sales
  -   4,399   -   4,399  
Management and other fees
  299   479   (22 ) 756  
General, administrative, selling and marketing expense
  6,355   2,249   (4 ) 8,600  
Depreciation and amortization
  4,252   2,757   -   7,009  
Operating income
  5,947   5,364   -   11,311  
Interest income
  843   228   (80 ) 991  
Equity in earnings from unconsolidated entities
  (1 ) 2,021   -   2,020  
Interest expense
  9,436   4,681   (80 ) 14,037  
Minority interest in consolidated entities
  332   1,418   -   1,750  
(Loss) income before (benefit) provision for income taxes
  (2,975 ) 1,697   -   (1,278 )
Income tax (benefit) provision
  (829 ) 810   -   (19 )
Net (loss) income
  (2,146 ) 887   -   (1,259 )
Gross profit on land sales
  2,102   -   -   2,102  
Gross profit on home sales
  -   1,714   -   1,714  
Total assets
  260,772   101,056   (1,624 ) 360,204  
Additions to long lived assets
  6,226   524   -   6,750  
                   
 
 
United
 
Puerto
Inter-
     
 
States
 
Rico
Segment
 
Total
 
Three Months Ended September 30, 2007 (Unaudited):
      ($)
 
         ($)
              ($)
 
    ($)
 
Rental property revenues
9,823   5,594   -   15,417  
Rental property operating expenses
4,887   2,905   (5 ) 7,787  
Land sales revenue
2,063   -   -   2,063  
Cost of land sales
1,574   -   -   1,574  
Home sales revenue
-   899   -   899  
Cost of home sales
-   583   -   583  
Management and other fees
91   166   (7 ) 250  
General, administrative, selling and marketing expense
2,432   801   (1 ) 3,232  
Depreciation and amortization
1,507   921   -   2,428  
Operating income
1,577   1,449   (1 ) 3,025  
Interest income
252   2   (25 ) 229  
Equity in earnings from unconsolidated entities
-   175   -   175  
Interest expense
3,210   1,515   (25 ) 4,700  
Minority interest in consolidated entities
159   34   -   193  
(Loss) income before (benefit) provision for income taxes
(1,539 ) 134   -   (1,405 )
Income tax (benefit) provision
(348 ) 41   -   (307 )
Net (loss) income
(1,191 ) 93   -   (1,098 )
Gross profit on land sales
489   -   -   489  
Gross profit on home sales
-   316   -   316  
Total assets
260,772   101,056   (1,624 )  360,204  
Additions to long lived assets
1,707   102   -   1,809  
                 
 
(9)
SUBSEQUENT EVENTS

Appointment of Stephen Griessel as Chief Executive Officer

Effective October 1, 2008, the Company appointed Mr. Stephen Griessel as the Company’s Chief Executive Officer.  Effective the same date, J. Michael Wilson resigned from that position, but will continue to serve as Chairman of the Board of Trustees.  In connection with his appointment as Chief Executive Officer, the Company entered into an employment agreement with Mr. Griessel effective the same.  The agreement supersedes Mr. Griessel’s prior consulting agreement with the Company, dated July 2, 2007.  The agreement provides for Mr. Griessel to serve as the Company’s Chief Executive Officer for a term expiring October 1, 2011, unless earlier terminated pursuant to the terms of the agreement.  The agreement renews automatically for successive one-year periods following October 1, 2011, unless either the Company or Mr. Griessel notifies the other of non-renewal in accordance with the terms of the agreement.

The agreement also provides that the Company will grant Mr. Griessel an award of 363,743 restricted common shares of beneficial interest.  Such shares will be awarded pursuant to, and shall vest in accordance with, an award agreement granted under the Company’s equity incentive plan and approved by the Company’s Compensation Committee, subject to approval by the Company’s Board of Trustees, with such award remaining subject to approval by the Company’s shareholders at the Company’s annual meeting.  Half the shares awarded will vest over five years with the remaining shares vesting based on performance criteria to be determined by the Company’s Board of Trustees.  Mr. Griessel has also entered into an agreement with Mr. Wilson and members of his family pursuant to which the Wilsons have assigned to Mr. Griessel the economic benefit of seven percent of the shares of common stock owned by them.
 
