IRVINE APARTMENT COMMUNITIES L P, 424B1, 1998-01-15

IRVINE APARTMENT COMMUNITIES L P
424B1, 1998-01-15
REAL ESTATE INVESTMENT TRUSTS

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<PAGE> 1
This filing is made pursuant
to Rule 424(b)(1) under the
Securities Act of 1933 in
connection with Registration
Nos. 333-39405 and 333-39405-01

PROSPECTUS

6,000,000 SERIES A PREFERRED SECURITIES

IAC CAPITAL TRUST

8 1/4% SERIES A REIT TRUST ORIGINATED PREFERRED SECURITIES(SM)("TOPRS(SM)")

(LIQUIDATION AMOUNT $25 PER SERIES A PREFERRED SECURITY)
------------------------------

The 8 1/4% Series A REIT Trust Originated Preferred Securities (the "Series
A Preferred Securities") offered hereby (the "Offering") are being sold by IAC
Capital Trust, a Delaware business trust (the "Trust"). The Trust is a limited
purpose financing vehicle established by Irvine Apartment Communities, L.P., a
Delaware limited partnership (the "Operating Partnership"), and Irvine Apartment
Communities, Inc. (the "Company"), a Maryland corporation and the sole general
partner of the Operating Partnership. The proceeds from the Offering will be
used by the Trust to purchase 8 1/4% Series A Preferred Limited Partner
Interests ("Series A Preferred L.P. Units") in the Operating Partnership which
will use the proceeds to repay outstanding indebtedness and for general
partnership purposes. From time to time the Trust may issue additional series of
preferred securities (together with the Series A Preferred Securities, the
"Preferred Securities") and invest the proceeds therefrom in additional series
of preferred limited partner interests of the Operating Partnership (together
with the Series A Preferred L.P. Units, the "Preferred L.P. Units"). The Company
and certain members of management of the Company will own all of the common
securities (the "Common Securities") of the Trust. The Common Securities and the
Preferred Securities (collectively, the "Trust Securities") will represent
undivided beneficial interests in the assets of the Trust, subject to the
priority and payment terms of the Trust Securities. The Trust exists for the
sole purpose of issuing its Preferred Securities and Common Securities and
investing the proceeds thereof primarily in an equivalent amount of Preferred
L.P. Units of the Operating Partnership. The Series A Preferred Securities and
the Series A Preferred L.P. Units have a stated maturity of December 31, 2092,
which corresponds to the term of the Operating Partnership.

(continued on next page)

The Series A Preferred Securities have been approved for listing on the New
York Stock Exchange, Inc. (the "NYSE"), subject to official notice of issuance.
Trading of the Series A Preferred Securities on the NYSE is expected to commence
within a 30-day period after the date of this Prospectus. While the Underwriters
have advised the Trust that they intend to make a market in the Series A
Preferred Securities prior to commencement of trading on the NYSE, they are
under no obligation to do so and no assurance can be given that a market for the
Series A Preferred Securities will exist prior to commencement of trading. See
"Underwriting." See "Glossary" beginning on page 109 for definitions of certain
terms used in this Prospectus.

SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF MATERIAL RISKS
RELEVANT TO AN INVESTMENT IN THE SERIES A PREFERRED SECURITIES, INCLUDING:

- - The Trust's ability to make distributions and other payments on the Series A
Preferred Securities is initially dependent upon the Operating Partnership
making distributions and other payments on the Series A Preferred L.P. Units
held as trust assets. As a result, if the Operating Partnership does not make
distributions or other payments on the Series A Preferred L.P. Units for any
reason, it is expected that the Trust will not be able to make payments on the
Series A Preferred Securities;

- - The Series A Preferred L.P. Units will rank on a parity with all other series
of Preferred L.P. Units issued by the Operating Partnership unless such other
series states that such series ranks junior to the Series A Preferred L.P.
Units.

- - The Series A Preferred Securities have no voting rights except in limited
circumstances;

- - Substantial influence of The Irvine Company over the affairs of the Operating
Partnership and conflicts of interest between The Irvine Company and the
Operating Partnership;

- - Risks associated with development or acquisition of apartment community
properties both on and off the Irvine Ranch, including land use entitlement,
construction, lease-up and financing risks; and

- - Real estate operations and development risks may adversely affect the
Operating Partnership's ability to make distributions on the Series A
Preferred L.P. Units.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C>
===========================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC(1) COMMISSION(2) TRUST(3)(4)
- ---------------------------------------------------------------------------------------------------------------------------
Per Series A Preferred Security................. $25.00 (3) $25.00
- ---------------------------------------------------------------------------------------------------------------------------
Total(5)........................................ $150,000,000 (3) $150,000,000
===========================================================================================================================
</TABLE>

(1) Plus accrued distributions, if any, from January 20, 1998.

(2) The Company and the Operating Partnership have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."

(3) Since the proceeds of the sale of the Series A Preferred Securities will be
invested in the Series A Preferred L.P. Units, the Operating Partnership has
agreed to pay to the Underwriters, as compensation ("Underwriters'
Compensation") for their arranging the investment therein of such proceeds,
$.7875 per Series A Preferred Security (or $4,725,000 in the aggregate). See
"Underwriting."

(4) Expenses of the Offering which are payable by the Operating Partnership are
estimated to be $1,000,000.

(5) The Trust has granted to the Underwriters an option, exercisable for a
period of 30 days after the date of the Prospectus, to purchase up to
900,000 additional Series A Preferred Securities, solely to cover
overallotments. The Operating Partnership will pay Underwriters'
Compensation in the amount per Series A Preferred Security set forth in Note
3 with respect to such additional Series A Preferred Securities. If all such
Series A Preferred Securities are purchased, the total Price to Public,
Underwriting Commission and Proceeds to Trust will be $172,500,000,
$5,433,750 and $172,500,000, respectively. See "Underwriting."

------------------------------

The Series A Preferred Securities offered hereby are offered severally by
the Underwriters, as specified herein, subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part. It is
expected that delivery of the Series A Preferred Securities will be made only in
book-entry form through the facilities of The Depository Trust Company on or
about January 20, 1998.

------------------------------

MERRILL LYNCH & CO.

GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
------------------------------

THE DATE OF THIS PROSPECTUS IS JANUARY 14, 1998.

(SM)"TRUST ORIGINATED PREFERRED SECURITIES" AND "TOPRS" ARE SERVICE MARKS OF
MERRILL LYNCH & CO., INC.
<PAGE> 2

(continued from previous page)

Holders of the Series A Preferred Securities will be entitled to receive
upon declaration by the Trust cumulative preferential cash distributions at an
annual rate of 8 1/4% of the liquidation amount of $25 per Series A Preferred
Security, accruing from the date of original issuance of the Series A Preferred
Securities and payable quarterly in arrears on March 31, June 30, September 30
and December 31 of each year, commencing on March 31, 1998. The Trust, as the
holder of the Series A Preferred L.P. Units, will be entitled to receive upon
declaration by the Operating Partnership cumulative preferential cash
distributions at the annual rate of 8 1/4% of the stated value of $25 per Series
A Preferred L.P. Unit, accumulating from the date of original issuance of the
Series A Preferred L.P. Units and payable quarterly in arrears on March 31, June
30, September 30 and December 31 of each year, commencing March 31, 1998. Cash
distributions on the Series A Preferred Securities and the Series A Preferred
L.P. Units in arrears will accumulate without interest. If distributions are not
paid on Preferred L.P. Units deposited in the Trust as trust assets, including
the Series A Preferred L.P. Units, the Trust will not be able to make payments
on the Series A Preferred Securities.

So long as any Series A Preferred L.P. Units are outstanding except as
otherwise described herein, no distribution shall be paid or declared on the
regular limited partner interests in the Operating Partnership (the "Common L.P.
Units"), the general partnership interest in the Operating Partnership (the
"G.P. Units") or any other series of outstanding Preferred L.P. Units of the
Operating Partnership ranking junior as to the payment of distributions to the
Series A Preferred L.P. Units (collectively, the "Junior OP Units") nor shall
any sum or sums be set aside for or applied to the purchase or redemption of the
Series A Preferred L.P. Units or any other series of outstanding Preferred L.P.
Units or the purchase, redemption or other acquisition for value of any Junior
OP Units unless, in each case, full cumulative distributions accumulated on all
Series A Preferred L.P. Units and all other outstanding series of Preferred L.P.
Units ranking on a parity with the Series A Preferred L.P. Units as to the
payment of distributions have been paid in full. Distributions with respect to
the Series A Preferred Securities will be senior to distributions on the Common
Securities and will have the same priority with respect to distributions on
other series of Preferred Securities as are set forth in this paragraph. See
"Description of the Series A Preferred Securities -- Distributions."

Except as described below, the Series A Preferred L.P. Units are not
redeemable prior to December 31, 2002. On or after December 31, 2002, the Series
A Preferred L.P. Units may be redeemed at the option of the Operating
Partnership, in whole or from time to time in part, at a redemption price of $25
per Series A Preferred L.P. Unit, plus accumulated and unpaid distributions, if
any, to the redemption date. The Series A Preferred L.P. Units may also be
redeemed, in whole but not in part, at any time upon the occurrence of a Tax
Event or Investment Company Act Event (each as defined herein). The redemption
price of the Series A Preferred L.P. Units (other than the portion consisting of
accumulated and unpaid distributions) will be payable solely out of the sale
proceeds of capital stock of the Company, which will be contributed by the
Company to the Operating Partnership as an additional capital contribution, or
the sale proceeds of Common L.P. Units or Preferred L.P. Units (collectively,
"L.P. Units") of the Operating Partnership, and from no other source. The Series
A Preferred L.P. Units will have a stated maturity of December 31, 2092, which
corresponds to the term of the Operating Partnership. See "Description of the
Series A Preferred L.P. Units -- Redemption." If the Operating Partnership
redeems Series A Preferred L.P. Units, the Trust currently intends to redeem in
cash Series A Preferred Securities having an aggregate liquidation amount equal
to the aggregate stated value of the Series A Preferred L.P. Units so redeemed,
at $25 per Series A Preferred Security plus accumulated and unpaid distributions
thereon (the "Redemption Price") to the date of redemption. See "Description of
the Series A Preferred Securities -- Redemption." The Series A Preferred L.P.
Units and the Series A Preferred Securities will not be subject to any sinking
fund and, except as described in this Prospectus under "Description of the
Series A Preferred Securities -- Restrictions on Ownership and Transfer of
Series A Preferred Securities," neither the Series A Preferred L.P. Units nor
the Series A Preferred Securities will be convertible into any securities of the
Company, the Operating Partnership or the Trust.

(continued on next page)

2
<PAGE> 3

(continued from previous page)

Upon consummation of the Offering, the Trust will operate as an equity real
estate investment trust (a "REIT") under the Internal Revenue Code of 1986, as
amended (the "Code"). To ensure that the Trust maintains its qualification as a
REIT, ownership by any person is generally limited to 9.8% of the outstanding
Series A Preferred Securities, with certain exceptions.

------------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES A PREFERRED
SECURITIES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE PURCHASE OF SERIES A
PREFERRED SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUMMARY.............................. 5
IAC Capital Trust............................. 5
The Operating Partnership..................... 5
Structure and Ownership....................... 8
Risk Factors.................................. 9
The Properties................................ 10
Management and Control of the Operating
Partnership................................. 11
Tax Status of the Trust....................... 11
Conflicts of Interest......................... 11
The Offering.................................. 12
Summary Financial Data........................ 15
RISK FACTORS.................................... 17
Dependence on Operating Partnership........... 17
Ranking of Series A Preferred L.P. Units and
Series A Preferred Securities............... 17
No Voting Rights Except in Limited
Circumstances............................... 17
Adverse Consequences of Failure to Qualify as
a REIT...................................... 17
Distributions to Holders of Series A Preferred
Securities.................................. 18
Ownership Limit Necessary to Maintain REIT
Qualification............................... 18
Special Event Redemption of Series A Preferred
Securities.................................. 19
Conflicts of Interest......................... 19
The Irvine Company Controls Land Designation
and the Timing of Land Designation Pursuant
to the Land Rights Agreement; Inability of
The Irvine Company to Deliver Entitled
Properties.................................. 20
Early Termination of the Exclusive Land Rights
and Non-Competition Arrangements with The
Irvine Company and Mr. Bren Would Adversely
Affect the Operating Partnership............ 20
Potential for Additional Debt Financing and
Increased Leverage.......................... 21
Real Estate Operations and Development Risks
May Adversely Affect the Operating
Partnership's Ability to Make Distributions
on the Series A Preferred L.P. Units........ 21
Certain Participation Rights of The Irvine
Company..................................... 23
Lack of Public Market......................... 23
IAC CAPITAL TRUST............................... 24

<CAPTION>
PAGE
-----
<S> <C>
RECENT DEVELOPMENTS............................. 27
"Off-Ranch" Expansion......................... 27
Recently Completed Irvine Ranch Land
Acquisitions................................ 27
Issuance of 7% Notes due 2007................. 27
USE OF PROCEEDS................................. 28
OPERATING PARTNERSHIP CONSOLIDATED RATIOS OF
EARNINGS TO FIXED CHARGES AND PREFERRED L.P.
UNIT DISTRIBUTIONS............................ 28
CAPITALIZATION OF IAC CAPITAL TRUST............. 29
CAPITALIZATION OF IRVINE APARTMENT COMMUNITIES,
L.P........................................... 29
SELECTED CONSOLIDATED FINANCIAL DATA............ 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THE OPERATING PARTNERSHIP.................. 32
Overview...................................... 32
Results of Operations......................... 32
Liquidity and Capital Resources............... 36
Capital Expenditures.......................... 39
Impact of Inflation........................... 40
BUSINESS AND PROPERTIES OF THE OPERATING
PARTNERSHIP................................... 41
General....................................... 41
Business Strategy............................. 42
Irvine Ranch Master Plan...................... 44
Exclusive Land Rights Agreement............... 45
The Properties................................ 46
Management and Control of the Operating
Partnership................................. 48
Competition................................... 49
Employees..................................... 49
Cyclicality................................... 49
Environmental Matters......................... 49
Regulation.................................... 50
Factors Relating to Real Estate Operations and
Development................................. 52
Legal Proceedings............................. 54
Principal Executive Offices................... 54
</TABLE>

3
<PAGE> 4

(continued from previous page)

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CONFLICTS OF INTEREST........................... 55
Control of the Company and the Operating
Partnership; Influence of Certain Directors
and The Irvine Company...................... 55
Other Business Activities of The Irvine
Company..................................... 55
The Irvine Company Controls Land Designation
and the Timing of Land Designation Pursuant
to the Land Rights Agreement; Inability of
The Irvine Company to Deliver Entitled
Properties.................................. 55
Early Termination of the Exclusive Land Rights
and Non-Competition Arrangements with The
Irvine Company and Mr. Bren Would Adversely
Affect the Operating Partnership............ 56
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES..... 57
Operating Partnership......................... 57
The Trust..................................... 60
MANAGEMENT...................................... 61
Executive Officers and Directors of the
Company..................................... 61
Board of Directors; Committees................ 64
Compensation of Directors..................... 65
Certain Rights of The Irvine Company with
Respect to the Company's Board of
Directors................................... 65
Executive Compensation........................ 66
1997 Option and Restricted Stock Unit Grants
to Named Executive Officers................. 67
New President and Chief Executive Officer..... 68
Employment Agreements and Termination of
Employment Agreements....................... 68
PRINCIPAL SECURITYHOLDERS....................... 69
Operating Partnership......................... 69
The Company................................... 70
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.................................. 72
Transactions with The Irvine Company.......... 72
Other Transactions............................ 75
DESCRIPTION OF THE SERIES A PREFERRED
SECURITIES.................................... 76
General....................................... 76
Common Securities............................. 76
Restrictions on Ownership and Transfer of
Series A Preferred Securities............... 77
Ranking....................................... 78
Distributions................................. 78
Redemption.................................... 80
Redemption Procedures......................... 80
Liquidation................................... 81
Merger, Consolidation or Amalgamation of the
PAGE
-----
<-> Trust....................................... 82
Voting Rights................................. 82
Conversion Rights............................. 84
Modification and Amendment of the
Declaration................................. 84
Book-Entry Only Issuance -- The Depository
Trust Company............................... 85
Registrar, Transfer Agent and Paying Agent.... 87
Information Concerning the Property Trustee... 87
Governing Law................................. 88
Miscellaneous................................. 88
DESCRIPTION OF THE SERIES A PREFERRED L.P.
UNITS......................................... 89
General....................................... 89
Ranking....................................... 89
Distributions................................. 89
Liquidation................................... 90
Redemption.................................... 91
Voting Rights................................. 92
RELATIONSHIP BETWEEN THE PREFERRED SECURITIES
AND THE PREFERRED L.P. UNITS.................. 94
OPERATING PARTNERSHIP AGREEMENT................. 95
Management.................................... 95
Transfer of L.P. Units........................ 96
Issuance of Additional L.P. Units............. 96
Exchange Rights............................... 96
Cash Tender Rights............................ 97
Funding of Investments........................ 97
Tax Accounting................................ 97
Term.......................................... 97
FEDERAL INCOME TAX CONSEQUENCES................. 98
Taxation of the Trust......................... 98
Tax Aspects of the Trust's Investment in the
Operating Partnership....................... 101
Taxation of Taxable Domestic Holders.......... 101
Recent Legislation Applicable to REITs........ 102
Taxation of Tax-Exempt Holders................ 102
Taxation of Foreign Holders................... 102
Other Tax Consequences........................ 104
UNDERWRITING.................................... 105
EXPERTS......................................... 107
LEGAL MATTERS................................... 107
ADDITIONAL INFORMATION.......................... 108
GLOSSARY........................................ 109
INDEX TO FINANCIAL STATEMENTS................... F-1
</TABLE>

4
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
financial and other information appearing elsewhere in this Prospectus. Unless
otherwise indicated, all information in this Prospectus relates to the
properties of the Operating Partnership as of September 30, 1997. In addition,
all property, statistical and operating data relating to the Existing
Communities (as defined herein) in this Prospectus presented as of any date
prior to, or for any period ending on or prior to, June 30, 1997 excludes data
for The Villas of Renaissance (as defined herein), which the Operating
Partnership acquired on June 30, 1997. All data relating to the Existing
Communities presented as of June 30, 1997 or any later date, or for any period
ending after June 30, 1997, includes data for The Villas of Renaissance, unless
otherwise indicated. See "Recent Developments -- 'Off-Ranch' Expansion." Unless
otherwise indicated, all references in this Prospectus to The Irvine Company's
interest in the Operating Partnership or its ownership of Common L.P. Units
includes the interest and ownership of its affiliates. The Operating Partnership
refers to its multifamily rental apartment properties as communities.

IAC CAPITAL TRUST

IAC Capital Trust is a statutory business trust formed on October 31, 1997
under the Delaware Business Trust Act (the "Business Trust Act") pursuant to a
declaration of trust, among the Trustees (as defined herein), the Company and
the Operating Partnership, and the filing of a certificate of trust with the
Secretary of State of the State of Delaware. Such declaration will be amended
and restated in its entirety (as so amended and restated, the "Declaration")
substantially in the form filed as an exhibit to the Registration Statement of
which this Prospectus forms a part, as of the date the Series A Preferred
Securities are initially issued. The Company and certain members of management
of the Company will acquire all of the Common Securities of the Trust for an
aggregate consideration of $5,000. From time to time the Trust may issue
additional series of Preferred Securities and invest the proceeds of any such
issuance in an additional series of Preferred L.P. Units of the Operating
Partnership. The Trust Securities represent undivided beneficial interests in
the assets of the Trust, subject to the priority and payment terms of the Trust
Securities, and are not secured by any assets of the Operating Partnership or
any of its affiliates. The Trust is a limited purpose financing vehicle
established by the Company and the Operating Partnership and exists solely for
the purpose of (a) issuing its Preferred Securities (and, if applicable, Excess
Preferred Securities (as defined herein)), (b) issuing its Common Securities to
the persons described above and investing the proceeds thereof in an interest
bearing account in, or certificate of deposit of, a bank, (c) investing the
proceeds from the sale of each series of Preferred Securities in a series of
Preferred L.P. Units of the Operating Partnership and (d) engaging in such other
activities as are necessary, convenient or incidental thereto. The rights of the
holders of the Trust Securities, including economic rights, rights to
information and voting rights, are as set forth in the Declaration and the
Business Trust Act. The Preferred Securities have no voting rights except in
limited circumstances. The Declaration does not permit the incurrence by the
Trust of any indebtedness for borrowed money or the making of any investment
other than in Preferred L.P. Units of the Operating Partnership and as described
above in connection with the investment of the proceeds from the sale of the
Common Securities. In the Declaration, the Operating Partnership has agreed to
reimburse all costs, expenses and liabilities of the Trust, including any taxes
and all costs and expenses with respect thereto, to which the Trust may become
subject, except with respect to distributions on the Trust Securities and
withholding taxes on such distributions. For a more detailed description of the
rights of holders of the Series A Preferred Securities, see "-- The Offering,"
"IAC Capital Trust" and "Description of the Series A Preferred Securities."

THE OPERATING PARTNERSHIP

Irvine Apartment Communities, L.P., a Delaware limited partnership, is
engaged in the development and operation of multifamily rental apartment
communities in California. The Operating Partnership's management and operating
decisions are under the unilateral control of Irvine Apartment Communities,
Inc., a Maryland corporation, a self-administered equity real estate investment
trust. The Operating Partnership and the Company were formed in December 1993 to
continue and expand the apartment community business of

5
<PAGE> 6

The Irvine Company, a real estate and community development company. At
September 30, 1997, the Company had a 45.2% (44.4% as of December 31, 1997)
general partnership interest in the Operating Partnership and was its sole
managing general partner. At such date, the limited partners of the Operating
Partnership had a 54.8% (55.6% as of December 31, 1997) interest in the
Operating Partnership, represented by the Common L.P. Units, with The Irvine
Company and certain of its affiliates owning a 54.6% (55.4% as of December 31,
1997) limited partnership interest in the Operating Partnership.

As of September 30, 1997, the Operating Partnership owned and operated
14,991 units in 51 apartment communities (the "Existing Communities") and had
four additional apartment communities aggregating 1,110 units under construction
(the "Communities Under Construction" and, together with the Existing
Communities, the "Properties"). Upon completion of the Communities Under
Construction, the Operating Partnership will own a total of 16,101 units in 55
apartment communities, representing an increase in units of approximately 42%
since the Company's initial public offering (the "Initial Public Offering") in
December 1993. Through July 2020, the Company and the Operating Partnership hold
the exclusive right, but not the obligation, to acquire land from The Irvine
Company, the owner and developer of the Irvine Ranch since 1864, for development
of additional apartment communities on the Irvine Ranch. Fifty-three of the
Properties aggregating 14,836 units (the "Irvine Ranch Properties") are or will
be located on the Irvine Ranch, of which 50 constitute Existing Communities
(14,068 units) and three constitute Communities Under Construction (768 units).

In 1997, the Operating Partnership commenced an "off-Ranch" expansion
program through the acquisition of rights to purchase three apartment community
development sites located in Northern California's Silicon Valley. The Operating
Partnership has exercised its right with respect to one of these sites and has
begun construction on a 342-unit apartment community on the site. On October 23,
1997, the Board of Directors of the Company authorized the Operating
Partnership, subject to receipt of necessary entitlements, to exercise another
of the options. Construction of an apartment community of approximately 155
units on this site is expected to commence in the first half of 1998.
Preliminary design and jurisdictional approvals are also in process with respect
to the remaining development site. In addition, on June 30, 1997, the Operating
Partnership purchased for $127 million an existing 923-unit apartment community
("The Villas of Renaissance") located in Northern San Diego County (the "Villas
of Renaissance Acquisition"). Two additional sites located in Northern San Diego
County were purchased in early December, 1997. See "Recent
Developments -- 'Off-Ranch' Expansion." The Operating Partnership believes that
the economic expansion being experienced by the State of California provides the
Operating Partnership with growth potential beyond the Irvine Ranch.

The Irvine Ranch is located in central Orange County, California between
San Diego and Los Angeles. The western boundary of the Irvine Ranch borders
approximately six miles of the Pacific Ocean. Today, the portion of the Irvine
Ranch which is still owned by The Irvine Company covers approximately 50,000
acres and includes the largest remaining privately-owned undeveloped acreage in
Orange County. The developed portion of the Irvine Ranch, which includes the
City of Irvine and significant parts of the cities of Newport Beach and Tustin,
is one of the largest urban master-planned communities in the United States. The
Irvine Ranch has been developed over the past 30 years in accordance with an
original master plan (the "Master Plan") which, over time, has been refined to
accord with locally approved general plans. The Irvine Ranch is one of the major
commercial, industrial, retail and residential centers in Southern California.

The Operating Partnership believes that a variety of factors have
contributed to the development and operating performance of the Existing
Communities located on the Irvine Ranch and the existence of opportunities for
the development of additional apartment communities on the Irvine Ranch. Most
important among these factors are:

- The market position of the Operating Partnership, which owns over 85% of
all apartment communities having 100 or more units on the Irvine Ranch;

- The Operating Partnership's 23-year exclusive right to acquire land from
The Irvine Company for development of additional rental apartment
communities on the Irvine Ranch;

6
<PAGE> 7

- The limited supply of developable land, other than on the Irvine Ranch,
adjacent to employment centers in Orange County;

- The Irvine Company's Master Plan strategy which emphasizes market
segmentation in order to ensure adequate and appropriate allocation of
land uses which support sustained growth for the long-term;

- The quality of the design, construction and maintenance of the Irvine
Ranch Properties and their location in or near the City of Irvine, which
was ranked by the Federal Bureau of Investigation as among the safest
cities in the United States with a population of 100,000 or more;

- The close proximity of the Irvine Ranch Properties and of future
development sites to employment centers, the Pacific Ocean, quality
schools, and resort, recreational and open space amenities;

- An affluent, growing population and diversified employment base in Orange
County and on the Irvine Ranch;

- The Operating Partnership's ability to defer the purchase of land on the
Irvine Ranch under its land rights agreement until site and zoning
entitlements have been obtained, the land is ready for construction and
the Operating Partnership determines favorable market conditions exist;

- The operating efficiencies available to the Operating Partnership because
the Irvine Ranch Properties are located in a single geographic area;

- An average of 20 years of experience of the Company's 11 most senior
members of management in the design, development, construction, property
management and financing of apartment communities; and

- The effectiveness of management's policies regarding property management
and expense control.

The Operating Partnership's intent is to develop or acquire new apartment
communities in California. The Operating Partnership has recently commenced
operations in the Silicon Valley and Northern San Diego County, which possess
rental demographics and economic growth prospects similar to those on the Irvine
Ranch.

7
<PAGE> 8

STRUCTURE AND OWNERSHIP

The following diagram depicts the ownership of the Trust and the Operating
Partnership upon consummation of the Offering.

[Description]

[Depiction of the ownership of the Trust and the Operating Partnership as
well as the flow of proceeds received upon consummation of the Offering.]

8
<PAGE> 9

RISK FACTORS

PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
"RISK FACTORS" PRIOR TO MAKING AN INVESTMENT DECISION REGARDING THE SERIES A
PREFERRED SECURITIES OFFERED HEREBY. SOME OF THE SIGNIFICANT CONSIDERATIONS
INCLUDE:

- The Trust's ability to make distributions and other payments on the
Series A Preferred Securities is initially dependent upon the Operating
Partnership making distributions and other payments on the Series A
Preferred L.P. Units held as trust assets. As a result, if the Operating
Partnership does not make distributions or other payments on the
Preferred L.P. Units deposited in the Trust as trust assets, including
the Series A Preferred L.P. Units, for any reason, it is expected that
the Trust will not be able to make payments on the Series A Preferred
Securities.

- The Series A Preferred L.P. Units rank junior to all existing and future
debt and other liabilities of the Operating Partnership and its
subsidiaries and on a parity with any other series of Preferred L.P.
Units hereafter issued, unless the terms of such other series state that
such Preferred L.P. Units rank junior to the Series A Preferred L.P.
Units. There are no terms in the Series A Preferred Securities or the
Series A Preferred L.P. Units that restrict the ability of the Operating
Partnership from incurring additional debt or other liabilities or
issuing additional series of Preferred L.P. Units.

- The Series A Preferred Securities have no voting rights except in limited
circumstances.

- The taxation of the Trust as a corporation if it fails to qualify as a
REIT could result in increased costs to the Operating Partnership since
it will be responsible for such taxes and may result in the redemption of
the Series A Preferred Securities. See "Description of the Series A
Preferred Securities -- Redemption" and "Description of the Series A
Preferred L.P. Units -- Redemption."

- The restriction on ownership of more than 9.8% of the outstanding Series
A Preferred Securities (the "Ownership Limit"). If the Ownership Limit is
exceeded, Series A Preferred Securities in excess of the Ownership Limit
will automatically be exchanged for Excess Preferred Securities that have
limited rights.

- Conflicts of interest with, and influence of, The Irvine Company,
including the substantial influence of The Irvine Company and its three
nominees to the Board of Directors of the Company over the affairs of the
Operating Partnership. The interests of The Irvine Company may not be
consistent with the interests of other holders of L.P. Units or those of
holders of the Series A Preferred Securities.

- The Irvine Company will determine which land will be designated for
rental apartment community development on the Irvine Ranch. Since The
Irvine Company also develops industrial, commercial and other properties
on the Irvine Ranch, the feasibility and development of additional
apartment communities by the Operating Partnership on the Irvine Ranch
may be adversely affected by the feasibility and development of
commercial, industrial and residential for-sale properties by The Irvine
Company on the Irvine Ranch. In addition, The Irvine Company will control
the application for initial land use approvals from local governing
entities ("Village Related Entitlements") and will also have certain
approval rights with respect to the architectural design and physical
layout of rental apartment communities.

- The potential for early termination of the Land Rights Agreement, as
amended, among the Company, the Operating Partnership, The Irvine Company
and Mr. Bren (the "Land Rights Agreement") upon the occurrence of certain
events, including the failure of the shareholders of the Company to elect
as directors of the Company those persons nominated by The Irvine
Company. If the Land Rights Agreement is terminated as a result of the
occurrence of one of these events, the Operating Partnership would no
longer have an option to acquire apartment community land sites from The
Irvine Company and The Irvine Company and Mr. Bren would no longer be
prohibited from acquiring or developing apartment communities on or off
the Irvine Ranch in competition with the Operating Partnership.
Accordingly, the termination of the Land Rights Agreement would likely
have a material adverse effect on the future development activities of
the Operating Partnership on the Irvine Ranch.

9
<PAGE> 10

- Financing risks, including the ability of the Operating Partnership to
incur substantial indebtedness, subject to certain covenants in the
Operating Partnership's debt agreements, thereby permitting the Operating
Partnership to become more highly leveraged. Increased leverage and the
resulting increase in debt service requirements could adversely affect
the Operating Partnership's ability to make required distributions on the
Preferred L.P. Units, including the Series A Preferred L.P. Units, which
in turn would adversely affect the Trust's ability to make required
distributions on the Series A Preferred Securities.

- General real estate investment risks, including:

-- risks associated with the development or acquisition of new apartment
communities, including the possible inability of The Irvine Company to
obtain Village Related Entitlements (as defined below); construction,
lease-up and financing risks; and the possibility that newly developed
or acquired properties will fail to perform as expected;

-- the effect of local economic conditions, such as unemployment rates,
supply of and demand for apartments, and other conditions on apartment
community cash flows and values (including the risk arising from
concentration of the Properties in Orange County); the ability of
residents to make rent payments; the ability of a property to generate
income sufficient to meet operating expenses (including real estate
taxes) and debt service; and the illiquidity of real estate
investments, all of which may affect the Operating Partnership's
ability to make expected distributions; and

-- potential losses in the event of a casualty loss (e.g., an earthquake)
that is not insured, insurable or economically insurable.

- The lack of a prior market for the Series A Preferred Securities. There
can be no assurance as to the development of any market, or the liquidity
of any market that may develop, for the Series A Preferred Securities.

THE PROPERTIES

As of September 30, 1997, the Operating Partnership owned and operated
14,991 apartment units in the Existing Communities and had four Communities
Under Construction. The Properties are located within the following individual
jurisdictions:

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF PERCENT OF TOTAL
LOCATION PROPERTIES (1) UNITS (1) UNITS
- ----------------------------------------------------- -------------- --------- ----------------
<S> <C> <C> <C>
ORANGE COUNTY
Irvine............................................. 37 9,849 61.2%
Newport Beach...................................... 8 2,305 14.3
Tustin............................................. 7 2,170 13.5
Newport Coast...................................... 1 512 3.2
SILICON VALLEY
Cupertino.......................................... 1 342 2.1
NORTHERN SAN DIEGO COUNTY
La Jolla........................................... 1 923 5.7
--- ------ -----
TOTAL...................................... 55 16,101 100.0%
=== ====== =====
</TABLE>

- ---------------

(1) Four of these Properties (aggregating 1,110 units) are Communities Under
Construction.