Retirement of Edwin L. Kelly as President and Chief Operating Officer

On October 1, 2008, Mr. Edwin L. Kelly notified the Company that he will retire as the Company’s President and Chief Operating Officer effective December 1, 2008.  Through December 1, 2008, Mr. Kelly will continue to be compensated in accordance with the terms of the Executive Retention Agreement between him and the Company.  On December 1, 2008, his agreement will terminate in accordance with its terms, and it will not be renewed.  Pursuant to the agreement, Mr. Kelly will receive a severance payment equal to 36 months of his base salary to be paid in a single lump sum on December 1, 2008.  The Company has also agreed to enter into a consulting agreement with Mr. Kelly for an initial term of one year.
 
Revolving Line of Credit
 
On October 20, 2008, the Company received $3,546,000 from its revolving acquisition and development line of credit.  With this draw, the Company has $6,572,000 outstanding on this facility.
 
ITEM 2.

FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing in this report.  Historical results set forth in Management's Discussion and Analysis of Financial Condition and Results of Operation and the Financial Statements should not be taken as indicative of our future operations.
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These include statements about our business outlook, 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 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 Part I, Item 1A to the Form 10-K for the year ended December 31, 2007.
 
EXECUTIVE SUMMARY OF RESULTS
Consolidated operating revenues are derived primarily from rental revenue, community development land sales and home sales.  For the nine and three months ended September 30, 2008, our consolidated rental revenues increased $1,424,000 and $319,000 or 3% and 2%, respectively, as compared to the same periods of 2007.  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 nine and three months ended September 30, 2008 decreased $1,575,000 and $1,603,000 or 20% or 78%, respectively, as compared to the same period of 2007.  Land sales revenue in any one period is affected by the timing of lot sales, the mix of lot type as well as a mix between residential and commercial sales.  For the nine-month period, community development land sales were less than the prior period due to decreases in commercial land sales, decreases in the recognition of previously deferred revenue, offset in part by increases in residential lot sales. For the three-month period, community development land sales were also less than prior period as there were no residential lot sales and less recognition of previously deferred revenue during the third quarter 2008.
Home sales for the nine and three months ended September 30, 2008 decreased $2,637,000 and $405,000 or 43% and 45%, respectively, as compared to the same period of 2007.  Home sales, currently sourced from the Puerto Rico segment, are impacted by the local real estate market.  The Company settled fourteen and two units during the nine and three months ended September 30, 2008, respectively, as compared to twenty-three and three units, respectively, closed during the same periods of 2007.  As of September 30, 2008, seven completed units remain within inventory, of which we currently have one unit under contract.  We currently believe that the remaining units will sell within the next twelve months.
On a consolidated basis, the Company reported a net loss for the nine and three months ended September 30, 2008 of $2,001,000 and $630,000, respectively.  The net losses for the nine and three months ended September 30, 2008 include $993,000 and $443,000 as benefits for income taxes, resulting in consolidated effective tax rates of approximately 33% and 41%, respectively.  The consolidated effective rate for the nine months ended September 30, 2008 was impacted by the benefit recorded for the net losses, offset by accrued penalties on uncertain tax positions and certain nondeductible permanent items.  The consolidated effective rate for the three months ended September 30, 2008 was the result of a benefit recorded for losses from our United States segment at the United States statutory rate offset in part by a provision recorded for income reported for the Puerto Rico segment at the Puerto Rico statutory rate.  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.
 
CRITICAL ACCOUNTING POLICIES
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.
Refer to the Company’s 2007 Annual Report on Form 10-K for a discussion of critical accounting policies, which include sales, profit recognition and cost capitalization, investment in unconsolidated real estate entities, impairment of long-lived assets, depreciation of investments in real estate, income taxes and contingencies.  For the nine and three months ended September 30, 2008, there were no material changes to our policies.

RESULTS OF OPERATIONS
The following discussion is based on the consolidated financial statements of the Company.  It compares the results of operations of the Company for the nine and three months ended September 30, 2008 (unaudited), with the nine and three months ended September 30, 2007 (unaudited).  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 and within our Annual Report on Form 10-K for the year ended December 31, 2007.

Results of Operations - U.S. Operations:
For the nine and three months ended September 30, 2008, our U.S. segment generated operating income of $5,567,000 and $1,684,000, respectively, compared to operating income of $5,947,000 and $1,577,000 for the nine and three months ended September 30, 2007, respectively.  Additional information and analysis of the U.S. operations are as follows:
 
Rental Property Revenues and Operating Expenses - U.S. Operations:
As of September 30, 2008, 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 September 30, 2008, 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.

Apartment Construction and Acquisitions
On January 31, 2007, we completed our newest addition to our rental apartment properties in St. Charles' Fairway Village, the Sheffield Greens Apartments (“Sheffield Greens”).  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.  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.