10
<PAGE> 11

MANAGEMENT AND CONTROL OF THE OPERATING PARTNERSHIP

As sole general partner of the Operating Partnership, the Company has the
exclusive power to manage and conduct the business of the Operating Partnership.
The Company, in turn, is governed by a Board of Directors, which has a majority
of directors unaffiliated with The Irvine Company. Furthermore, the Board of
Directors of the Company has established a committee of such unaffiliated
directors (the "Independent Directors Committee") whose approval is required
with respect to all transactions involving the Operating Partnership or the
Company on the one hand and The Irvine Company, affiliates of The Irvine Company
or Mr. Bren on the other hand, such as the acquisition of additional apartment
communities or sites therefor from The Irvine Company.

Consent of The Irvine Company is required by the Second Amended and
Restated Agreement of Limited Partnership of the Operating Partnership (the
"Partnership Agreement") for, among other things, (i) the Operating Partnership
to sell all or substantially all of its assets, (ii) the Company to take title
to assets (other than temporarily in connection with an acquisition prior to
contributing such assets to the Operating Partnership) or for the Company to
conduct business other than through the Operating Partnership, (iii) the
Operating Partnership to engage in any business other than the development and
ownership of apartment communities or (iv) the Operating Partnership to
liquidate, dissolve, wind-up or terminate. The Partnership Agreement requires,
absent receipt of consent, that title to assets be in the Operating Partnership
in order to maintain a one-for-one exchange ratio between Common L.P. Units and
shares of common stock of the Company (the "Common Stock"). See "Operating
Partnership Agreement -- Management."

At the option of The Irvine Company, The Irvine Company's 54.6% (55.4% as
of December 31, 1997) limited partnership interest in the Operating Partnership
(i) is exchangeable for Common Stock of the Company pursuant to the exchange
rights (the "Exchange Rights") set forth in the Partnership Agreement (subject
to the ownership limit applicable to The Irvine Company and certain related
persons contained in the Articles of Amendment and Restatement (the "Articles of
Incorporation") of the Company), and (ii) may be tendered to the Company for
cash payable solely out of the net proceeds of an offering of Common Stock of
the Company pursuant to the cash tender rights (the "Cash Tender Rights") set
forth in the Partnership Agreement.

TAX STATUS OF THE TRUST

The Trust will elect to be taxed as a REIT under the Code, commencing with
its taxable year ending December 31, 1998, and the Trust intends to operate so
as to qualify as a REIT. In the opinion of Davis Polk & Wardwell, commencing
with the Trust's taxable year ending December 31, 1998, the Trust will be
treated as being organized in conformity with the requirements for qualification
as a REIT, and its proposed method of operation will enable it to meet the
requirements for qualification and taxation as a REIT under current law. This
opinion is based upon certain assumptions and representations made by the Trust
and the Operating Partnership as to factual matters as set forth in this
Prospectus. An opinion of counsel is not binding on the Internal Revenue Service
or the courts. If the Trust qualifies for taxation as a REIT, then under current
federal income tax laws it generally will not be subject to federal corporate
income tax on its net income that is currently distributed to holders of its
Trust Securities to the extent it currently distributes at least 95% of its net
taxable income to the holders of its Trust Securities. Even if the Trust
qualifies for taxation as a REIT, the Trust may be subject to certain federal,
state and local taxes on its income and property and to federal income and
excise tax on its undistributed income. See "Federal Income Tax Consequences."

CONFLICTS OF INTEREST

The Irvine Company, through its representation on the Board of Directors of
the Company and its ability to terminate the Land Rights Agreement under certain
circumstances, has significant influence over the affairs of the Company and
thus the Operating Partnership, including the ability to block certain actions
such as amendments to the Company's Articles of Incorporation or Bylaws or the
Partnership Agreement and sales of all or substantially all of the Operating
Partnership's assets. The influence of The Irvine Company over the

11
<PAGE> 12

affairs of the Operating Partnership may not be consistent with the interests of
other holders of L.P. Units or those of holders of the Series A Preferred
Securities. In addition, The Irvine Company determines which land on the Irvine
Ranch is designated for apartment community development and therefore which land
is eligible for purchase by the Operating Partnership pursuant to the Land
Rights Agreement. The feasibility and development of additional apartment
communities by the Operating Partnership on the Irvine Ranch may be affected by
the feasibility and development of commercial, industrial and residential
for-sale properties by The Irvine Company on the Irvine Ranch. No assurance can
be given that The Irvine Company will entitle land for development of additional
apartment communities at a rate consistent with prior development. See "Risk
Factors -- Conflicts of Interest," "-- The Irvine Company Controls Land
Designation and the Timing of Land Designation Pursuant to the Land Rights
Agreement; Inability of The Irvine Company to Deliver Entitled Properties" and
"-- Early Termination of the Exclusive Land Rights and Non-Competition
Arrangements with The Irvine Company and Mr. Bren Would Adversely Affect the
Operating Partnership."

THE OFFERING

ISSUER..................... IAC Capital Trust, a Delaware business trust (the
"Trust").

SECURITIES OFFERED......... 6,000,000 8 1/4% Series A REIT Trust Originated
Preferred Securities of IAC Capital Trust
(6,900,000 Series A Preferred Securities if the
Underwriters' overallotment option is exercised in
full).

ASSETS OF THE TRUST........ The Trust will invest the proceeds from the sale of
the Series A Preferred Securities in Series A
Preferred L.P. Units. The assets of the Trust will
initially consist solely of the Series A Preferred
L.P. Units and the investment made in connection
with proceeds from the sale of the Common
Securities of the Trust.

DISTRIBUTIONS; DEPENDENCE
ON DISTRIBUTIONS ON SERIES
A PREFERRED L.P. UNITS..... Distributions on the Series A Preferred L.P. Units
and the Series A Preferred Securities will accrue
from January 20, 1998 and will be payable at an
annual rate of 8 1/4% of the liquidation amount of
$25 per security. Distributions will be payable
quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year,
commencing on March 31, 1998. The ability of the
Trust to pay distributions on the Series A
Preferred Securities is initially dependent on the
receipt of distributions from the Operating
Partnership on the Series A Preferred L.P. Units.
See "Description of the Series A Preferred
Securities -- Distributions."

LIQUIDATION AMOUNT......... Upon (i) any dissolution, liquidation, winding-up
or termination of the Trust, or (ii) upon any
dissolution, liquidation, winding-up or termination
of the Operating Partnership, at which time the
Trust will also terminate, holders of Series A
Preferred Securities will be entitled to receive,
after payment or provision for payment of debts and
other liabilities of the Trust and subject to the
rights of holders of other series of Preferred
Securities ranking on a parity with the Series A
Preferred Securities upon any dissolution,
liquidation, winding-up or termination of the
Trust, $25 per Series A Preferred Security plus
accumulated and unpaid distributions thereon and no
more. See "Description of the Series A Preferred
Securities -- Liquidation."

REDEMPTION................. Except as described below, the Series A Preferred
L.P. Units are not redeemable prior to December 31,
2002. On or after December 31, 2002, the Series A
Preferred L.P. Units may be redeemed at the option

12
<PAGE> 13

of the Operating Partnership, in whole or from time
to time in part, at a redemption price of $25 per
Series A Preferred L.P. Unit, plus accumulated and
unpaid distributions, if any, to the redemption
date. The Series A Preferred L.P. Units may also be
redeemed in whole but not in part at any time upon
the occurrence and continuance of a Tax Event (as
defined herein) or Investment Company Act Event (as
defined herein). The redemption price (other than
the portion consisting of accumulated and unpaid
distributions) will be payable solely out of the
sale proceeds of capital stock of the Company,
which will be contributed by the Company to the
Operating Partnership as an additional capital
contribution, or the sale proceeds of L.P. Units,
and from no other source. If the Operating
Partnership redeems Series A Preferred L.P. Units,
the Trust must redeem in cash a series of Preferred
Securities having economic terms substantially
similar to the Series A Preferred L.P. Units
redeemed and having an aggregate liquidation amount
equal to the aggregate stated value of the Series A
Preferred L.P. Units so redeemed. Accordingly, if
Series A Preferred L.P. Units are redeemed, the
Trust currently intends to redeem Series A
Preferred Securities at a redemption price equal to
$25 per Series A Preferred Security plus
accumulated and unpaid distributions thereon to the
date of redemption. See "Description of the Series
A Preferred Securities -- Redemption" and
"Description of the Series A Preferred L.P.
Units -- Redemption."

TERM OF SECURITIES......... The Series A Preferred Securities and the Series A
Preferred L.P. Units will have a stated maturity of
December 31, 2092. Unless previously redeemed, the
Series A Preferred Securities and the Series A
Preferred L.P. Units will be redeemed for cash upon
termination of the Operating Partnership. The
Operating Partnership will terminate on December
31, 2092, unless sooner dissolved.

NO CONVERSION RIGHTS; NO
SINKING FUND............... The Series A Preferred Securities and the Series A
Preferred L.P. Units will not be subject to any
sinking fund and, except as described under
"Description of the Series A Preferred
Securities -- Restrictions on Ownership and
Transfer of Series A Preferred Securities," neither
the Series A Preferred Securities nor the Series A
Preferred L.P. Units will be convertible into any
securities of the Company, the Operating
Partnership or the Trust.

VOTING RIGHTS.............. Holders of Series A Preferred Securities will have
no voting rights except in limited circumstances.
See "Description of the Series A Preferred
Securities -- Voting Rights."

RANKING.................... The Series A Preferred Securities will, with
respect to distributions and rights upon
liquidation, dissolution, winding-up or termination
of the Trust, rank (i) senior to the Common
Securities and (ii) on a parity with all other
series of Preferred Securities issued by the Trust
unless the terms of such other series specifically
provide that such other series ranks junior to the
Series A Preferred Securities. The Series A
Preferred L.P. Units will, with respect to
distributions and rights upon liquidation,
dissolution, winding-up or termination of the
Operating Partnership, rank (i) senior to the G.P.
Units and the Common L.P. Units and (ii) on a
parity with all other series of Preferred L.P.
Units issued by the Operating Partnership unless
the terms of such other series specifically provide
that such series ranks junior to the Series A
Preferred L.P. Units.

13
<PAGE> 14

See "Description of the Series A Preferred
Securities -- Ranking" and "Description of the
Series A Preferred L.P. Units -- Ranking."

USE OF PROCEEDS............ The proceeds from the sale of the Series A
Preferred Securities will be invested by the Trust
in Series A Preferred L.P. Units of the Operating
Partnership. After payment of the Underwriters'
Compensation and other expenses associated with the
Offering, the Operating Partnership will use a
portion of the proceeds received by it upon
issuance of the Series A Preferred L.P. Units to
repay all indebtedness outstanding under the
Operating Partnership's Credit Facility (as defined
herein), and the remainder of such proceeds will be
used for general partnership purposes, including
ongoing development activities on and off the
Irvine Ranch and the possible acquisition of
additional properties off the Irvine Ranch. See
"Use of Proceeds."

BOOK-ENTRY ONLY ISSUANCE...
Series A Preferred Securities will be represented
by one or more permanent global securities in fully
registered form deposited with the Depository Trust
Company ("DTC") and registered in the name of DTC
or its nominee. The laws of some jurisdictions
require that certain purchasers of securities take
physical delivery of securities in definitive form.
Such laws may impair the ability to transfer
beneficial interests in a global Series A Preferred
Security. See "Description of the Series A
Preferred Securities -- Book-Entry Only
Issuance -- The Depository Trust Company."

NEW YORK STOCK EXCHANGE
SYMBOL..................... "IAC Pr A"

14
<PAGE> 15

SUMMARY FINANCIAL DATA

The following Summary Financial Data (other than statistical and property
data) has been derived from the Operating Partnership's or the Operating
Partnership's predecessor's (the "Predecessor's") consolidated financial
statements. Information as of December 31, 1996 and 1995 and for each of the
years in the three year period ended December 31, 1996 has been derived from the
Operating Partnership's audited consolidated financial statements included
herein. Information for the year ended December 31, 1993 has been derived from
audited financial statements not included herein of the Company and the
Predecessor and is on a combined and consolidated historical basis for the
Operating Partnership and the Predecessor. Information at December 31, 1994 and
1993 has been derived from the Company's audited financial statements not
included herein and information at and for the year ended December 31, 1992 has
been derived from the Predecessor's audited financial statements not included
herein. Information at September 30, 1997 and for the respective nine month
periods ended September 30, 1997 and 1996 has been derived from the Operating
Partnership's unaudited consolidated financial statements included herein and
which, in the opinion of the Operating Partnership, reflect all adjustments
considered necessary for a fair presentation. Results for the nine month period
ended September 30, 1997 are not necessarily indicative of results for the full
year. All such financial information is qualified in its entirety by reference
to, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Operating
Partnership" and the Consolidated Financial Statements (including the notes
thereto) included herein. The Company acquired The Villas of Renaissance on June
30, 1997. See "Recent Developments -- 'Off-Ranch' Expansion." For pro forma
financial information of the Operating Partnership for the year ended December
31, 1996 and the nine months ended September 30, 1997, see the Unaudited Pro
Forma Consolidated Statements of Operations included elsewhere herein.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------- ------------------------------------------------------------
1997 1996 1996 1995 1994 1993(1) 1992
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PROPERTY INFORMATION, RATIOS AND PER UNIT AMOUNT)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
OPERATING DATA:
Revenues:
Rental income...... $133,114 $114,000 $154,925 $133,678 $127,338 $123,101 $119,097
Other income....... 3,093 2,317 3,162 2,079 1,585 1,659 2,097
Interest income.... 659 419 611 411 1,313 60 --
-------- -------- -------- -------- -------- -------- --------
136,866 116,736 158,698 136,168 130,236 124,820 121,194
-------- -------- -------- -------- -------- -------- --------
Expenses:
Property
expenses......... 28,790 24,903 33,859 31,761 33,105 34,057 35,685
Real estate
taxes............ 10,959 10,023 13,496 12,002 11,786 10,729 9,921
Property management
fees............. 3,809 3,316 4,502 3,893 3,800 3,881 4,393
Interest expense,
net.............. 21,949 22,378 29,506 25,894 26,827 50,248 49,154
Amortization of
deferred
financing
costs............ 1,882 1,975 2,627 8,510 15,942 3,012 1,474
Depreciation and
amortization..... 21,700 20,346 27,239 23,143 21,055 20,002 19,808
General and
administrative... 4,822 4,890 6,277 5,909 5,442 3,278 2,359
-------- -------- -------- -------- -------- -------- --------
93,911 87,831 117,506 111,112 117,957 125,207 122,794
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary
item............... 42,955 28,905 41,192 25,056 12,279 (387) (1,600)
Extraordinary item --
charge related to
debt
extinguishment..... -- -- -- (23,427) -- (12,487) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).... $ 42,955 $ 28,905 $ 41,192 $ 1,629 $ 12,279 $(12,874) $ (1,600)
======== ======== ======== ======== ======== ======== ========
Net income (loss) per
unit............... $ 0.99 $ 0.75 $ 1.06 $ 0.05 $ 0.41 $ (0.43)
======== ======== ======== ======== ======== ========
</TABLE>

15
<PAGE> 16

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993(1) 1992
--------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PROPERTY INFORMATION, RATIOS AND PER UNIT AMOUNT)
<S> <C> <C> <C> <C> <C> <C> <C>
STATISTICAL AND PROPERTY DATA:
Total stabilized communities
(at period end)(2)........... 51 47 48 43 43 42 42
Apartment units (at period
end)......................... 14,991 13,541 13,656 12,776 11,358 11,334 10,952
Average units in stabilized
communities(2)(3)(6)......... 13,683 11,786 12,139 11,334 11,334 10,799 10,446
Average physical occupancy in
stabilized
communities(2)(3)(6)......... 94.5% 94.8% 94.9% 94.6% 95.6% 96.3% 96.2%
OTHER DATA:
Average monthly rent per
unit(3)(4)(6)................ $ 1,101 $ 1,012 $ 1,025 $ 996 $ 981 $ 963 $ 950
Capital replacements per
unit(3)(5)(6)................ $ 234 $ 247 $ 393 $ 399 $ 490 $ 482 $ 458
EBITDA, as adjusted(7)......... $ 88,486 $ 73,604 $100,564 $ 82,603 $ 76,103 $ 72,875 $ 68,836
Ratio of EBITDA, as adjusted,
to interest expense(7)(8).... 4.03x 3.29x 3.41x 3.19x 2.84x 1.45x 1.40x
Cash flows provided by (used
in):
Operating activities......... $ 69,432 $ 55,748 $ 73,037 $ 55,403 $ 49,786 $ 10,249 $ 16,171
Investing activities......... $(205,807) $(44,220) $(66,616) $(128,218) $(50,918) $(23,649) $(19,285)
Financing activities......... $ 135,543 $ (8,356) $ (7,608) $ 73,739 $(23,316) $ 36,428 $ 3,516
</TABLE>

<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
SEPTEMBER 30, ----------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................. $ 1,101,826 $900,998 $853,230 $757,240 $740,120 $654,694
Total debt................................ 666,826 553,064 563,286 540,689 513,943 555,491
Total liabilities......................... 706,073 580,654 588,664 566,191 527,776 564,420
Partners' capital......................... 395,753 320,344 264,566 191,049 212,344 90,274
</TABLE>

- ---------------

(1) Includes the operations of the Predecessor through December 7, 1993 and of
the Operating Partnership from December 8 through December 31, 1993.

(2) A property is stabilized at the earlier of (i) one year after completion of
construction or (ii) when it achieves 95% occupancy.

(3) With respect to each period presented for communities that have been
stabilized for less than one year, reflects data from the date of stabilized
occupancy.

(4) Average monthly rent per unit is calculated by dividing the average rental
revenue per unit by average economic occupancy.

(5) Data for the year ended December 31, 1992 excludes capital replacements
totaling $534 per unit relating to a major renovation program at the
Operating Partnership's Promontory Point apartment community due to the
nonrecurring nature of the program.

(6) Excludes The Villas of Renaissance, which was acquired on June 30, 1997. If
The Villas of Renaissance were included for the nine months ended September
30, 1997, average units in stabilized communities would have been 13,991,
average physical occupancy in stabilized communities would have been 94.4%,
average monthly rent per unit would have been $1,104 and capital
replacements per unit would have been $229.

(7) EBITDA, as adjusted, represents earnings before interest, depreciation and
amortization and extraordinary items. EBITDA, as adjusted, is not
necessarily comparable to similarly titled measures of other companies, and
should not be considered as an alternative to operating income, as
determined in accordance with generally accepted accounting principles
("GAAP"), as an indicator of the Operating Partnership's operating
performance, or to cash flows from operating activities (as determined in
accordance with GAAP) as a measure of liquidity.

(8) The Operating Partnership did not have any Preferred L.P. Units outstanding
in any of the periods indicated, and, therefore, the ratio of EBITDA, as
adjusted, to interest expense and preferred securities distributions for
each of the periods indicated was equal to the ratio of EBITDA, as adjusted,
to interest expense for such period.

16
<PAGE> 17

RISK FACTORS

Prospective investors should carefully consider the following material
risks in conjunction with the other information contained in this Prospectus
before making an investment in the Series A Preferred Securities.

DEPENDENCE ON OPERATING PARTNERSHIP

The Trust's ability to make distributions and other payments on the Series
A Preferred Securities is initially dependent upon the Operating Partnership
making distributions and other payments on the Series A Preferred L.P. Units
held as trust assets. If the Operating Partnership does not make distributions
or other payments on the Preferred L.P. Units deposited in the Trust as trust
assets, including the Series A Preferred L.P. Units, for any reason, it is
expected that the Trust will not be able to make payments on the Series A
Preferred Securities.

The Declaration provides that the Operating Partnership shall reimburse all
costs, expenses and liabilities of the Trust, including any taxes and all costs
and expenses with respect thereto, to which the Trust may become subject, except
with respect to distributions on the Trust Securities and withholding taxes on
such distributions. No assurance can be given that the Operating Partnership
will have sufficient resources to enable it to pay such costs, expenses and
liabilities on behalf of the Trust.

RANKING OF SERIES A PREFERRED L.P. UNITS AND SERIES A PREFERRED SECURITIES

The Series A Preferred L.P. Units rank junior to all existing and future
debt and other liabilities of the Operating Partnership and its subsidiaries and
senior with respect to distributions and rights upon liquidation, dissolution,
winding-up or termination of the Operating Partnership to the G.P. Units, the
Common L.P. Units now or hereafter issued by the Operating Partnership and on a
parity with any other series of Preferred L.P. Units hereafter issued, unless
the terms of such other series state that such Preferred L.P. Units rank junior
to the Series A Preferred L.P. Units. There are no terms in the Series A
Preferred Securities or the Series A Preferred L.P. Units that restrict the
ability of the Operating Partnership from incurring additional debt or other
liabilities or issuing additional series of Preferred L.P. Units. See
"Description of the Series A Preferred Securities."

NO VOTING RIGHTS EXCEPT IN LIMITED CIRCUMSTANCES

Holders of Series A Preferred Securities will have limited voting rights
and, subject to the rights of holders of Preferred Securities to appoint a
Special Regular Trustee (as defined herein) upon the occurrence of an
Appointment Event (as defined herein), will not be able to appoint, remove or
replace, or to increase or decrease the number of, Trustees, which rights are
vested exclusively in the Common Securities. See "Description of the Series A
Preferred Securities -- Voting Rights" and "Description of the Series A
Preferred L.P. Units -- Voting Rights."

ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT

The Trust intends to operate so as to qualify as a REIT under the Code.

Although the Trust believes that it will be organized and will operate in
such a manner, no assurance can be given that the Trust will be able to operate
in such a manner so as to qualify as a REIT under the Code or to remain so
qualified. Qualification as a REIT involves the application of highly technical
and complex Code provisions for which there are only limited judicial or
administrative interpretations. The determination of various factual matters and
circumstances not entirely within the Trust's control may affect its ability to
qualify as a REIT. In addition, no assurance can be given that legislation, new
regulations, administrative interpretations, or court decisions will not
significantly change the tax laws with respect to the qualification as a REIT or
the federal income tax consequences of such qualification; however, the Trust is
not aware of any proposal in Congress to amend the tax laws that would
materially and adversely affect the Trust's ability to operate as a REIT.

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The Trust is relying on the opinion of Davis Polk & Wardwell, tax counsel
to the Operating Partnership and the Trust, regarding various issues affecting
the Trust's ability to qualify, and retain qualification, as a REIT. See "Legal
Matters." Such legal opinions are not binding on the Internal Revenue Service
("IRS") or the courts. See "Federal Income Tax Consequences."

If in any taxable year the Trust fails to qualify as a REIT, the Trust
would not be allowed a deduction for distributions to holders of Trust
Securities in computing its taxable income and would be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. This could result in increased costs to the
Operating Partnership since it will be responsible for such taxes. The taxation
of the Trust as a corporation if it fails to qualify as a REIT would generally
permit the Operating Partnership to redeem the Series A Preferred L.P. Units, in
which event the Trust currently intends to redeem the Series A Preferred
Securities. See "Description of the Series A Preferred L.P. Units --
Redemption."

Notwithstanding that the Trust currently intends to operate in a manner
designed to qualify as a REIT, future economic, market, legal, tax, or other
considerations may cause the Regular Trustees (as defined herein) and the
holders of the Common Securities to determine that it is in the best interest of
the Trust to revoke the REIT election. The Trust would be disqualified from
electing treatment as a REIT for the four taxable years following the year of
such revocation. The Trust's ability to maintain REIT status will also be
dependent on the nature of the income derived by the Operating Partnership. See
"Federal Income Tax Consequences."

DISTRIBUTIONS TO HOLDERS OF SERIES A PREFERRED SECURITIES

REIT REQUIREMENTS. To obtain the favorable tax treatment for REITs
qualifying under the Code, the Trust generally will be required each year to
distribute to holders of the Trust Securities at least 95% of its otherwise
taxable income (after certain adjustments). In addition, the Trust will be
subject to a 4% excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of 85% of its
ordinary income for the calendar year, 95% of its capital gains net income for
the calendar year (unless the REIT elects to retain and pay income tax on such
gains) and any undistributed taxable income from prior periods. Failure to
comply with these requirements would result in the Trust's income being subject
to tax at regular corporate rates.

INABILITY OF TRUST TO MAINTAIN ITS DISTRIBUTION POLICY; DEPENDENCE ON
OPERATING PARTNERSHIP. The Trust's income will consist solely of the Trust's
share of the income of the Operating Partnership, and the Trust's cash flow will
consist solely of its share of distributions from the Operating Partnership.
Differences in timing between the receipt of income and the payment of expenses
in arriving at taxable income (of the Operating Partnership) and the effect of
required debt amortization payments could require the Operating Partnership to
borrow funds on a short-term basis to meet its intended distribution policy.

The Trust's ability to make distributions on the Series A Preferred
Securities is initially effectively dependent upon the Operating Partnership's
ability to make distributions on the Series A Preferred L.P. Units.
Distributions by the Operating Partnership will be determined by the Board of
Directors of the Company, as general partner of the Operating Partnership.
Accordingly, there is no assurance that the Operating Partnership will declare
distributions on any Preferred L.P. Units deposited in the Trust as trust
assets, including the Series A Preferred L.P. Units, in an amount sufficient to
permit the Trust to make full quarterly distributions on the Series A Preferred
Securities.

OWNERSHIP LIMIT NECESSARY TO MAINTAIN REIT QUALIFICATION

In order for the Trust to maintain its qualification as a REIT, not more
than 50% in value of its outstanding Trust Securities may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code). In this
regard, the Declaration generally prohibits ownership of more than 9.8% of the
outstanding Series A Preferred Securities by any holder. Any change in the
Ownership Limit would require an amendment to the Declaration. Such an amendment
to the Declaration would require the affirmative vote of a majority of the
Regular Trustees. Series A Preferred Securities have no voting rights with
respect to such an amendment.

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The constructive ownership rules of the Code are complex and may cause
Series A Preferred Securities owned, directly or indirectly, by a group of
related individuals and/or entities to be deemed to be constructively owned by
one individual or entity. As a result, the acquisition of less than 9.8% of the
Series A Preferred Securities of any series (or the acquisition of an interest
in an entity which owns Series A Preferred Securities) by an individual or
entity could cause that individual or entity (or another individual or entity)
to own constructively in excess of 9.8% of the Series A Preferred Securities,
and thus subject such stock to the Ownership Limit.

Direct or constructive ownership in excess of the Ownership Limit would
cause the violative transfer or ownership to be void, and cause such securities
to be converted into Excess Preferred Securities (as defined herein), which have
limited economic rights. See "Description of the Series A Preferred
Securities -- Restrictions on Ownership and Transfer of Series A Preferred
Securities."

SPECIAL EVENT REDEMPTION OF SERIES A PREFERRED SECURITIES

Upon the occurrence and during the continuation of a Tax Event or
Investment Company Event, which may occur at any time, the Operating Partnership
shall, in certain circumstances, have the right to redeem the Series A Preferred
L.P. Units, in whole but not in part, in which event a series of Preferred
Securities having economic terms substantially similar to the Series A Preferred
L.P. Units would be redeemed in full. Accordingly, if the Series A Preferred
L.P. Units are redeemed in full, the Trust currently intends to redeem Series A
Preferred Securities in full at the Redemption Price. See "Description of the
Series A Preferred L.P. Units -- Redemption."

CONFLICTS OF INTEREST

CONTROL OF THE COMPANY AND THE OPERATING PARTNERSHIP; INFLUENCE OF CERTAIN
DIRECTORS AND THE IRVINE COMPANY. The Irvine Company has the right to nominate
for election to the Board of Directors of the Company (any such person, an
"Irvine Company Board Representative") three members of such Board of Directors
so long as The Irvine Company, its stockholders or its affiliates beneficially
own at least 20% of the outstanding Common Stock of the Company (including for
these purposes shares issuable upon exercise of the right set forth in the
Partnership Agreement to exchange Common L.P. Units for shares of Common Stock
of the Company subject to the ownership limit provisions applicable to The
Irvine Company set forth in the Company's Articles of Incorporation). In the
event this ownership falls below 20% but is at least 15%, The Irvine Company has
the right to nominate two persons for election to the Board of Directors; and if
this ownership falls below 15% but is at least 10%, The Irvine Company has the
right to nominate one person for election to the Board of Directors. See
"Management -- Executive Officers and Directors." In addition, the Articles of
Incorporation and Bylaws of the Company (the "Bylaws") provide that a majority
of the total number of directors of the Company, including at least one Irvine
Company Board Representative, shall constitute a quorum for the transaction of
business and, except as provided below, that the affirmative vote of the
majority of the directors present at a meeting at which a quorum is present
shall be the act of all of the Board of Directors. Notwithstanding the
foregoing, the approval of directors of the Company representing more than 75%
of the Board of Directors as a whole (the "Required Directors") is required with
respect to certain actions, and certain matters relating to the Operating
Partnership require the approval of the holders of a majority of the Common L.P.
Units. See "Management -- Certain Rights of The Irvine Company with Respect to
the Company's Board of Directors." Accordingly, The Irvine Company will have
substantial influence over the affairs of the Operating Partnership, which
influence might not be consistent with the interests of other holders of L.P.
Units or the holders of the Series A Preferred Securities.

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<PAGE> 20

engages an independent consultant to assist it in evaluating all land
transactions with The Irvine Company. However, there can be no assurance that
these policies will be successful in eliminating the influence of such conflicts
and, if they are not successful, decisions could be made that might fail to
reflect fully the interests of the Operating Partnership.

OTHER BUSINESS ACTIVITIES OF THE IRVINE COMPANY. The Irvine Company has
significant business interests in developed industrial, commercial and other
properties and in the future development of such properties on the Irvine Ranch,
the value of which exceeds the value of its aggregate interest in the Company
and the Operating Partnership. The feasibility and development of other
apartment communities by the Operating Partnership on the Irvine Ranch may be
affected by the feasibility and development of commercial, industrial and
residential for-sale properties by The Irvine Company on the Irvine Ranch. No
assurance can be given that The Irvine Company will not determine that certain
potential apartment community sites on undeveloped portions of the Irvine Ranch
should be developed as single family, for-sale homes or condominiums or as
industrial or commercial properties.

THE IRVINE COMPANY CONTROLS LAND DESIGNATION AND THE TIMING OF LAND DESIGNATION
PURSUANT TO THE LAND RIGHTS AGREEMENT; INABILITY OF THE IRVINE COMPANY TO
DELIVER ENTITLED PROPERTIES

Purchases of properties by the Operating Partnership from The Irvine
Company under the Land Rights Agreement may be made only with the approval of a
majority of the Independent Directors Committee. The Irvine Company determines
which land is designated for apartment community development in accordance with
the Master Plan for the Irvine Ranch, and therefore which land is eligible for
purchase by the Operating Partnership pursuant to the Land Rights Agreement. No
assurance can be given that The Irvine Company will entitle land for development
of additional apartment communities at a rate consistent with prior development.
Before an apartment may be developed on the Irvine Ranch, the Irvine Company
must obtain Village Related Entitlements. The Irvine Company controls the
application for Village Related Entitlements and also has certain approval
rights with respect to the architectural design and physical layout of the
rental apartment communities. The applications for Village Related Entitlements
will be obtained independently by The Irvine Company. The discretionary nature
of approval for Village Related Entitlements, together with the variety of
concerns which may be raised by government officials and public interest groups
during the approval process, may adversely affect The Irvine Company's ability
to entitle future apartment sites and offer them to the Operating Partnership
for development. Thus, the Operating Partnership's ability to develop future
properties on the Irvine Ranch may be delayed, reduced or prevented.

EARLY TERMINATION OF THE EXCLUSIVE LAND RIGHTS AND NON-COMPETITION ARRANGEMENTS
WITH THE IRVINE COMPANY AND MR. BREN WOULD ADVERSELY AFFECT THE OPERATING
PARTNERSHIP

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of a director designated by The Irvine Company and (iii) during the period that
The Irvine Company has the right to nominate three persons to the Board of
Directors of the Company, the provisions of the Company's Articles of
Incorporation and Bylaws requiring the approval of the Required Directors to
take certain actions are repealed, modified, or amended without the prior
written consent of The Irvine Company. If the Land Rights Agreement is
terminated as a result of the occurrence of one of these events, the Operating
Partnership would no longer have an option to acquire apartment community land
sites from The Irvine Company and The Irvine Company and Mr. Bren would no
longer be prohibited from acquiring or developing, or acquiring an equity
ownership interest in any entity that has an ownership interest in, apartment
communities on or off the Irvine Ranch in competition with the Operating
Partnership. Accordingly, the termination of the Land Rights Agreement would
likely have a material adverse effect on the future development activities of
the Operating Partnership on the Irvine Ranch. See "Management -- Certain Rights
of The Irvine Company with Respect to the Company's Board of Directors."