Nine months ended
For the nine months ended September 30, 2008, rental property revenues increased $1,147,000 or 4% to $29,676,000 compared to $28,529,000 for the nine months ended September 30, 2007.  The increase in rental revenues was primarily the result of additional revenues for Sheffield Greens Apartments which accounted for approximately $664,000 of the difference.  The increase was also attributable to an overall 2% increase in rents between periods.  These rental revenue increases were offset in part by increases in the vacancy rate at certain multifamily apartment properties in St. Charles and Baltimore.  However, incentives implemented by management to address the vacancy rates at these properties have been successful as vacancy rates have been reduced between the second and third quarters of 2008.
Rental property operating expenses decreased $640,000 or 4% for the nine months ended September 30, 2008 to $13,736,000 compared to $14,376,000 for the same period of 2007.  The overall decrease in rental property operating expenses was the result of cost cutting measures implemented at the end of 2007 and into 2008.  The cost cutting measures resulted in decreased operating expenses for comparable properties of $673,000 or 5%.  The decreases were experienced primarily in advertising expense, office salaries and expenses, security, grounds expense, repairs and maintenance, snow removal, rehabilitation, painting & decorating and insurance.  This amount is net of a significant increase noted in property taxes of $193,000 or 14% at comparable properties.  Partially offsetting these decreases was an increase in operating expenses for Sheffield Greens Apartments of $322,000 related to partial operations in the first half of 2007.
 
Three months ended
For the three months ended September 30, 2008, rental property revenues increased $159,000 or 2% to $9,982,000 compared to $9,823,000 for the three months ended September 30, 2007.  Overall, comparable gross potential rental revenues increased $181,000 or 2%.  (The increase was offset in part by a $22,000 increase in vacancy rates.)  As noted above, incentives implemented by management to address the vacancy rates have been successful and management has noted improvement in vacancies since the second quarter.
Rental property operating expenses decreased $375,000 or 8% for the third quarter of 2008 to $4,512,000 compared to $4,887,000 for the third quarter of 2007.  The overall decrease in rental property operating expenses was the result of cost cutting measures implemented at the end of 2007 and into 2008.  Operating expense decreases were experienced primarily within advertising, concessions, office salaries and expenses, grounds and repairs and maintenance.  Offsetting the noted decreases were increases in utilities and real estate taxes.

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 require 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.  In December 2007, the Company agreed to an amendment to the Lennar Agreements which temporarily reduced the final lot price for 100 lots (51 lots purchased by Lennar in December 2007 and 49 lots purchased during 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.  During the first nine months of 2008, Lennar actually purchased 69 total lots, 20 more than required by the December Amendment.  The Company agreed that these additional 20 lots would be sold with the same terms as those covered by the December Amendment.
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.  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 based on current sales prices 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 generally cyclical.
Community development land sales revenue decreased $1,575,000 for the nine months ended September 30, 2008 to $6,457,000 as compared to $8,032,000 for the nine months ended September 30, 2007.  The decrease was primarily related to fewer commercial land sales and less recognition of previously deferred revenue, partially offset by an increase in residential land sales between the nine-month periods.
Community development land sales revenue decreased $1,603,000 or 78% for the three months ended September 30, 2008 to $460,000 as compared to $2,063,000 for the three months ended September 30, 2007.  The overall decrease primarily resulted from no residential land sales during the third quarter 2008 as well as less recognition of previously deferred revenue as compared to the third quarter of 2007.  Further discussions of the components of these variances are as follows:
 
Residential Land Sales
For the nine months ended September 30, 2008, we recognized $5,479,000 related to the delivery of eight townhome lots and sixty-one single family lots to Lennar as compared to $2,255,000 consisting of twenty-four townhome lots and three single family lots delivered in the nine months ended September 30, 2007.  For the lots delivered in 2008, we recognized as revenue the minimum guaranteed price of $68,000 per townhome lot and $78,000 per single family lot, plus water and sewer fees, road fees and other off-site fees.  For the lots delivered in 2007, we recognized as revenue an average minimum guaranteed price of $76,667 per townhome lot and $115,333 per single family lot, plus water and sewer fees, road fees and other off-site fees.
For the three months ended September 30, 2008, we did not deliver any lots to Lennar.  For the same period of 2007, we recognized $650,000 related to the delivery of ten townhome lots.  These lots represent an average minimum guaranteed price of $65,000 per townhome lot.  In addition, the Company receives water and sewer fees, road fees and other off-site fees.
The Company recognizes additional revenue based on a percentage of the final settlement price of the home sold by Lennar to the homebuyer, to the extent greater than the guaranteed minimum price, as provided by our agreement with Lennar.  For the nine and three months ended September 30, 2008, the Company recognized $424,000 and $211,000, respectively, of additional revenue for lots that were previously delivered to Lennar.  For the nine and three months ended September 30, 2007, the Company recognized $1,813,000 and $727,000, respectively, of additional revenue for lots that were previously delivered to Lennar.
As of September 30, 2008, 1,441 lots remained under contract to Lennar, of which 60 single family lots were developed and ready for delivery.
 
Commercial Land Sales
For the nine months ended September 30, 2008, we sold 1.89 commercial acres in St. Charles for $362,000.  This compares to 6.81 commercial acres in St. Charles for $2,717,000 for the nine months ended September 30, 2007.  For the three months ended September 30, 2008, we sold .90 commercial acres in St. Charles for $178,000 compared to 1.03 commercial acres for $180,000 for the third quarter 2007.  As of September 30, 2008, our commercial sales backlog contained 82.15 acres under contract for a total of $16,275,000.

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 Company is currently negotiating with Lennar for their purchase of the Company’s equity within this Joint Venture.
In the nine months ended September 30, 2008, the joint venture did not deliver any lots to Lennar.  However, in the nine and three months ended September 30, 2007, the joint venture delivered 48 and 18 lots to Lennar.  Accordingly, the Company recognized $1,063,000 and $408,000 in deferred revenue and off-site fees and $358,000 and $140,000 of deferred costs for the nine and three months ended September 30, 2007, respectively.
 
Gross Margin on Land Sales
The gross margin on land sales for the nine and three months ended September 30, 2008 were 19% and negative 7%, respectively, as compared to 26% and 24% for the same periods of 2007, respectively.  Gross margins differ from period to period depending on the mix of land sold as well as volume of sales available to absorb certain period costs.  Excluding period costs, gross margins for the nine months ended September 30, 2008 were 27% for residential land sales and 30% for commercial sales as compared to residential margins of 42% and commercial margins of 17% for the same period 2007.  The commercial margins for 2007 were impacted by increases in the estimated cost of constructing a boardwalk within the O’Donnell Lake Restaurant Park as the actual bid proposals received were higher than the engineer’s expected cost.
For the three months ended September 30, 2008, sales volumes were insufficient to absorb period costs, resulting in negative margins.  Excluding period costs, gross margins for the three months ended September 30, 2008 were 27% for residential land sales and 29% for commercial sales as compared to residential margins of 30% and commercial margins of 37% for the same period 2007.

Customer Dependence
Residential land sales to Lennar within our U.S. segment were $5,903,000 for the nine months ended September 30, 2008, which represents 16% of the U.S. segment's revenue and 10% of our total year-to-date consolidated revenue.  No other customers accounted for more than 10% of our consolidated revenue for the nine months ended September 30, 2008.  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.
 
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 property to a third party.  Management fees generated by this property 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 costs 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.  As noted above, the Company is currently negotiating with Lennar for their purchase of the Company’s equity within the Joint Venture, at which point the Company would no longer receive management fees from the Joint Venture.
Management fees for the nine months ended September 30, 2008 decreased $182,000 to $117,000 as compared to $299,000 for the same period of 2007.  Management fees for the three months ended September 30, 2008 decreased $53,000 to $38,000 as compared to $91,000 for the same period of 2007.  The decreases in the nine and three month periods were primarily as a result of the reduction in number of lots delivered by the joint venture.  Management fees presented on the consolidated income statements include only the fees earned from the non-controlled properties; the fees earned from the controlled properties are eliminated in consolidation.

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.
For the nine months ended September 30, 2008, general, administrative, selling and marketing costs incurred within our U.S. operations increased $690,000 or 11% to $7,045,000 compared to $6,355,000 for the same period of 2007.  The increase is primarily attributable to expenses associated with a severance accrual related to the departure of the Chief Financial Officer, accruals for another executive retention agreement as well as an accrual related to the Capital Park litigation.  In addition, legal costs increased for the nine months ended September 30, 2008 as compared to the same period of 2007 due to an internal investigation.  Accounting and audit expenses were also greater than the prior period due to certain tax structuring services.  Board of Trustee fees were also more for the first nine months of 2008 due to the decision of the Trustees’ Share Incentive Plan Committee to accelerate the vesting of restricted shares for Trustees whose terms ended in June 2008, as well an increase in the size of the board and increased fee accruals for meetings held.  These increases were partially offset by a reduction in the accrual for stock appreciation rights due to a decrease in share price, as well as a decrease in the number of rights remaining outstanding, a decrease in strategic planning expenses, a decrease in selling and marketing expenses and a decrease in advertising expenses.
For the three months ended September 30, 2008, general, administrative, selling and marketing costs incurred within our U.S. operations decreased $166,000 or 7% to $2,266,000 compared to $2,432,000 for the same period of 2007.  The decrease is primarily attributable to decreases in strategic planning expenses as these efforts ceased during the second quarter 2008.  There were also noted decreases in accrual for stock appreciation rights due to a decrease in share price, decreases in salaries and benefits expenses as a result of the recent departure of the former Chief Financial Officer and reduced bonus accruals and decreases in selling and marketing expenses.  Partially offsetting these decreases was an accrual related to the Capital Park litigation as well as increases noted in accounting and audit expenses due to certain tax structuring services, increases in legal fees due to an internal investigation wrapped up during the third quarter of 2008 and increased Board of Trustee expenses due to an increased number of meetings as compared to the prior year.