POTENTIAL FOR ADDITIONAL DEBT FINANCING AND INCREASED LEVERAGE

Where possible, the Operating Partnership seeks to use leverage to increase
the rate of return on its investments and to allow the Operating Partnership to
make more investments than it otherwise could. Such use of leverage presents an
element of risk in the event that the cash flow from the Properties is
insufficient to meet the Operating Partnership's debt service and other
obligations or to make distributions with respect to its partnership interests,
including the Series A Preferred L.P. Units. In addition, all debt and other
liabilities of the Operating Partnership would rank senior to the Series A
Preferred L.P. Units, with a prior claim on the assets of the Operating
Partnership. As of September 30, 1997, the Operating Partnership had
approximately $706.1 million of total liabilities reflected on the Operating
Partnership's balance sheet.

REAL ESTATE OPERATIONS AND DEVELOPMENT RISKS MAY ADVERSELY AFFECT THE OPERATING
PARTNERSHIP'S ABILITY TO MAKE DISTRIBUTIONS ON THE SERIES A PREFERRED L.P. UNITS

GENERAL. Real property investments are subject to varying degrees of risk.
The investment returns available from equity investments in real estate depend
in large part on the amount of income earned and capital appreciation generated
by the related properties as well as the expenses incurred. If the Properties do
not generate revenue sufficient to meet operating expenses, including debt
service and capital expenditures, the Operating Partnership's income and ability
to service its debt and other obligations and to make distributions on its
partnership interests, including the Series A Preferred L.P. Units, will be
adversely affected. This in turn would adversely affect the Trust's ability to
make distributions on the Series A Preferred Securities. In addition, the
Properties consist primarily of apartment communities located in Orange County.
Income from and the performance of the Irvine Ranch Properties may therefore be
adversely affected by the general economic climate in Orange County, including
unemployment rates and local conditions such as the supply of and demand for
apartments in the area, the attractiveness of the Irvine Ranch Properties to
residents, zoning or other regulatory restrictions, competition from other
available apartments and alternative forms of housing, the affordability of
single family homes, the ability of the Operating Partnership to provide
adequate maintenance and insurance and the potential of increased operating
costs (including real estate taxes). Certain significant expenditures associated
with an investment in real estate (such as mortgage and other debt payments,
real estate taxes and maintenance costs) generally are not reduced when
circumstances cause a reduction in revenue from the investment. In addition,
income from properties and real estate values are also affected by a variety of
other factors, such as governmental regulations and applicable laws (including
real estate, zoning and tax laws), interest rate levels and the availability of
financing. The Irvine Ranch Properties in the aggregate historically have
generated positive cash flow from operations; however, no assurance can be given
that such will be the case in the future.

In 1997, the Operating Partnership commenced an "off-Ranch" expansion
program through the acquisition of rights to purchase three apartment community
development sites located in Northern California's Silicon Valley. The Operating
Partnership commenced construction of a 342-unit apartment community on one of
such sites in May 1997 and on October 23, 1997, the Company's Board of Directors
authorized, subject to receipt of necessary entitlements, the acquisition of
another of the development sites.

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<PAGE> 22

Construction of an apartment community of approximately 155 units on this site
is expected to commence in the first half of 1998. On June 30, 1997, the
Operating Partnership acquired an existing 923-unit apartment community located
in Northern San Diego County. These new Properties represent the Operating
Partnership's first strategic expansion off the Irvine Ranch and the Operating
Partnership may make additional investments in California in the future. The
development, construction and operation of rental apartment communities in such
new markets may present risks different from or in addition to the risks
discussed above related to the Irvine Ranch Properties, which are located
entirely in Orange County. In addition, in contrast to acquisitions of land
pursuant to the Land Rights Agreement in which a substantial portion of
pre-development costs and expenses, including the cost and expense of obtaining
Village Related Entitlements, is borne solely by The Irvine Company, all
pre-development costs and expenses in connection with "off-Ranch" expansion will
be borne by the Operating Partnership and the Operating Partnership will bear
all risk relating to the failure to obtain entitlements. For jurisdictions off
the Irvine Ranch, local jurisdiction approvals with respect to entitlements may
impose requirements and conditions different from those applicable to the Irvine
Ranch. No assurance can be given that the Operating Partnership will be
successful in pursuing any additional "off-Ranch" expansion or that any
"off-Ranch" apartment communities will be successful.

Equity real estate investments, such as the investments made by the
Operating Partnership in the Properties and any additional properties that may
be developed or acquired by the Operating Partnership, are relatively illiquid.
Such illiquidity limits the ability of the Operating Partnership to vary its
portfolio in response to changes in economic or other conditions.

The Properties are subject to all operating risks common to apartment
ownership in general. Such risks include: the Operating Partnership's ability to
rent units at the Properties, including the 1,110 units in the Communities Under
Construction; competition from other apartment communities; excessive building
of comparable properties which might adversely affect apartment occupancy or
rental rates; increases in operating costs due to inflation and other factors,
which increases may not necessarily be offset by increased rents; increased
affordable housing requirements that might adversely affect rental rates;
inability or unwillingness of residents to pay rent increases; and future
enactment of rent control laws or other laws regulating apartment housing,
including present and possible future laws relating to access by disabled
persons. If operating expenses increase, the local rental market may limit the
extent to which rents may be increased to meet increased expenses without
decreasing occupancy rates. If any of the above occurred, the Operating
Partnership's ability to meet its debt service and other obligations and to make
distributions on its partnership interests, including with respect to the Series
A Preferred L.P. Units, could be adversely affected.

REAL ESTATE DEVELOPMENT AND ACQUISITION. A primary focus of the Operating
Partnership is on development of new apartment communities on sites acquired or
that may be acquired in the future primarily from The Irvine Company, although
the Operating Partnership also plans to develop new rental apartment communities
on sites acquired or that may be acquired in the future from third parties. The
Operating Partnership has also acquired and may continue to acquire completed
rental apartment communities. See "Recent Developments -- 'Off-Ranch'
Expansion." The real estate development business involves significant risks in
addition to those involved in the ownership and operation of established
apartment communities, including the risks that specific project approvals may
take more time and resources to obtain than expected, that construction may not
be completed on schedule or budget and that apartment communities may not
achieve anticipated rent or occupancy levels. In addition, if long-term debt or
equity financing is not available on acceptable terms to refinance new
development or acquisitions undertaken without long-term financing, further
development activities or acquisitions might be curtailed or cash available for
debt service and other obligations might be adversely affected.

INSURANCE. The Operating Partnership carries comprehensive liability, fire,
extended coverage and rental loss insurance covering all of the Properties, with
policy specifications and insured limits which the Operating Partnership
believes are adequate and appropriate under the circumstances. There are,
however, certain types of losses (such as from earthquakes) that are not
generally insured because they are either uninsurable or not economically
insurable. The Operating Partnership does not carry earthquake insurance on any
of the Properties. Should an uninsured loss or a loss in excess of insured
limits occur, the Operating Partnership could lose its capital invested in the
Property, as well as anticipated future revenues from the Property and, in

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the case of debt which is recourse to the Operating Partnership, would remain
obligated for any mortgage debt or other financial obligations related to such
Property. Any such loss would adversely affect the Operating Partnership. The
Operating Partnership believes that the Properties are adequately insured. In
addition, in light of the California earthquake risk, California building codes
since the early 1970s have established construction standards for all newly
built and renovated buildings, including apartment buildings, the current and
strictest construction standards having been adopted in 1984. Thirty-two of the
51 Existing Communities (representing approximately 68.9% of the units in the
Existing Communities) have been completed and occupied since January 1, 1985 and
the Operating Partnership believes that all of the Existing Communities were
constructed, and all of the Communities Under Construction are being
constructed, in full compliance with the applicable standards existing at the
time of construction. While earthquakes have occurred from time to time in
California, the Operating Partnership has not experienced any material losses as
a result of earthquakes. No assurance can be given that this will be the case in
the future.

CERTAIN PARTICIPATION RIGHTS OF THE IRVINE COMPANY

The Irvine Company, unlike shareholders of the Company and holders of
Preferred L.P. Units, generally has the right to purchase shares of Common Stock
of the Company or securities convertible, exchangeable or exercisable for Common
Stock of the Company upon the issuance of such securities by the Company (for
cash or property) and also has the right to purchase Common L.P. Units upon the
issuance of additional Common L.P. Units by the Operating Partnership for cash
(but not for property) in order to maintain its percentage interest in the
Company and the Operating Partnership on a consolidated basis. Holders of Series
A Preferred L.P. Units will not have such purchase rights. See "Policies with
Respect to Certain Activities -- Operating Partnership -- Financing Policies"
and "Operating Partnership Agreement -- Issuance of Additional L.P. Units."

LACK OF PUBLIC MARKET

The Series A Preferred Securities are a new issue of securities for which
there is currently no active trading market. If any of the Series A Preferred
Securities are traded after their initial issuance, they may trade at a discount
from their initial offering price, depending upon prevailing interest rates, the
market for similar securities and other factors, including general economic
conditions and the financial condition of, performance of, and prospects for,
the Operating Partnership. Although the Series A Preferred Securities have been
approved for listing on the NYSE, subject to official notice of issuance, there
can be no assurance as to the development of any market, or the liquidity of any
market that may develop, for the Series A Preferred Securities. Trading of the
Series A Preferred Securities on the NYSE is expected to commence within a
30-day period after the date of this Prospectus. The Underwriters have informed
the Trust that they intend to make a market in the Series A Preferred Securities
offered hereby; however, they are not obligated to do so and any such
market-making may be terminated at any time without notice to the holders of the
Series A Preferred Securities. See "Underwriting."

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IAC CAPITAL TRUST

The following description summarizes the material terms of the Declaration
and is qualified in its entirety by reference to the form of Declaration which
has been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.

IAC Capital Trust is a statutory business trust formed on October 31, 1997
under the Business Trust Act pursuant to a declaration of trust among the
Trustees of the Trust, the Company and the Operating Partnership, and the filing
of a certificate of trust with the Secretary of State of the State of Delaware.
Such declaration will be amended and restated in its entirety (as so amended and
restated, the "Declaration") substantially in the form filed as an exhibit to
the Registration Statement of which this Prospectus forms a part, as of the date
the Series A Preferred Securities are initially issued. The Company and certain
members of management of the Company will acquire all of the Common Securities
of the Trust, for an aggregate consideration of $5,000. From time to time the
Trust may issue additional series of Preferred Securities and invest the
proceeds of any such issuance in an additional series of Preferred L.P. Units of
the Operating Partnership. The Trust Securities represent undivided beneficial
interests in the assets of the Trust, subject to the priority and payment terms
of the Trust Securities, and are not secured by any assets of the Operating
Partnership or any of its affiliates. Holders of Series A Preferred Securities
will have no voting rights, except in limited circumstances, and, except as
otherwise provided in the Declaration, the exclusive voting power for all
purposes (including with respect to amendments to the Declaration) shall be
vested in the holders of the Common Securities, including the exclusive right
(subject to the terms of the Declaration) to appoint, remove or replace the
Trustees and to increase or decrease the number of Trustees, subject to the
right of holders of any series of Preferred Securities upon whom such voting
rights have been conferred, including the Series A Preferred Securities, to
appoint for all series of Preferred Securities upon whom such voting rights have
been conferred and are then exercisable one additional Regular Trustee of the
Trust (a "Special Regular Trustee") in certain limited circumstances set forth
in this Prospectus. A Special Regular Trustee so appointed shall, without any
further act or vote by the holders of any series of Preferred Securities, be
deemed to have been appointed to act in such capacity for all series of
Preferred Securities upon which like voting rights have been conferred and are,
or in the future become, exercisable. A Special Regular Trustee need not be an
employee or officer of, or otherwise affiliated with, the Company. The Special
Regular Trustee shall have the same rights, powers and privileges under the
Declaration as the Regular Trustees. The Trust is a limited purpose financing
vehicle established by the Company and the Operating Partnership and exists
solely for the purpose of (a) issuing one or more series of its Preferred
Securities (and, if applicable, Excess Preferred Securities), (b) issuing its
Common Securities as described above and investing the proceeds of such issuance
in an interest bearing account in, or certificate of deposit of, a banking
institution, (c) investing the proceeds from the sale of each series of
Preferred Securities in a series of Preferred L.P. Units of the Operating
Partnership having economic terms substantially similar to the series of
Preferred Securities and (d) engaging in such other activities as are necessary,
convenient or incidental thereto. The rights of the holders of the Trust
Securities, including economic rights, rights to information and voting rights,
are set forth in the Declaration and the Business Trust Act.

The number of trustees (the "Trustees") of the Trust shall initially be
three. One or more of such Trustees (the "Regular Trustees") will be an
individual who is an officer of the Company. Initially, one Regular Trustee will
be appointed. The second trustee is The Bank of New York, which is unaffiliated
with the Company, the Operating Partnership and The Irvine Company and which
will serve as the property trustee (the "Property Trustee"). The third trustee
is an affiliate of The Bank of New York that has its principal place of business
in the State of Delaware (the "Delaware Trustee"). Pursuant to the Declaration,
legal title to each series of Preferred L.P. Units purchased by the Trust will
be held by the Property Trustee for the benefit of the holders of the Trust
Securities. In addition, the Property Trustee will maintain exclusive control of
one or more segregated non-interest bearing bank accounts (collectively, the
"Property Account") to hold, subject to the priority and payment terms of the
Preferred Securities, all payments in respect of the Preferred L.P. Units
purchased by the Trust for the benefit of the holders of the Preferred
Securities.

The duties and obligations of the Trustees of the Trust shall be governed
by the Declaration. Under the Declaration, the Trust shall not, and the Trustees
shall cause the Trust not to, engage in any activity other

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than in connection with the purposes of the Trust or other than as required or
authorized by the Declaration. In particular, the Trust shall not and the
Trustees shall not (a) invest any amounts received by the Trust from holding the
Preferred L.P. Units purchased by the Trust but, shall promptly deposit such
funds in the Property Account; (b) acquire any assets other than as expressly
provided in the Declaration; (c) possess Trust property for other than a Trust
purpose; (d) make any loans or investments other than investments represented by
the Preferred L.P. Units and in connection with the investment of the proceeds
of the sale of the Common Securities as described above; (e) issue any
securities or other evidences of beneficial ownership of, or beneficial
interests in, the Trust other than the Trust Securities; or (f) incur any
indebtedness for borrowed money.

The books and records of the Trust will be maintained at the principal
office of the Trust and will be open for inspection by a holder of Preferred
Securities or its representative for any purpose reasonably related to its
interest in the Trust during normal business hours.

Pursuant to the Declaration and, subject to the rights of holders of any
series of Preferred Securities hereafter issued which may rank on parity with
the Series A Preferred Securities in respect of distributions, distributions on
the Series A Preferred Securities when, as and if declared by the Regular
Trustees, must be paid on the dates payable to the extent that the Property
Trustee has cash on hand in the Property Account to permit such payment. So long
as the Series A Preferred L.P. Units are the only assets of the Trust, the funds
available for distribution to the holders of the Series A Preferred Securities
will be limited to payments received by the Property Trustee in respect of the
Series A Preferred L.P. Units that are deposited in the Trust as trust assets.
If the Preferred Securities of a series are called for redemption or are to be
repaid upon their stated maturity or upon liquidation, dissolution, winding-up
or termination of the Trust, the Property Trustee shall, subject to the priority
and payments terms of the Trust Securities, on the applicable redemption or
repayment date, pay to the holders of such series of Preferred Securities out of
funds deposited in the Property Account the amount specified in the terms of
such series of Preferred Securities to be paid on such date in accordance with
the terms of the Declaration and of such series of Preferred Securities. If the
Operating Partnership does not make distribution and other payments on the
Preferred L.P. Units deposited in the Trust as trust assets, including the
Series A Preferred L.P. Units, for any reason, it is expected that the Trust
will not be able to make distributions and other payments on the Series A
Preferred Securities. The Trust will terminate on December 31, 2092, the
termination date of the Operating Partnership, but may terminate earlier as
provided in the Declaration.