Depreciation Expense - U.S. Operations:
Depreciation expense increased $432,000 to $4,684,000 for the first nine months of 2008 compared to $4,252,000 for the same period in 2007.  The increase in depreciation is primarily the result of depreciation related to the addition of Sheffield Greens Apartments.  Depreciation expense for the third quarter 2008 increased $18,000 to $1,525,000 compared to $1,507,000 for the third quarter 2007.
 
Interest Income – U.S. Operations:
Interest income decreased $543,000 to $300,000 for the nine months ended September 30, 2008, as compared to $843,000 for the nine months ended September 30, 2007.  For the three months ended September 30, 2008, interest income decreased $181,000 to $71,000, as compared to $252,000 for the three months ended September 30, 2007.  The decrease was primarily the result of undistributed bond proceeds held by the County being used to fund development costs, resulting in a reduction of interest income earned on these funds.  In addition, the interest rate earned on the escrowed funds decreased between periods.

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 2008 and 2007, the excess interest primarily relates to the interest incurred on the non-recourse debt from our investment properties.
For the nine months ended September 30, 2008, interest expense decreased $930,000 or 10% to $8,506,000, as compared to $9,436,000 for the same period of 2007.  For the three months ended September 30, 2008, interest expense decreased $388,000 or 12% to $2,822,000, as compared to $3,210,000 for the same period of 2007.  The decreases for the nine and three month periods were primarily attributable to an increase in qualifying assets eligible for interest capitalization as new Apartment and Condominium projects begin in Fairway Village’s Gleneagles section, the construction of an office building within O’Donnell Lake Restaurant Park, and additional infrastructure investments as the Company nears completion of the County Road projects.  In addition, interest expense decreased as a result of routine amortization of our mortgage notes.
For the nine and three months ended September 30, 2008, $1,942,000 and $696,000 of interest cost was capitalized, respectively.  For the nine and three months ended September 30, 2007, $926,000 and $325,000 of interest cost was capitalized, respectively.
 
Minority Interest in Consolidated Entities – U.S. Operations:
The Company records minority interest expense related to the minority partners’ share of the consolidated apartment 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 partners’ 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 partners’ basis previously required to be recognized as our expense, we will be required to expense 100 percent of future distributions to minority partners and any subsequent losses.
For the nine months ended September 30, 2008, minority interest in consolidated entities increased $124,000 to $456,000, as compared to $332,000 for the same period of 2007.  For the three months ended September 30, 2008, minority interest in consolidated entities increased $174,000 to $333,000, as compared to $159,000 for the same period of 2007.  The increases for the nine and three-month periods were the result of an increase in surplus cash distributions made to minority partners between periods.
 
Provision for Income Taxes – U.S. Operations:
       The effective tax rates for the nine and three months ended September 30, 2008, and September 30, 2007, were 30% and 37% and 28% and 23%, respectively.  The statutory rate is 40%.  The effective tax rates for 2008 and 2007 differ from the statutory rate due to relatively small net losses reported for the periods, the related benefit for which, were partially offset by accrued penalties on uncertain tax positions.
 
Results of Operations - Puerto Rico Operations:
For the nine and three months ended September 30, 2008, our Puerto Rico segment generated operating income of $4,924,000 and $1,545,000, respectively, compared to operating income of $5,364,000 and $1,449,000 for the nine and three months ended September 30, 2007, respectively.  Additional information and analysis of the Puerto Rico operations are as follows:
 
Rental Property Revenues and Operating Expenses - Puerto Rico Operations:
As of September 30, 2008, 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.  As of September 30, 2008, all of the Puerto Rico Apartments were HUD subsidized projects with rental rates governed by HUD.
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