The Declaration provides that the Trustees may treat the person in whose
name a certificate representing the Preferred Securities of a series is
registered on the books and records of the Trust as the sole holder thereof and
of the Preferred Securities represented thereby for purposes of receiving
distributions and payments on redemption or liquidation of the Trust and for all
other purposes and, accordingly, shall not be bound to recognize any equitable
or other claim to or interest in such certificate or in the Preferred Securities
represented thereby on the part of any person, whether or not the Trust shall
have actual or other notice thereof. Preferred Securities of a series will be
issued in fully registered form. The Series A Preferred Securities will be
represented by a global certificate registered on the books and records of the
Trust in the name of DTC or its nominee. Under the Declaration:

(i) the Trust and the Trustees shall be entitled to deal with the DTC
(or any successor depositary) for all purposes, including the payment of
distributions and payments on redemption or liquidation of the Trust and
receiving approvals, votes or consents under the Declaration, and except as
set forth in the Declaration with respect to the Property Trustee, shall
have no obligation to persons owning a beneficial interest in Series A
Preferred Securities ("Preferred Security Indirect Owners") registered in
the name of and held by the DTC or its nominee; and

(ii) the rights of Preferred Security Indirect Owners shall be
exercised only through the DTC (or any successor depositary) and shall be
limited to those established by law and agreements between such Preferred
Security Indirect Owners and the DTC and/or its participants. With respect
to Series A Preferred Securities registered in the name of and held by the
DTC or its nominee, all notices and other communications required under the
Declaration shall be given to, and all distributions on such Preferred
Securities shall be given or made to, the DTC (or its successor).

25
<PAGE> 26

The specific terms of the depositary arrangement with respect to the Series
A Preferred Securities are set forth under "Description of the Series A
Preferred Securities -- Book-Entry Only Issuance -- The Depository Trust
Company."

In the Declaration, the Operating Partnership has agreed to reimburse all
costs, expenses and liabilities of the Trust, including the fees and expenses of
its Trustees and any taxes and all costs and expenses with respect thereto, to
which the Trust may become subject, except with respect to distributions on the
Trust Securities and withholding taxes on such distributions. The foregoing
obligations of the Operating Partnership under the Declaration are for the
benefit of, and shall be enforceable by, any person to whom any such debts,
obligations, costs, expenses and taxes are owed (a "Creditor") whether or not
such Creditor has received notice thereof. Any such Creditor may enforce such
obligations of the Operating Partnership directly against the Operating
Partnership, and the Operating Partnership and the Company have irrevocably
waived any right or remedy to require that any such Creditor take any action
against the Trust or any other person before proceeding against the Operating
Partnership. The Operating Partnership and the Company have agreed in the
Declaration to execute such additional agreements as may be necessary or
desirable in order to give full effect to the foregoing.

The address of the Trust is c/o Irvine Apartment Communities, Inc., 550
Newport Center Drive, Suite 300, Newport Beach, California 92660, telephone
number (714) 720-5500.

26
<PAGE> 27

RECENT DEVELOPMENTS

"OFF-RANCH" EXPANSION

The Operating Partnership's intent is to develop or acquire new apartment
communities in the Silicon Valley and Northern San Diego County and other
locations in California which the Operating Partnership believes possess rental
demographics and economic growth prospects similar to those on the Irvine Ranch.
On October 23, 1997 the Board of Directors of the Company authorized the
Operating Partnership, subject to receipt of necessary entitlements, to exercise
an option for a land site located in Redwood City, California. Construction of
an apartment community of approximately 155 units on this site is expected to
commence in the first half of 1998. The site is located just off Highway 101
(the Bayshore Freeway), approximately midway between San Jose and San Francisco,
and is immediately adjacent to the 20 million square foot San
Mateo/FosterCity/Redwood City office market, in which headquarter facilities for
Oracle, Visa, Franklin Funds and Genentech are located. Preliminary design and
jurisdictional approvals are also in process with respect to the remaining
development site.

On June 30, 1997, the Operating Partnership acquired for $127 million an
existing 923-unit apartment community, known as The Villas of Renaissance,
located in Northern San Diego County. Situated in La Jolla, California, the
project is located in University Town Center ("UTC") and enjoys free access from
the La Jolla Village Road/Interstate 805 interchange. The property is within
walking distance of 4.3 million square feet of office buildings in the UTC
financial district and the 1.3 million square foot UTC regional shopping mall
that is anchored by Nordstrom's, Macy's, Sears and Robinsons-May.

In early December, 1997, the Operating Partnership completed the purchase
of two development sites located in San Diego county. The first site which was
purchased for cash is located on La Jolla Village Drive in the University Town
Center region of greater La Jolla. Construction of an apartment community of
approximately 232 units is expected to commence in mid-1998. The second site is
located in the master-planned community of Stonecrest Village in the Mission
Valley/Kearney Mesa region of San Diego county. Construction of an approximately
336-unit apartment community is scheduled to commence in early 1998, subject to
receipt of necessary entitlements. This site was acquired from an affiliate of
The Irvine Company controlled by Donald Bren, the Chairman of the Board of
Directors of the Company, in exchange for 305,707 Common L.P. Units. See
"Certain Relationships and Related Transactions -- Transactions with The Irvine
Company."

RECENTLY COMPLETED IRVINE RANCH LAND ACQUISITIONS

On October 21, 1997, the Operating Partnership acquired a 196-unit
development site from The Irvine Company pursuant to the Land Rights Agreement.
On December 16, 1997 the Operating Partnership acquired from The Irvine Company
a 393-unit development site pursuant to the Land Rights Agreement.

ISSUANCE OF 7% NOTES DUE 2007

On October 1, 1997, the Operating Partnership issued $100,000,000 aggregate
principal amount of 7% Notes due 2007 (the "7% Notes"). The Operating
Partnership used the net proceeds from the issuance of the 7% Notes to repay
outstanding borrowings under the Operating Partnership's $250 million revolving
credit facility (the "Credit Facility"), most of which was incurred in
connection with the Villas of Renaissance Acquisition.

27
<PAGE> 28

USE OF PROCEEDS

The proceeds from the sale of the Series A Preferred Securities will be
$150.0 million ($172.5 million if the Underwriters' overallotment option is
exercised in full). Such proceeds will be invested by the Trust in Series A
Preferred L.P. Units of the Operating Partnership. After paying the
Underwriters' Compensation and estimated expenses associated with the Offering,
the net proceeds to the Operating Partnership from the issuance of the Series A
Preferred L.P. Units are estimated to be $144.3 million ($166.1 million if the
Underwriters' overallotment option is exercised in full). The Operating
Partnership will use such net proceeds to repay indebtedness outstanding under
the Credit Facility and for general partnership purposes, including ongoing
development activities on and off the Irvine Ranch and the possible acquisition
of additional properties off the Irvine Ranch. Pending such use, the net
proceeds to the Operating Partnership will be invested in income-producing
short-term investments. On a pro forma basis after giving effect to the
repayment of indebtedness from the net proceeds of the offering of the 7% Notes,
as of September 30, 1997, $36.7 million would have been outstanding under the
Credit Facility with an average interest rate of 6.20% and, as of December 31,
1997, the Credit Facility had an outstanding balance of approximately $75.0
million. Indebtedness under the Credit Facility was incurred primarily to
finance the Villas of Renaissance Acquisition and for general partnership
purposes. The Company expects to use future borrowings under the Credit Facility
for general partnership purposes, including those described above.

OPERATING PARTNERSHIP CONSOLIDATED RATIOS OF EARNINGS TO
FIXED CHARGES AND PREFERRED L.P. UNIT DISTRIBUTIONS

The following table sets forth the consolidated ratios of earnings to fixed
charges for the Operating Partnership.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------- -------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges........................... 2.42x 2.00x 2.07x 1.44x 1.25x .99x .96x
</TABLE>

For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of net earnings before income taxes, extraordinary items and
fixed charges. Fixed charges consist of interest expense, capitalized interest
and amortization of deferred financing costs. The ratios are computed using the
amounts for the Operating Partnership, on a consolidated basis, including its
majority owned subsidiary. The Operating Partnership did not have any Preferred
L.P. Units outstanding in any of the periods indicated, and, therefore, the
ratio of earnings to combined fixed charges and Preferred L.P. Unit
distributions for each of the periods indicated was equal to the ratio of
earnings to fixed charges for such period. The Trust did not have any operations
in any of the periods indicated, and, therefore, the historical ratio with
respect to the Trust is not applicable. On a pro forma basis, the ratio of
earnings to combined fixed charges and preferred securities distributions of the
Trust is expected to be 1.00x.

Prior to completion of the Company's Initial Public Offering in December
1993, the Predecessor of the Company and the Operating Partnership operated in a
highly leveraged manner. As a result, although the Company, the Operating
Partnership and the Predecessor have historically generated positive net cash
flow, the financial statements of the Predecessor showed net losses for the
periods prior to December 8, 1993. Consequently, the computations of the ratio
of earnings to fixed charges for such periods indicate that earnings were
inadequate to cover fixed charges by approximately $0.6 million and $2.2 million
for the years ended December 31, 1993 and 1992, respectively.

28
<PAGE> 29

CAPITALIZATION OF IAC CAPITAL TRUST

The following table sets forth the capitalization of the Trust as of
October 31, 1997, and as adjusted to give effect to the issuance of Common
Securities and the offering of the Series A Preferred Securities offered hereby
(assuming no exercise of the Underwriters' overallotment option). See "Use of
Proceeds."

<TABLE>
<CAPTION>
OCTOBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(UNAUDITED, IN
THOUSANDS)
<S> <C> <C>
Redeemable Series A Preferred Securities, no securities
outstanding at October 31, 1997; 6,000,000 securities
outstanding as adjusted.............................. $ -- $ 150,000
Common Securities, no securities outstanding at October
31, 1997; 200 securities outstanding as adjusted..... -- 5
------- ---------
Total Capitalization................................... $ -- $ 150,005
======= =========
</TABLE>

CAPITALIZATION OF IRVINE APARTMENT COMMUNITIES, L.P.

The following table sets forth the capitalization of the Operating
Partnership as of September 30, 1997, and as adjusted to give effect to (i) the
sale on October 1, 1997 of $100,000,000 aggregate principal amount of the
Operating Partnership's 7% Notes and the application of the net proceeds
therefrom to repay indebtedness under the Credit Facility and (ii) the offering
of the Series A Preferred Securities offered hereby (assuming no exercise of the
Underwriters' overallotment option) and the application of the proceeds
therefrom for the purchase of Series A Preferred L.P. Units, which proceeds
after payment of the Underwriters' Compensation and estimated expenses of the
Offering will in turn be used by the Operating Partnership to repay outstanding
indebtedness under the Credit Facility and for general partnership purposes. See
"Use of Proceeds."

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(UNAUDITED, IN
THOUSANDS)
<S> <C> <C>
Mortgages and Notes
7% Notes............................................ $ -- $ 99,208
Credit Facility(1).................................. 135,000 --
Tax-exempt mortgage bond financings................. 326,569 326,569
Conventional mortgage financings.................... 132,902 132,902
Mortgage notes payable to The Irvine Company........ 50,608 50,608
Tax-exempt assessment district...................... 21,747 21,747
---------- -----------
666,826 631,034
Redeemable Series A Preferred L.P. Units, no units
outstanding at September 30, 1997; 6,000,000 units
outstanding as adjusted............................. -- 144,275(2)
Partners' Capital
43,972,813 partnership units outstanding at
September 30, 1997 and as adjusted:
General partner, 19,878,643 G.P. Units
outstanding at September 30, 1997 and as
adjusted....................................... 210,685 210,685
Limited partners, 24,094,170 Common L.P. Units
outstanding at September 30, 1997 and as
adjusted....................................... 185,068 185,068
---------- -----------
Total Capitalization.................................. $1,062,579 $ 1,171,062
========== ===========
</TABLE>

- ---------------

(1) As of December 31, 1997, the Credit Facility had an outstanding balance of
approximately $75 million, all of which will be repaid with the net proceeds
of the Offering. See "Use of Proceeds."

(2) Proceeds of the Offering invested in Series A Preferred L.P. Units net of
the Underwriters' Compensation and other expenses associated with the
Offering to be paid by the Operating Partnership.

29
<PAGE> 30

SELECTED CONSOLIDATED FINANCIAL DATA

The following Selected Consolidated Financial Data (other than statistical
and property data) has been derived from the Operating Partnership's or the
Predecessor's consolidated financial statements. Information as of December 31,
1996 and 1995 and for each of the years in the three year period ended December
31, 1996 has been derived from the Operating Partnership's audited consolidated
financial statements included herein. Information for the year ended December
31, 1993 has been derived from audited financial statements not included herein
of the Company and the Predecessor and is on a combined and consolidated
historical basis for the Operating Partnership and the Predecessor. Information
at December 31, 1994 and 1993 has been derived from the Company's audited
financial statements not included herein and information at and for the year
ended December 31, 1992 has been derived from the Predecessor's audited
financial statements not included herein. Information at September 30, 1997 and
for the respective nine month periods ended September 30, 1997 and 1996 has been
derived from the Operating Partnership's unaudited consolidated financial
statements included herein and which, in the opinion of the Operating
Partnership, reflect all adjustments considered necessary for a fair
presentation. Results for the nine month period ended September 30, 1997 are not
necessarily indicative of results for the full year. All such financial
information is qualified in its entirety by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Operating Partnership" and the Consolidated
Financial Statements (including the notes thereto) included herein. The Company
acquired The Villas of Renaissance on June 30, 1997. See "Recent
Developments -- 'Off-Ranch' Expansion." For pro forma financial information of
the Operating Partnership for the year ended December 31, 1996 and the nine
months ended September 30, 1997, see the Unaudited Pro Forma Consolidated
Statements of Operations included elsewhere herein.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993(1) 1992
--------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PROPERTY INFORMATION, RATIOS AND PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Revenues:
Rental income.................. $ 133,114 $114,000 $154,925 $ 133,678 $127,338 $123,101 $119,097
Other income................... 3,093 2,317 3,162 2,079 1,585 1,659 2,097
Interest income................ 659 419 611 411 1,313 60 --
--------- -------- -------- --------- -------- -------- --------
136,866 116,736 158,698 136,168 130,236 124,820 121,194
--------- -------- -------- --------- -------- -------- --------
Expenses:
Property expenses.............. 28,790 24,903 33,859 31,761 33,105 34,057 35,685
Real estate taxes.............. 10,959 10,023 13,496 12,002 11,786 10,729 9,921
Property management fees....... 3,809 3,316 4,502 3,893 3,800 3,881 4,393
Interest expense, net.......... 21,949 22,378 29,506 25,894 26,827 50,248 49,154
Amortization of deferred
financing costs.............. 1,882 1,975 2,627 8,510 15,942 3,012 1,474
Depreciation and
amortization................. 21,700 20,346 27,239 23,143 21,055 20,002 19,808
General and administrative..... 4,822 4,890 6,277 5,909 5,442 3,278 2,359
--------- -------- -------- --------- -------- -------- --------
93,911 87,831 117,506 111,112 117,957 125,207 122,794
--------- -------- -------- --------- -------- -------- --------
Income (loss) before
extraordinary item............. 42,955 28,905 41,192 25,056 12,279 (387) (1,600)
Extraordinary item -- charge
related to debt
extinguishment................. -- -- -- (23,427) -- (12,487) --
--------- -------- -------- --------- -------- -------- --------
Net income (loss)................ $ 42,955 $ 28,905 $ 41,192 $ 1,629 $ 12,279 $(12,874) $ (1,600)
========= ======== ======== ========= ======== ======== ========
Net income (loss) per unit....... $ 0.99 $ 0.75 $ 1.06 $ 0.05 $ 0.41 $ (0.43)
========= ======== ======== ========= ======== ========
</TABLE>

30
<PAGE> 31

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993(1) 1992
--------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PROPERTY INFORMATION, RATIOS AND PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATISTICAL AND PROPERTY DATA:
Total stabilized communities (at
period end)(2)................. 51 47 48 43 43 42 42
Apartment units (at period
end)........................... 14,991 13,541 13,656 12,776 11,358 11,334 10,952
Average units in stabilized
communities(2)(3)(6)........... 13,683 11,786 12,139 11,334 11,334 10,799 10,446
Average physical occupancy in
stabilized
communities(2)(3)(6)......... 94.5% 94.8% 94.9% 94.6% 95.6% 96.3% 96.2%
OTHER DATA:
Average monthly rent per
unit(3)(4)(6).................. $ 1,101 $ 1,012 $ 1,025 $ 996 $ 981 $ 963 $ 950
Capital replacements per
unit(3)(5)(6).................. $ 234 $ 247 $ 393 $ 399 $ 490 $ 482 $ 458
EBITDA, as adjusted(7)........... $ 88,486 $ 73,604 $100,564 $ 82,603 $ 76,103 $ 72,875 $ 68,836
Ratio of EBITDA, as adjusted, to
interest expense(7)(8)......... 4.03x 3.29x 3.41x 3.19x 2.84x 1.45x 1.40x
Cash flows provided by (used in):
Operating activities........... $ 69,432 $ 55,748 $ 73,037 $ 55,403 $ 49,786 $ 10,249 $ 16,171
Investing activities........... $(205,807) $(44,220) $(66,616) $(128,218) $(50,918) $(23,649) $(19,285)
Financing activities........... $ 135,543 $ (8,356) $ (7,608) $ 73,739 $(23,316) $ 36,428 $ 3,516
</TABLE>

- ---------------

(1) Includes the operations of the Predecessor through December 7, 1993 and of
the Operating Partnership from December 8 through December 31, 1993.

(2) A property is stabilized at the earlier of (i) one year after completion of
construction or (ii) when it achieves 95% occupancy.

(3) With respect to each period presented for communities that have been
stabilized for less than one year, reflects data from the date of stabilized
occupancy.

(4) Average monthly rent per unit is calculated by dividing the average rental
revenue per unit by average economic occupancy.

(6) Excludes Villas of Renaissance, which was acquired on June 30, 1997. If the
operations of The Villas of Renaissance were included for the nine months
ended September 30, 1997, average units in stabilized communities would have
been 13,991, average physical occupancy in stabilized communities would have
been 94.4%, average monthly rent per unit would have been $1,104 and capital
replacements per unit would have been $229.

(7) EBITDA, as adjusted, represents earnings before interest, depreciation and
amortization and extraordinary items. EBITDA, as adjusted, is not
necessarily comparable to similarly titled measures of other companies, and
should not be considered as an alternative to operating income, as
determined in accordance with GAAP, as an indicator of the Operating
Partnership's operating performance, or to cash flows from operating
activities (as determined in accordance with GAAP) as a measure of
liquidity.

31
<PAGE> 32

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THE OPERATING PARTNERSHIP

The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data," the Operating Partnership's Consolidated Financial
Statements and the Notes thereto for the years ended December 31, 1996, 1995 and
1994 (the "OP Audited Financial Statements") and the Operating Partnership's
Unaudited Condensed Consolidated Financial Statements and the Notes thereto for
the nine months ended September 30, 1997 and 1996 (the "OP Unaudited Quarterly
Financial Statements").

OVERVIEW

At September 30, 1997, the Company had a 45.2% general partnership interest
in and was the sole managing general partner of the Operating Partnership, which
began operations as of December 8, 1993, the date of the Company's Initial
Public Offering. In connection with the Initial Public Offering, The Irvine
Company transferred 42 apartment communities and a 99% interest in a limited
partnership which owned one apartment community to the Operating Partnership. At
September 30, 1997, the limited partners of the Operating Partnership had a
54.8% limited partner interest with The Irvine Company and its affiliates having
a 54.6% limited partnership interest in the Operating Partnership.

The Trust did not have any operations prior to October 31, 1997.

RESULTS OF OPERATIONS

Nine months ended September 30, 1997 compared to nine months ended
September 30, 1996. The Operating Partnership's net income was $43.0 million for
the nine months ended September 30, 1997, up from $28.9 million for the same
period of 1996. The improvement was due to the contribution of new rental units
from the Operating Partnership's acquisition and development program, as well as
an increase in revenues within its stabilized portfolio achieved through higher
rental rates slightly offset by lower occupancy and higher operating expenses.

32
<PAGE> 33

The following table sets forth certain operating data for the Properties
for the nine month periods ended September 30, 1997 and 1996.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
REVENUE AND EXPENSE DATA 1997 1996
- ------------------------------------------------------------------------ -------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Communities Owned and Stabilized More Than Two Years(a)
Number of communities................................................. 43 43
Number of units at end of period...................................... 11,334 11,334
Operating revenues.................................................... $104,486 $99,112
Property expenses..................................................... $ 23,520 $21,819
Real estate taxes..................................................... $ 8,058 $ 8,120
Property management fees.............................................. $ 3,018 $ 2,864
Depreciation and amortization of real estate assets................... $ 15,438 $15,525

Communities Stabilized Less Than Two Years(b)
Number of communities................................................. 5 5
Number of units at end of period...................................... 2,207 2,207
Operating revenues.................................................... $ 23,679 $17,205
Property expenses..................................................... $ 3,693 $ 3,084
Real estate taxes..................................................... $ 2,166 $ 1,902
Property management fees.............................................. $ 614 $ 453
Depreciation and amortization of real estate assets................... $ 4,303 $ 4,715

Lease-Up and Newly Acquired Communities(c)
Number of communities................................................. 3
Number of units at end of period...................................... 1,450
Operating revenues.................................................... $ 8,042
Property expenses..................................................... $ 1,577
Real estate taxes..................................................... $ 735
Property management fees.............................................. $ 177
Depreciation and amortization of real estate assets................... $ 1,784
</TABLE>

- ---------------

(a) Represents "same store" communities.

(b) Represents five communities that began leasing in 1995 and reached
stabilized occupancy (95%) at various dates in 1996.

(c) Represents Baypointe and Santa Maria communities that began leasing in 1996,
completed deliveries in June 1997, and reached stabilized occupancy (95%) in
July 1997 and The Villas of Renaissance (see Note 6 to the OP Unaudited
Quarterly Financial Statements), an apartment community acquired by the
Operating Partnership on June 30, 1997.

Operating revenues (rental and other income) increased to $136.2 million in
the first nine months of 1997, up from $116.3 million in the same period of
1996. Operating revenues rose as a result of higher occupancy and rental rates,
as well as the contribution of newly delivered rental units from five properties
which achieved stabilization during 1996, a newly acquired community and two new
lease-up communities. In total, these new units added $31.7 million to operating
revenues in the first nine months of 1997 compared to $17.2 million in the first
nine months of 1996. Within communities owned and stabilized more than two
years, operating revenues increased 5.4% from the first nine months of 1996, as
a result of improvement in average monthly rental rates and higher non-rental
income, slightly offset by a decrease in physical occupancy to 94.5% from 94.8%.
Average monthly rental rates increased to $1,068 in the first nine months of
1997 from $1,007 in the year-earlier period. Healthy job growth in the Operating
Partnership's marketplace has been a key factor in the upward trend in rental
rates.

33
<PAGE> 34

Property expenses increased to $28.8 million in the first nine months of
1997 from $24.9 million in the first nine months of 1996. This increase reflects
the added expenses of newly delivered rental units from five properties which
achieved stabilization during 1996, a newly acquired community and two new
lease-up communities. Property expenses within communities owned and stabilized
more than two years increased by $1.7 million to $23.5 million in the first nine
months of 1997 from $21.8 million a year ago. In the first nine months of 1997,
average monthly property expenses at these Properties increased to $231 per unit
from $214 per unit in the first nine months of 1996, primarily as a result of
higher unit turnover and related expenses in addition to preventative
maintenance scheduled in preparation for a potentially unseasonably wet winter.
Properties stabilized less than two years added $3.7 million to property
expenses in the first nine months of 1997 and $3.1 million in the first nine
months of 1996. Lease-up and newly acquired properties added $1.6 million to
property expenses in the first nine months of 1997.

Real estate taxes totaled $11.0 million in the first nine months of 1997
compared to $10.0 million in the first nine months of 1996. Taxes increased in
the first nine months of 1997 due to the addition of rental units from lease-up
properties and an acquisition.

Property management fees increased to $3.8 million in the first nine months
of 1997 from $3.3 million in the first nine months of 1996. Management fees
increased in the first nine months of 1997 due to the addition of rental units
from development, an acquisition and an increase in revenue from communities
owned and stabilized more than two years.

Net interest expense decreased to $21.9 million in the first nine months of
1997 from $22.4 million for the same period of 1996. The decrease was largely
due to a greater amount of capitalized interest during the 1997 period partially
offset by a higher level of borrowings under the Credit Facility. The Operating
Partnership capitalizes interest on projects actively under development using
average qualifying asset balances and applicable weighted average interest
rates. The average monthly qualifying asset balances for projects under
development in the first nine months of 1997 and 1996 were approximately $66.0
million and $39.7 million, respectively. Interest capitalized totaled $3.7
million in the first nine months of 1997 compared to $2.3 million in the same
period of 1996. Interest incurred was $25.6 million and $24.7 million for the
first nine months of 1997 and 1996, respectively.

Amortization of deferred financing costs was comparable in the first nine
months of 1997 and 1996.

Depreciation and amortization expense increased to $21.7 million in the
first nine months of 1997, up from $20.3 million in the first nine months of
1996. This increase reflects the completion and delivery of newly developed
rental units from the Operating Partnership's lease-up properties and an
acquisition.

General and administrative expense of $4.8 million was comparable to the
same nine month period of the prior year.

Years ended December 31, 1996, 1995 and 1994. The Operating Partnership's
income before extraordinary item was $41.2 million in 1996, up from $25.1
million in 1995 and $12.3 million in 1994. The Operating Partnership's financial
results improved in 1996 due to the contribution of newly delivered rental units
from its development program, cost reductions and an increase in revenues within
its stabilized portfolio achieved primarily through higher occupancy and higher
rental rates. In 1995, financial results improved largely as a result of the
contribution of newly delivered rental units and operating cost reductions
within the Operating Partnership's stabilized portfolio.

34
<PAGE> 35

The following table sets forth certain operating data for the Properties
for the years ended December 31, 1996 and 1995.

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
REVENUE AND EXPENSE DATA 1996 1995
- ----------------------------------------------------------------------- -------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Communities Stabilized More Than Two Years
Number of communities................................................ 43 43
Number of units at end of period..................................... 11,334 11,334
Operating revenues................................................... $133,287 $130,082
Property expenses.................................................... $ 29,466 $ 30,325
Real estate taxes.................................................... $ 10,799 $ 11,256
Property management fees............................................. $ 3,851 $ 3,733
Depreciation and amortization of real estate assets.................. $ 20,757 $ 21,237

Communities Stabilized Less Than Two Years(a)
Number of communities................................................ 5 5
Number of units at end of period..................................... 2,207 1,442
Operating revenues................................................... $ 24,656 $ 5,675
Property expenses.................................................... $ 4,351 $ 1,436
Real estate taxes.................................................... $ 2,693 $ 746
Property management fees............................................. $ 647 $ 160
Depreciation and amortization of real estate assets.................. $ 6,304 $ 1,858

Lease-Up Communities
Number of communities................................................ 2
Number of units at end of period..................................... 115
Operating revenues................................................... $ 144
Property expenses.................................................... $ 42
Real estate taxes.................................................... $ 4
Property management fees............................................. $ 4
Depreciation and amortization of real estate assets.................. $ 26
</TABLE>

- ---------------

(a) Represents five communities that began leasing in 1995 and reached
stabilized occupancy (95%) at various dates in 1996.

Operating revenues (rental and other income) increased by 16.4% to $158.1
million in 1996, up from $135.8 million in 1995. Operating revenues in 1995 had
increased by 5.3% from $128.9 million in 1994. Operating revenues rose in 1996
as a result of higher occupancy, higher rental rates and the contribution of
newly delivered rental units from five properties which achieved stabilization
during 1996. In total, these new units added $24.7 million to operating revenues
in 1996, compared to $5.7 million in 1995. Within communities stabilized more
than two years, operating revenues increased 2.5% in 1996, primarily due to
increases in rental rates and an increase in average physical occupancy to 95.0%
from 94.6% in 1995. Average monthly rental rates per unit increased 1.9% to
$1,015 in 1996, from $996 in 1995.

Operating revenues improved in 1995 from the prior year largely as a result
of the contribution of newly delivered rental units. In total, these new units
added $5.7 million to operating revenues in 1995. They made virtually no
contribution in 1994. Within communities stabilized more than two years,
operating revenues increased less than 1% in 1995, as modest increases in rental
rates were largely offset by a decline in average physical occupancy to 94.6%
from 95.6% in 1994. Average monthly rental rates per unit increased 1.5% to $996
in 1995, from $981 in 1994.

35
<PAGE> 36

Property expenses increased by 6.6% to $33.9 million in 1996 from $31.8
million in 1995. These expenses had decreased in 1995 by 4.1% from $33.1 million
in 1994. The increase in 1996 reflects the added expenses of newly delivered
rental units from five properties which achieved stabilization during 1996.
Property expenses within communities stabilized more than two years decreased
2.8% to $29.5 million in 1996 from $30.3 million in 1995. During the three years
ended December 31, 1996, the Operating Partnership achieved sustained reductions
in its per-unit property expenses through aggressive bidding of external service
and purchase contracts and a series of initiatives to enhance the efficiency of
customer service and property maintenance operations. In 1996, average monthly
property expenses within communities stabilized more than two years decreased to
$217 per unit from $223 per unit in 1995 and $243 per unit in 1994. Properties
stabilized less than two years added $4.4 million to property expenses in 1996
and $1.4 million in 1995.

Real estate taxes totaled $13.5 million in 1996, $12.0 million in 1995 and
$11.8 million in 1994. Taxes increased in 1996 due to the addition of rental
units, partially offset by a reduction in assessed values. In 1995, the
Operating Partnership's real estate taxes increased from the 1994 level due to
the addition of rental units.

Property management fees increased to $4.5 million in 1996 from $3.9
million in 1995 and $3.8 million in 1994. Management fees increased in 1996 and
1995 due to the addition of rental units and an increase in revenue from
communities stabilized more than two years.

Net interest expense increased to $29.5 million in 1996 from $25.9 million
in 1995 and $26.8 million in 1994. The increase in 1996 net interest expense was
due to new properties being placed in service. The Operating Partnership
capitalizes interest on projects actively under development using qualifying
asset balances and applicable weighted average interest rates. Capitalized
interest totaled $3.2 million in 1996 compared to $6.8 million in 1995 and $1.3
million in 1994. In 1995, net interest expense decreased $0.9 million from the
prior year primarily due to a higher level of capitalized interest resulting
from increased construction activity, offset by higher interest incurred as a
result of the May 1995 refinancing of tax-exempt mortgage debt and increased
borrowings under bank lines of credit. Total interest incurred was $32.7 million
in 1996 and 1995, and $27.6 million in 1994.

Interest income totaled $0.6 million in 1996, $0.4 million in 1995 and $1.3
million in 1994. The changes in interest income reflect changes in the Operating
Partnership's average cash balances.

Amortization of deferred financing costs decreased by 69.1% to $2.6 million
in 1996 from $8.5 million in 1995 and $15.9 million in 1994. The $5.9 million
decrease in 1996 and $7.4 million decrease in 1995 were largely due to the
elimination of deferred financing costs through an extraordinary charge of $23.4
million related to the refinancing of tax-exempt mortgage debt in May 1995.

Depreciation and amortization expense increased by 17.7% to $27.2 million
in 1996, up from $23.1 million in 1995. These expenses had increased in 1995 by
9.9% from $21.1 million in 1994. The increases in both years reflect the
completion and delivery of newly developed rental units.

General and administrative expense increased to $6.3 million in 1996, up
from $5.9 million in 1995. General and administrative expense had increased in
1995 from $5.4 million in 1994. These increases were largely the result of
increased staffing levels.

LIQUIDITY AND CAPITAL RESOURCES

The Operating Partnership believes that cash provided by operations will be
adequate to meet both operating requirements and payment of distributions on its
G.P. Units and L.P. Units in both the short and long term.

Liquidity. The Operating Partnership expects to meet its long-term
liquidity requirements, such as construction, scheduled debt maturities and
potential future property acquisitions, through the issuance or refinancing of
long-term debt, borrowings from financial institutions, or the issuance of
additional equity securities of the Company and/or L.P. Units. On June 27, 1997,
the Operating Partnership renewed its $250 million unsecured Credit Facility for
a three-year term. The new Credit Facility currently bears interest at LIBOR
plus 0.70% or prime. The Credit Facility provides for the borrowing interest
rates to be adjusted up

36
<PAGE> 37

or down reflecting the credit ratings on the Operating Partnership's senior
unsecured long-term indebtedness. Availability under the Credit Facility was
$115 million at September 30, 1997 ($213.3 million after giving effect to the
repayment of outstanding borrowings with the net proceeds from the issuance of
the 7% Notes).

Additional Equity. On February 20, 1997 the Company sold, in a public
offering, 1.15 million shares of Common Stock at $27.50 per share, the proceeds
of which were contributed to the Operating Partnership for an additional general
partnership interest. Concurrently, The Irvine Company, pursuant to its rights
under the Partnership Agreement, purchased 1.39 million additional Common L.P.
Units at $26.06 per unit (which is equal to the public offering price of the
Common Stock less an amount equivalent to the underwriting discount) which are
exchangeable for Common Stock on a one for one basis, subject to adjustment and
certain limitations. The proceeds from the two transactions totaled
approximately $66.0 million and were used by the Operating Partnership to repay
all then outstanding indebtedness under its revolving line of credit, and for
general partnership purposes, including development of new apartment
communities.

Shelf Registration Statements. On May 14, 1997 the Company filed a shelf
registration statement with the Securities and Exchange Commission providing for
the issuance from time to time of up to $350 million of common stock, preferred
stock, debt securities, and warrants to purchase common stock, preferred stock
and debt securities. Concurrently, the Operating Partnership filed a shelf
registration statement with the Commission providing for the issuance from time
to time of up to $350 million of debt securities. Proceeds raised from any
securities issued under the Company's shelf registration statement will be
contributed to the Operating Partnership and such proceeds, together with any
proceeds raised from any securities issued under the Operating Partnership's
shelf registration statement will be used for general partnership purposes,
including the development of new apartment communities, acquisitions and the
repayment of existing debt. On October 1, 1997 the Operating Partnership issued
$100 million aggregate principal amount of 7% Notes. Net proceeds of $98.3
million were used to repay indebtedness under the Credit Facility that had been
incurred primarily to finance the Villas of Renaissance Acquisition. See Note 6
to the OP Unaudited Quarterly Financial Statements.

Debt. The Operating Partnership's conventional and tax-exempt mortgage debt
bears interest at fixed interest rates, or variable rates that have been
effectively fixed through interest rate swap agreements. Interest rates on
conventional mortgage debt were reduced to then-current market rates at the time
of the Company's December 1993 Initial Public Offering through interest rate
buy-down agreements that are scheduled to expire at various dates prior to loan
maturity. A buy-down agreement relating to $35.8 million of conventional debt
expired in September 1997, and as a result, the interest rate on that loan
increased from 5.82% to 8.30%. The weighted average effective interest rate on
the Operating Partnership's debt, including the non-cash charges of amortization
of deferred financing costs, was 6.44% at September 30, 1997. The Operating
Partnership uses interest rate swap agreements to effectively convert its
floating rate tax-exempt mortgage bond financings to a fixed-rate basis, thus
reducing the impact of fluctuations in interest rates on future income.

37
<PAGE> 38

The following table sets forth certain information with respect to the
Operating Partnership's outstanding debt at September 30, 1997. For additional
information relating to the Operating Partnership's debt, see Note 3 to the OP
Audited Financial Statements.

<TABLE>
<CAPTION>
WEIGHTED
DEBT AVERAGE
DEBT STRUCTURE AT SEPTEMBER 30, 1997 BALANCE INTEREST RATE
- ----------------------------------------------------------------------- ------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Fixed rate debt
Conventional mortgage financings..................................... $ 132.9 6.45%
Mortgage notes payable to The Irvine Company......................... 50.6 5.75%
Tax-exempt mortgage bond financings.................................. 326.6 5.94%
Tax-exempt assessment district debt.................................. 5.6 6.27%
------- ----
Total fixed rate debt............................................. 515.7 6.06%
------- ----
Variable rate debt
Revolver line of credit.............................................. 135.0 6.42%
Tax-exempt assessment district debt.................................. 16.1 3.53%
------- ----
Total variable rate debt.......................................... 151.1 6.11%
------- ----
Total debt................................................... $ 666.8 6.07%
======= ====
</TABLE>

<TABLE>
<CAPTION>
WEIGHTED
BALANCE AT AVERAGE
SEPTEMBER 30, REMAINING
DEFERRED FINANCING COSTS 1997 TERM
- --------------------------------------------------------------------- ------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Interest rate buy-downs on conventional mortgage financings.......... $ 8.6 9.0 yrs
Loan origination costs and other..................................... 10.1 24.9 yrs
----- --------
Total........................................................... $18.7 17.6 yrs
===== ========
</TABLE>

Operating Activities. Cash flow provided by operating activities was $69.4
million and $55.7 million in the first nine months of 1997 and 1996,
respectively. Cash provided by operating activities increased in 1997 primarily
due to higher revenues from newly developed and acquired apartment units, as
well as an increase in revenues within the Operating Partnership's stabilized
portfolio achieved through higher rental rates. Cash flow provided by operating
activities was $73.0 million, $55.4 million and $49.8 million for the years
ended 1996, 1995 and 1994, respectively. Cash provided by operating activities
increased in 1996 and 1995 compared to prior years primarily due to higher
revenues and lower per-unit operating costs in the Operating Partnership's
stabilized portfolio.

Investing Activities. Cash flow used in investing activities was $205.8
million and $44.2 million in the first nine months of 1997 and 1996,
respectively. This increase resulted from increased development activity in the
first nine months of 1997 (see "-- Capital Expenditures" below), and the
acquisition of The Villas of Renaissance (see Note 6 to the OP Unaudited
Quarterly Financial Statements). Cash flow used in investing activities was
$66.6 million, $128.2 million and $50.9 million for the years ended 1996, 1995
and 1994, respectively. Changes in levels of cash flows used in investing
activities for each year reflect the changing levels of real estate development
by the Operating Partnership. See "-- Capital Expenditures."

Financing Activities. Cash flow provided by (used in) financing activities
was $135.5 million and ($8.4) million in the first nine months of 1997 and 1996,
respectively. The Operating Partnership received an aggregate of approximately
$66.0 million from the sale of Common L.P. Units and the contribution by the
Company of the proceeds from the sale of its Common Stock in the first quarter
of 1997. See "-- Additional Equity" above. These proceeds were used to pay down
borrowings from the lines of credit. In June 1997, the Operating Partnership
borrowed $118 million under the Credit Facility to fund the acquisition of The
Villas of Renaissance. Additionally, the Operating Partnership paid $47.5
million in distributions on its G.P. Units and Common L.P. Units in the first
nine months of 1997, compared to $41.3 million in the first nine months of 1996.
Cash flow provided by (used in) financing activities was $(7.6) million, $73.7
million and $(23.3) mil-

38
<PAGE> 39

lion for the years ended 1996, 1995 and 1994, respectively. Among the factors
affecting these cash flows in 1996, the Operating Partnership received an
aggregate of approximately $60.0 million from the sale of Common L.P. Units and
the contribution by the Company of the proceeds from the sale of its Common
Stock, compared to $109.3 million in 1995. These proceeds were used to pay down
borrowings from the line of credit. In 1995, the Operating Partnership received
$8.3 million of additional proceeds from the refinancing of tax-exempt debt,
while incurring loan origination costs of $9.2 million and net borrowings from
the line of credit of $15.7 million. Distributions paid on its G.P. Units and
Common L.P. Units in 1996 increased to $56.1 million from $44.8 million in 1995.
In 1994, cash flows used in financing activities included $33.6 million in
distributions paid on its G.P. Units and Common L.P. Units, partially offset by
new borrowings in excess of principal reductions of approximately $11.1 million
and net borrowings from the line of credit of $6.3 million.

CAPITAL EXPENDITURES

Capital Expenditures on New Development. The Operating Partnership's major
cash requirements in the next twelve months are expected to be for the
construction of new apartment communities and possibly for acquisitions of
apartment communities. Currently, the Operating Partnership has four apartment
communities under development (The Colony, Santa Rosa II, Rancho Santa Fe and
The Hamptons) that will require total expenditures of approximately $162
million, of which $102 million had been incurred at September 30, 1997. Funding
for these developments came from, and funding for future development activities
is expected to come from, the Credit Facility and the proceeds from this
Offering. The Company or the Operating Partnership may issue other debt or
equity securities as discussed above under "-- Liquidity and Capital Resources."

Construction Information

<TABLE>
<CAPTION>
ESTIMATED TOTAL
COMMENCEMENT INITIAL ESTIMATED
COMMENCEMENT OF OF LEASING STABILIZED COSTS
APARTMENT COMMUNITY VILLAGE, CITY UNITS CONSTRUCTION ACTIVITY OCCUPANCY (IN MILLIONS)
- -------------------- ------------------------------ ----- --------------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
The Colony Newport Center, Newport Beach 245 7/96 4Q '97 1Q '99 $ 44
Santa Rosa II Westpark II, Irvine 207 12/96 4Q '97 3Q '98 27
Rancho Santa Fe Tustin Ranch, Tustin 316 2/97 4Q '97 1Q '99 39
The Hamptons Cupertino 342 5/97 2Q '98 1Q '99 52
----- -----
Total 1,110 $ 162
===== =====
</TABLE>

The timing of future construction, leasing activities and initial
stabilized occupancy and estimated costs of apartment communities that are in
development are only estimates. Actual results will depend on numerous factors,
many of which are beyond the control of the Operating Partnership. These include
the extent and timing of economic growth in the Company's rental markets; future
trends in the pricing of construction materials and labor; entitlement decisions
by local government authorities; weather; changes in interest rate levels; and
other changes in capital markets. No assurance can be given that the timing or
estimates set forth in the foregoing table will not vary substantially from
actual results.

Capital Replacements on Stabilized Properties. Expenditures for capital
replacements totaled $3.2 million and $2.9 million in the first nine months of
1997 and 1996, respectively. Average capital replacements per unit for
communities owned and stabilized more than two years increased to $275 from $254
in the first nine months of 1997 and 1996, respectively, due to the nature and
timing of scheduled capital programs. Expenditures for capital replacements in
1997 are expected to be similar to 1996 levels. Expenditures for capital
replacements within communities stabilized more than two years totaled $4.7
million, $4.5 million and $5.6 million in 1996, 1995 and 1994, respectively.
Average capital replacements per unit within communities stabilized more than
two years were $415, $399 and $490 in 1996, 1995 and 1994, respectively.
Overall, these expenditures declined over this period reflecting greater
efficiency in property enhancement activities, including centralized purchasing
of major replacement materials. The Operating Partnership has a policy of
capitalizing expenditures related to asset acquisitions, costs which increase
the value of an existing asset, or

39
<PAGE> 40

costs which substantially extend an existing asset's useful life. Capital
replacements for communities stabilized more than two years were as follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
-------------------
TOTAL PER UNIT
------ --------
(IN
THOUSANDS)
<S> <C> <C>
Carpet replacements....................................... $1,188 $105
Exterior painting, siding and stucco...................... 669 59
Upgrades, renovations and major building items............ 466 41
Appliances, water heaters and air conditioning............ 170 15
Roofing, concrete and pavement............................ 270 24
Equipment and other....................................... 357 31
------ ----
Total........................................... $3,120 $275
====== ====
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, 1996
-------------------
TOTAL PER UNIT
------ --------
(IN
THOUSANDS)
<S> <C> <C>
Carpet replacements....................................... $1,462 $129
Exterior painting, siding and stucco...................... 786 69
Upgrades, renovations and major building items............ 970 86
Appliances, water heaters and air conditioning............ 401 35
Roofing, concrete and pavement............................ 542 48
Equipment and other....................................... 545 48
------ ----
Total........................................... $4,706 $415
====== ====
</TABLE>

The Operating Partnership also plans to incur approximately $5.2 million in
capital expenditures over the next two years at one of its existing apartment
communities, Promontory Point. Management believes that these capital
expenditures will generate additional revenue by enhancing the community's
appeal in the luxury segment of the marketplace. In addition, the Operating
Partnership plans to incur approximately $5.0 million in capital expenditures of
which $0.4 million had been incurred through September 30, 1997 at The Villas of
Renaissance which was acquired on June 30, 1997 (see Note 6 to the OP Unaudited
Quarterly Financial Statements). The Operating Partnership believes these
capital expenditures will generate additional revenue by enhancing the apartment
community's appeal within the luxury segment of the marketplace. Funding for
these expenditures is expected to come from the Credit Facility and proceeds of
this Offering.

IMPACT OF INFLATION

The Operating Partnership's business is affected by general economic
conditions, including the impact of inflation and interest rates. Substantially
all of the Operating Partnership's leases allow, at time of renewal, for
adjustments in the rent payable thereunder, and thus may enable the Operating
Partnership to seek increases in rents. Substantially all leases are for a
period of one year or less. The short-term nature of these leases generally
serves to minimize the risk to the Operating Partnership of the adverse effects
of inflation. For construction, the Operating Partnership has entered into
various contracts for the development and construction of new apartment
communities. These are fixed-fee contracts and thus partially insulate the
Operating Partnership from inflationary risk.

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<PAGE> 41

BUSINESS AND PROPERTIES OF THE OPERATING PARTNERSHIP

GENERAL

The Operating Partnership is engaged in the development and operation of
multifamily rental apartment communities in California. The Operating
Partnership's management and operating decisions are under the unilateral
control of the Company, a self-administered equity real estate investment trust.
The Operating Partnership and the Company were formed in December 1993 to
continue and expand the apartment community business of The Irvine Company, a
real estate and community development company. At September 30, 1997, the
Company had a 45.2% (44.4% at December 31, 1997) general partnership interest in
the Operating Partnership and was its sole managing general partner. At such
date, the limited partners of the Operating Partnership had a 54.8% (55.6% as of
December 31, 1997) interest in the Operating Partnership, represented by the
Common L.P. Units, with The Irvine Company and certain of its affiliates owning
a 54.6% (55.4% as of December 31, 1997) limited partnership interest in the
Operating Partnership.

As of September 30, 1997, the Operating Partnership owned and operated
14,991 units in 51 Existing Communities and had four additional Communities
Under Construction aggregating 1,110 units. Upon completion of the Communities
Under Construction, the Operating Partnership will own a total of 16,101 units
in 55 apartment communities, representing an increase in units of approximately
42% since the Initial Public Offering in December 1993. Through July 2020, the
Company and the Operating Partnership hold the exclusive right, but not the
obligation, to acquire land from The Irvine Company, the owner and developer of
the Irvine Ranch since 1864, for development of additional apartment communities
on the Irvine Ranch. Fifty-three of the Properties aggregating 14,836 units (the
"Irvine Ranch Properties") are or will be located on the Irvine Ranch, of which
50 constitute Existing Communities (14,068 units) and three constitute
Communities Under Construction (768 units).

In 1997, the Operating Partnership commenced an "off-Ranch" expansion
program through the acquisition of rights to purchase three apartment community
development sites located in Northern California's Silicon Valley. The Operating
Partnership has exercised its right with respect to one of these sites and has
begun construction on a 342-unit apartment community on the site. On October 23,
1997, the Board of Directors of the Company authorized the Operating
Partnership, subject to the receipt of necessary entitlements, to exercise
another of the options. Construction of an apartment community of approximately
155 units on this site is expected to commence in the first half of 1998.
Preliminary design and jurisdictional approvals are also in process with respect
to the remaining development site. In addition, on June 30, 1997, the Operating
Partnership purchased for $127 million the 923-unit Villas of Renaissance
located in Northern San Diego County. See "Recent Developments -- 'Off-Ranch'
Expansion." Two additional sites located in Northern San Diego County were
purchased in early December 1997. The Operating Partnership believes that the
economic expansion being experienced by the State of California provides the
Operating Partnership with growth potential beyond the Irvine Ranch.

The Irvine Ranch is located in central Orange County, California between
San Diego and Los Angeles. The western boundary of the Irvine Ranch borders
approximately six miles of the Pacific Ocean. Today, the portion of the Irvine
Ranch which is still owned by The Irvine Company covers approximately 50,000
acres and includes the largest remaining privately-owned undeveloped acreage in
Orange County. The developed portion of the Irvine Ranch, which includes the
City of Irvine and significant parts of the cities of Newport Beach and Tustin,
is one of the largest urban master-planned communities in the United States. The
Irvine Ranch has been developed over the past 30 years in accordance the Master
Plan which, over time, has been refined to accord with locally approved general
plans. The Irvine Ranch is one of the major commercial, industrial, retail and
residential centers in Southern California.

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<PAGE> 42